<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1999
REGISTRATION NO. 333-85281
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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PENTASTAR COMMUNICATIONS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 4813 84-1502003
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(State or jurisdiction of incorporation (Primary Standard Industrial Classification Code (I.R.S. Employer
or organization) Number) Identification No.)
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1522 BLAKE STREET
DENVER, COLORADO 80202
(303) 825-4400
(Address and telephone number of principal executive offices)
(Address of principal place of business or intended principal place of business)
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CRAIG J. ZOELLNER, PRESIDENT
PENTASTAR COMMUNICATIONS, INC.
1522 BLAKE STREET
DENVER, COLORADO 80202
(303)825-4400
(Name, address and telephone number of agent for service)
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Copies to:
B. SCOTT PULLARA, ESQ. ROBERT W. WALTER, ESQ.
LESLIE A. NICHOLS, ESQ. STACEY L. BOWERS, ESQ.
SHERMAN & HOWARD L.L.C. BERLINER ZISSER WALTER & GALLEGOS, P.C.
633 SEVENTEENTH STREET, SUITE 3000 1700 LINCOLN STREET, SUITE 4700
DENVER, COLORADO 80202 DENVER, COLORADO 80203
(303) 297-2900 (303) 830-1700
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
this registration statement becomes effective.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
PROSPECTUS Subject to completion, dated September 23, 1999
PENTASTAR COMMUNICATIONS, INC.
1,500,000 SHARES OF COMMON STOCK
This is an initial public offering. PentaStar is offering all of the
1,500,000 shares. The 1,500,000 shares do not include any of the shares of
PentaStar's common stock that will be issued in the two acquisitions described
in this prospectus.
PentaStar estimates that the share price will be between $9.00 and
$11.00. PentaStar has applied for the listing of its shares on the Nasdaq
SmallCap Market under the symbol "PNTA."
THESE ARE SPECULATIVE SECURITIES. AN INVESTMENT IN THESE SECURITIES INVOLVES A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 7.
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PER SHARE TOTAL
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Public offering price $ $
Underwriting discounts $ $
Proceeds to PentaStar $ $
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The representative of the underwriters has a 45-day option to purchase
an additional 225,000 shares from PentaStar to cover over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS A CRIME TO MAKE ANY REPRESENTATION TO
THE CONTRARY.
SCHNEIDER SECURITIES, INC.
PROSPECTUS DATED ______________, 1999
<PAGE> 3
We intend to furnish shareholders with annual reports containing financial
statements audited by an independent public accounting firm and quarterly
reports containing unaudited financial information for the first three quarters
of each year.
<PAGE> 4
PENTASTAR PROSPECTUS
INTRODUCTION
Please read this prospectus carefully. It describes our business, services
and finances. We have prepared this prospectus so that you will have the
information necessary to make an investment decision.
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
TABLE OF CONTENTS
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Page
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Prospectus Summary................................................................................................1
Risk Factors......................................................................................................7
Where You Can Find Additional Information........................................................................21
Forward Looking Statements.......................................................................................21
Use of Proceeds..................................................................................................22
Dividend Policy..................................................................................................23
Capitalization...................................................................................................24
Dilution.........................................................................................................25
Selected Financial Data..........................................................................................27
Management's Discussion and Analysis of Financial Condition and Results of Operations............................30
Business.........................................................................................................51
Management.......................................................................................................68
Certain Transactions.............................................................................................75
Principal Shareholders...........................................................................................77
Description of Capital Stock.....................................................................................80
Shares Eligible for Future Sale..................................................................................83
Underwriting.....................................................................................................86
Legal Matters....................................................................................................89
Experts..........................................................................................................89
Index to Financial Statements...................................................................................F-1
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<PAGE> 5
PROSPECTUS SUMMARY
This summary is qualified by more detailed information appearing
elsewhere in this prospectus. The other information is important, so please read
this entire prospectus carefully. Simultaneously with the closing of this
offering we will acquire two communications services agents, ICM Communications
Integration, Inc. and DMA Ventures, Inc., d/b/a Access Communications.
References in this prospectus to "PentaStar," "we," "us" and "our" refer to
PentaStar, ICM and Access on a combined basis, unless the context otherwise
requires. Unless otherwise indicated, all information in this prospectus: (1)
reflects a 3,417.96 for 1 split of the PentaStar common stock immediately prior
to this offering; (2) assumes completion of the acquisitions of ICM and Access
concurrently with the closing of this offering and the issuance of 370,000
shares of common stock to the shareholders of ICM and Access in those
acquisitions; and (3) assumes that the representative of the underwriters does
not exercise its over-allotment option or its warrants and that no other person
exercises any other option or warrant.
PENTASTAR COMMUNICATIONS, INC.
PentaStar was formed on March 15, 1999 to become a communications
services agent. PentaStar intends to acquire communications services agents in
major metropolitan areas. PentaStar also plans to acquire Internet service
providers, or ISPs, in small, high-growth areas. We believe there are a number
of significant advantages for agents and ISPs to join us, including enhanced
revenue opportunities and reduced costs that we believe are inherent in a larger
organization within our industry.
PentaStar's activities to date have consisted of:
o organizing PentaStar;
o developing PentaStar's business plan, management and corporate
structure;
o pursuing the acquisitions of ICM and Access; and
o conducting activities in connection with this offering.
PentaStar has not yet engaged in any business operations and has not generated
any revenues.
Upon the closing of this offering and the acquisitions of ICM and
Access, we will commence our business operations as a communications services
agent. We will design, procure and facilitate the installation and use of
communications services solutions that best meet customers' specific
requirements and budgets. We sell local access, long distance, wireless and
Internet services for voice and data communications for various communications
service providers. We presently work exclusively with U S WEST to provide
customers with local access services, and intend to work exclusively with U S
WEST and other regional bell operating companies, or RBOCs, with whom we may
establish agent relationships in the future for local access services. We also
act as an agent for other U S WEST services, including wireless and Internet
services.
<PAGE> 6
Our customers are small to medium-sized businesses active in a wide
variety of industries. They are usually of a size that cannot justify a
dedicated internal communications staff but, given the complexities of the
communications industry, need assistance in procuring services. Since we do not
own any communications infrastructure, we believe that we will be able to give
our customers an independent evaluation of available communications services and
technologies as we establish relationships with multiple providers of long
distance, wireless and Internet services. We intend to continue to work
exclusively with RBOCs for local access services. We will focus our personnel
and financial resources on:
o assessing the customers' needs for current and future
communications services;
o analyzing and designing specific customer solutions;
o helping customers integrate those communications services into
their operations;
o selecting the providers that best match the customers'
requirements;
o facilitating the ordering and installation of communications
services;
o staying current with developing technologies and pricing plans and
analyzing how they may be applicable to our customers; and
o working with our customers on an on-going basis to address their
communications issues.
We believe our agent services will be attractive to communications
service providers because we will allow them to out-source a difficult function
in a cost-effective manner that provides them a means of retaining customers and
increasing sales. We are paid a commission by each service provider based on a
percentage of each customer's cost of service.
We intend to use the staff and customer relationships of ISPs we may
acquire to implement our comprehensive local access, long distance and wireless
solution in their small, high-growth markets. We believe we will offer
communications service providers an effective means to sell into and service
small markets. The ISPs we acquire are expected to offer a unique sales channel
to serve the communications needs of these markets, in addition to the value to
us of their core Internet businesses.
We estimate the core communications market segments of local access,
long distance, wireless and Internet services had 1998 sales in excess of $200
billion. The communications industry offers its services through the direct
sales forces of communications service providers and through independent agents.
The agent industry is highly fragmented and characterized by hundreds of local
companies with no large national competitors. Based upon the 1999 Boardwatch
Magazine's Directory of Internet Service Providers, the ISP industry is also
highly fragmented with over 5,000 mostly small, local ISPs in North America.
This fragmentation enhances the opportunity to build, through acquisitions, a
leading agent with operations in multiple regions of the country.
ICM was formed in 1990 as a division of ICM, Inc., to provide
communications consulting and sell comprehensive communications services to
small to medium-sized businesses.
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Approximately 99% of ICM's revenues for 1998 were from commissions paid by U S
WEST. The balance was comprised of revenues from the sale of long distance and
Internet services procured from a former affiliate of ICM.
Access was formed in 1995. Originally, Access acted as an agent for U S
WEST communications services and sold local area network and wide area network
hardware for computer systems. In November 1998, Access determined to
discontinue its hardware sales to focus on selling U S WEST communications
services. While all of Access' 1998 revenues were from commissions paid by U S
WEST, Access has recently begun offering Qwest long distance services and is
beginning to develop other provider relationships.
We are party to a consulting agreement with BIBD, LLC, a venture
between BACE Industries, LLC and Black Diamond Capital, LLC. Under the
consulting agreement, BIBD will help us identify potential agent and ISP
acquisition candidates, evaluate certain financial and business aspects of the
candidates and document and close the acquisitions approved by PentaStar's board
of directors. After this offering BACE Investments, which is under common
ownership with BACE Industries, will own 33.5%, and Black Diamond will own
14.6%, of our common stock. Our board of directors has adopted a policy pursuant
to which a majority of our directors who are not affiliated with BIBD, BACE
Industries or Black Diamond must approve any acquisitions.
On August 13, 1999, we changed our name to PentaStar Communications,
Inc. from Optimal Communications, Inc. Our executive offices are located at 1522
Blake Street, Denver, Colorado 80202 and our telephone number is (303) 825-4400.
THE OFFERING
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Common stock offered............................................. 1,500,000 shares
Common stock to be outstanding after this offering............... 4,999,997 shares
Use of proceeds.................................................. To finance the acquisition of ICM and
Access; to make other complementary
acquisitions or investments; to repay
certain indebtedness; and for working
capital, systems investment and other
general corporate purposes.
Proposed Nasdaq SmallCap Market symbol........................... PNTA
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The 1,500,000 shares offered by this prospectus do not include any of
the shares of our common stock that will be issued in the acquisitions of ICM
and Access.
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The number of shares of common stock to be outstanding after this
offering does not include shares we have either agreed to issue or reserved for
issuance under our stock option plan. For an explanation, please refer to the
"Capitalization" section on page 24.
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SUMMARY PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary unaudited pro forma combined financial data
present financial data for our business as adjusted for: (1) the effects of the
acquisitions of ICM and Access on an historical basis; (2) the effects of pro
forma adjustments to the historical financial statements; and (3) the completion
of this offering.
We prepared the unaudited pro forma statement of operations data to
reflect the acquisitions of ICM and Access as if they had each occurred on
January 1, 1998. These results have been prepared using the purchase method of
accounting. We have presented this information to give you a better picture of
what our business might have looked like if we had owned ICM and Access since
January 1, 1998. These companies may have performed differently if they had
actually been combined with our operations. You should not rely on the unaudited
pro forma information as being indicative of the historical results that we
would have had or the future results that we will experience after the
acquisitions. Please see our unaudited pro forma condensed combined financial
information beginning on page F-2.
SUMMARY PRO FORMA STATEMENT OF OPERATIONS DATA
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YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER -------------------------
31, 1998 1998 1999
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Total revenues ................................ $6,657 $2,744 $2,996
Costs and expenses ............................ 5,592 2,603 2,789
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Income from continuing operations ............. $1,065 $ 141 $ 207
====== ====== ======
Net income (loss) from continuing operations .. $ 617 $ 10 $ 134
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Basic and diluted per share data (1)
Net income (loss) per share from
continuing operations ...................... $ 0.18 $ -- $ .04
====== ====== ======
Depreciation and amortization ................. $ 307 $ 154 $ 160
EBITDA(2) ..................................... $1,372 $ 295 $ 367
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SUMMARY PRO FORMA BALANCE SHEET DATA AS OF JUNE 30, 1999
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PRO PRO FORMA
FORMA (3) AS ADJUSTED (4)
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Current assets ....................................... $ 2,008 $12,044
Goodwill ............................................. 3,814 3,814
Other noncurrent assets .............................. 1,076 1,076
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Total assets ................................. $ 6,898 $16,934
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Current liabilities .................................. $ 3,570 $ 1,120
Shareholders' equity ................................. 3,328 15,814
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Total liabilities and shareholders' equity ... $ 6,898 $16,934
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(1) Based upon 3,499,997 pro forma basic and diluted shares outstanding.
(2) EBITDA represents the income (loss) from operations before interest, other
expense (income), income tax expense (benefit) depreciation and
amortization. PentaStar considers EBITDA an important indication of the
operational performance of its
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<PAGE> 10
business. EBITDA is presented to enhance an understanding of operating
results. EBITDA does not represent cash flow for the periods presented and
should not be considered as an alternative to net income (loss), as an
indicator of operating performance or as an alternative to cash flows as a
measure of liquidity, in each case determined in accordance with generally
accepted accounting principles. PentaStar's definition of EBITDA may not be
comparable to EBITDA as defined by other companies.
(3) The pro forma column reflects the acquisitions of ICM and Access as if they
had each occurred on June 30, 1999. For purposes of presentation, the
current liabilities include the $2,423 cash portion of the purchase price
for ICM and Access.
(4) The pro forma as adjusted column gives effect to completion of this
offering at an assumed offering price of $10.00 per share, after deducting
underwriting discounts and other estimated offering expenses. Additionally,
the $2,423 cash portion of the purchase price for ICM and Access shown
within the current liabilities in the pro forma column, is reflected as
repaid in this column using proceeds from this offering.
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RISK FACTORS
You should carefully consider the following risks before you decide to
buy our common stock. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us may also impair our business.
If any of the events described in the following risks actually occur,
our business, financial condition and operating results could be materially
adversely affected and cause the price of our common stock to be highly
volatile. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
RISKS RELATING GENERALLY TO OUR COMPANY
WE CANNOT PREDICT OUR SUCCESS BECAUSE WE HAVE NO COMBINED OPERATING HISTORY AND
OUR BUSINESS MODEL IS UNTESTED.
We are a newly-formed company with no operations for you to review in
evaluating our business. We will combine ICM and Access into PentaStar
concurrently with the completion of this offering. This makes it difficult to
determine if their businesses can be integrated and operated successfully
together. We will be applying a business model that has not been tested in our
industry, and the success of this business model depends on our ability to build
on the strengths of ICM, Access and other future acquisitions and to centralize
many of their business functions. It may take us longer than anticipated to
implement our business model and some components of our model may not prove to
be feasible or possible. As a result, our business may not produce the level of
profitability we are trying to achieve.
OUR SUCCESS WILL DEPEND IN LARGE PART ON OUR ABILITY TO SUCCESSFULLY INTEGRATE
THE OPERATIONS AND MANAGEMENT OF AGENTS AND ISPS WE ACQUIRE.
Our success as a multi-regional communications services agent and ISP
will depend in large part on our ability to integrate ICM and Access and our
ability to integrate agents and ISPs we may acquire in the future. We will have
to expend substantial managerial, operating, financial and other resources to
integrate these businesses. If we do not successfully integrate our agents and
ISPs we may experience significant operating inefficiencies, which would reduce
our profitability.
OUR FUTURE REVENUES ARE UNPREDICTABLE, OUR OPERATING RESULTS WILL FLUCTUATE AND
THE VALUE OF YOUR INVESTMENT MAY BE ADVERSELY AFFECTED.
We are unable to forecast our revenues with any degree of certainty as
a result of our lack of combined operating history. Our current and projected
expense levels are based largely on our estimates of future revenues. We also
believe that our operating results may fluctuate significantly from quarter to
quarter due primarily to customer ordering patterns for
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communications equipment and services. As a result, we believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of future performance. It is also likely that in some future quarter,
our operating results may be below the expectations of public market analysts or
investors. In this event, the price of our common stock may fall.
WE MUST INCREASE REVENUES TO SUPPORT OUR EXPANDED INFRASTRUCTURE.
To implement our business plan following the acquisitions of ICM and
Access, we anticipate making expenditures to build our infrastructure, including
the management and systems necessary to support a multi-regional company. As a
result, our success will depend greatly upon our ability to continue to increase
revenues through acquisitions of agents and ISPs to offset these expenses. To
the extent these expenses are not offset by increased revenues, our net income
will decline.
WE FACE RISKS ASSOCIATED WITH THE TWO ACQUISITIONS WE WILL COMPLETE CONCURRENTLY
WITH THE COMPLETION OF THIS OFFERING AND WE WILL CONTINUE TO FACE RISKS DUE TO
OUR ACQUISITION STRATEGY THAT MAY DILUTE SHAREHOLDERS' EQUITY AND RESULT IN US
FAILING TO MEET OUR FINANCIAL OBJECTIVES.
Our acquisition strategy to acquire agents and ISPs is subject to the
following risks:
o we may be unable to identify suitable acquisition candidates at
reasonable prices;
o costs of these acquisitions, including the amortization of
intangible assets, could adversely affect our operating results
and profitability;
o because we plan to use our common stock as acquisition currency,
the completion of acquisitions is dependent on our stock price and
the acquisitions may be dilutive to our shareholders; and
o we may be unable to retain the customer base of our specific
acquisitions.
In addition, it is typical in our industry for agent agreements to
contain provisions that require the consent of the communications service
provider to a change of control of the agent. We may not be able to complete
attractive acquisitions if we are unable to obtain the approval of these third
parties. Additionally, due to these risks, we may be unable to successfully
engage in our planned acquisition strategy.
COMPETING BIDS FOR AGENTS AND ISPS THAT WE ARE INTERESTED IN MAY DRIVE UP
PURCHASE PRICES AND LIMIT OUR ABILITY TO CARRY OUT OUR ACQUISITION STRATEGY.
Our future success depends greatly on our ability to expand into new
markets through the acquisition of agents and ISPs. We will face competition
from other companies seeking to acquire and consolidate agents and ISPs. Many of
these companies may have significantly greater financial and other resources
than we do. As a result of this competition and demand, we may be unable to
purchase potential acquisition candidates due to increased acquisition prices.
If
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<PAGE> 13
we are unable to purchase, or must pay higher acquisition prices for, agents or
ISPs, our business, financial condition and operating results will be materially
adversely affected.
WE MAY ACQUIRE CONTINGENT OR UNDISCLOSED LIABILITIES AS A RESULT OF OUR
ACQUISITIONS THAT COULD DEPLETE OUR CASH RESERVES.
The acquisitions of ICM and Access are, and the acquisition of other
agents and ISPs may be, structured as stock purchases. As a result, we may
acquire liabilities that we did not know about at the time we negotiated or
closed these acquisitions. If these liabilities arise, they may be in excess of
our ability to collect on our indemnification rights against the former owners
of the acquired company. In that case, our cash reserves may decline.
THE COMMUNICATIONS INDUSTRY IS UNDERGOING RAPID CHANGE AND WE MUST KEEP CURRENT
WITH THESE CHANGES IN ORDER TO ADDRESS THE NEEDS OF OUR CUSTOMERS.
Our business plan is premised upon providing a comprehensive
communications solution to customers. As a result, we must continually be aware
of and educate ourselves on developments in the communications industry,
including:
o rapidly changing technology and communication delivery methods;
o constantly evolving industry standards and practices;
o frequent new service introductions and enhancements; and
o changing client requirements and preferences.
If we do not remain knowledgeable of technology developments and
evolving service offerings, we will not be able to address the complex and
varied needs of our customers.
AS A RESULT OF THE ACQUISITIONS OF ICM AND ACCESS WE WILL INCUR GOODWILL EQUAL
TO 22.6% OF OUR TOTAL ASSETS, $191,000 OF WHICH WILL BE AMORTIZED EACH YEAR FOR
20 YEARS, WHICH WILL DECREASE OUR NET INCOME.
As a result of the acquisitions of ICM and Access, we will incur
goodwill currently estimated at approximately $3.8 million. This goodwill is
equal to approximately 22.6% of our total assets and will be expensed at an
approximate annual rate of $191,000 for 20 years . We expect these charges to
have a significant adverse effect on our net income for the foreseeable future.
In addition, if we are required to write-off a significant portion of any
unamortized intangible asset our net income would decline.
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<PAGE> 14
WE WILL RELY ON BIBD TO ASSIST US IN EXECUTING OUR ACQUISITION STRATEGY.
We are party to a consulting agreement with BIBD, LLC, a venture
between BACE Industries and Black Diamond. We will be reliant on BIBD in
executing our acquisition strategy. BIBD will identify potential acquisitions
through industry contacts, referrals from other agents or ISPs and analysis of
various data bases. Once a candidate fitting PentaStar's acquisition profile is
identified, BIBD will assist PentaStar in gathering and evaluating financial and
business information. If the acquisition is approved by a majority of our
directors who are not affiliated with BIBD, BACE Industries or Black Diamond,
BIBD will help us document and close the acquisition. Robert S. Lazzeri and
Carleton A. Brown will be the directors who, at the closing of this offering,
will not be affiliated with BIBD, BACE Industries or Black Diamond. Within 90
days of this offering we will add an additional independent director. The
termination of this consulting agreement or the loss of the services provided by
BIBD could have a material adverse effect on our ability to successfully
implement our acquisition strategy. Please see "Certain Transactions" for a more
detailed description of the terms of this consulting agreement and other
agreements with these parties.
WE MAY HAVE CONFLICTS OF INTEREST WITH BIBD, BACE INDUSTRIES AND BLACK DIAMOND
WITH RESPECT TO THE CONSULTING AGREEMENT.
Under the terms of our consulting agreement with BIBD, we pay BIBD a
fee that will range from $12,000 per month to $21,000 per month depending on
PentaStar's annualized revenues. Because acquisitions will increase our
annualized revenues, and as a result the monthly fee payable to BIBD, there may
be conflicts of interest in connection with any proposed acquisition. To address
this, any acquisition must be approved by a majority of our directors who are
not affiliated with BIBD, BACE Industries or Black Diamond. In addition, after
this offering BACE Investments, which is under common ownership with BACE
Industries, will own 33.5%, and Black Diamond will own 14.6%, of our common
stock.
THE LOSS OF SENIOR MANAGEMENT OR OTHER KEY PERSONNEL, WITH EXPERIENCE IN THE
COMMUNICATIONS SERVICES INDUSTRY, THE INABILITY OF THESE PERSONS TO WORK
EFFECTIVELY TOGETHER AND OUR FAILURE TO ATTRACT AND RETAIN ADDITIONAL HIGHLY
SKILLED PERSONNEL COULD HARM OUR BUSINESS AND CAUSE OUR STOCK PRICE TO FALL.
We believe that our success will depend on the services and performance
of our senior management team, especially Robert S. Lazzeri, our chief executive
officer upon this offering, and R. Neal Tomblyn, our president and chief
operating officer upon this offering, and other key personnel. The loss of the
services of any of our senior management team or other key employees could
adversely affect our business, financial condition and operating results.
Members of our senior management team have not worked together prior to the date
of this prospectus and may not be able to work effectively together. Intense
competition in the communications industry for qualified personnel may adversely
impact our ability to identify, hire, train and retain highly qualified
technical, marketing, sales and operations personnel.
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OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS.
The year 2000 issue could result in major system failures or
miscalculations. Many of our service providers, customers and potential
customers maintain their operations on systems that may not be year 2000
compliant. If our service providers are not year 2000 compliant, we may be
unable to obtain the services we require for our operations. If our customers'
and potential customers' systems are impacted by the year 2000 issue, our
business could be materially impacted, particularly if demand for our services
declines as a result of our customers' needs to upgrade their computer systems.
The services we deliver to our customers are dependent on third-party services
and products. As a result, it is difficult for us to determine which part of our
services may result in year 2000 problems. This may cause us to be involved in
litigation concerning our services.
GENERAL ECONOMIC CONDITIONS MAY AFFECT OUR CUSTOMERS' NEEDS FOR COMMUNICATIONS
AND INTERNET SERVICES.
In the last few years the health of the general economy has been
relatively strong. To the extent the general economic health of the United
States declines from recent historical high levels, or to the extent companies
and individuals fear a decline is imminent, these companies and individuals may
delay or cancel plans to expand or upgrade their communication systems, which
could cause our revenues to decline or be delayed.
WE CURRENTLY HAVE ONLY ONE INDEPENDENT DIRECTOR.
Upon this offering, our board of directors will consist of four
persons, only one of whom will not be affiliated with PentaStar. We intend to
add an additional independent director within 90 days of this offering.
RISKS RELATED TO OUR COMMUNICATIONS SERVICES AGENT BUSINESS
WE CURRENTLY DEPEND UPON THE COMMISSIONS AND FEES FROM ONE RBOC.
Our operating results currently depend upon our agreements with U S
WEST. If these agreements were terminated or not renewed, our revenues would be
materially impacted. The agreements with U S WEST include performance
benchmarks, which if not met, could result in termination of these agreements.
These agreements expire in December 2000.
-11-
<PAGE> 16
OUR AGREEMENTS WITH U S WEST PERMIT IT TO MAKE CHANGES IN MATERIAL TERMS OF THE
AGREEMENTS WITHOUT OUR CONSENT.
Our agreements with U S WEST provide that, upon notice, U S WEST may
without our consent change the commission rates payable, the services covered
and the geographical territory in which we may sell its services. Any reduction
in the commission rates, changes in the types of services or the geographical
territory in which services may be sold would materially reduce our revenues.
THE EXCLUSIVITY PROVISIONS IN OUR U S WEST AGREEMENTS MIGHT IMPAIR THE
IMPLEMENTATION OF OUR BUSINESS PLAN.
Our agreements with U S WEST provide that we are to exclusively market
specified U S WEST core products and services, including local access, wireless
and Internet services. We believe all U S WEST agent agreements contain similar
provisions. Our business plan contemplates that we will market certain of these
services, other than local access, for communications service providers other
than U S WEST. We believe that U S WEST has not enforced the exclusivity
provisions against its agents with respect to communications services other than
local access. If the exclusivity provisions were enforced against us for
services other than local access, we would be forced to market local access
services from a communications service provider other than U S WEST. Enforcement
of those provisions could have a material adverse effect on our ability to
execute our business plan in the future.
WE WILL NEED TO ESTABLISH AGENT RELATIONSHIPS WITH OTHER COMMUNICATIONS SERVICE
PROVIDERS TO FULLY EXECUTE OUR BUSINESS PLAN.
In order to provide our customers with a comprehensive communications
solution and independent evaluation of available communications services and
technologies, except in local access, we will need to establish agent
relationships with multiple providers of long distance, wireless and Internet
services. Failure to establish these relationships could result in reduced
revenues due to the loss of customers to other agents or service providers.
A DECLINE IN THE QUALITY OF SERVICES OR COMPETITIVENESS OF PRICING PROVIDED BY
THE COMMUNICATION SERVICE PROVIDERS FOR WHOM WE ACT AS AGENTS MAY CAUSE US TO
LOSE CUSTOMERS.
The communications services that we sell are critical to the operations
of the businesses of our customers. These communications services are priced,
provided and billed by third party providers that we do not control. If the
quality or delivery of services offered by U S WEST or any other communications
service providers we may deal with were to decline or if their pricing was no
longer competitive, we may lose customers, which would adversely affect our
revenues.
-12-
<PAGE> 17
WE RELY ON U S WEST TO PROVIDE LOCAL ACCESS SERVICE, AND IF U S WEST ENCOUNTERS
WORK STOPPAGES, SLOWDOWNS, STRIKES OR OTHER DISRUPTIONS OF THEIR LABOR FORCE, IT
MAY IMPACT OUR ABILITY TO SERVICE OUR CUSTOMERS, WHICH MAY AFFECT OUR
PROFITABILITY.
We rely on U S WEST, and in the future may rely upon other RBOCs, to
provide local access service to our customers. Unions have been established at
all of the RBOCs. If U S WEST or any other RBOC with whom we establish an agent
relationship were to experience a work stoppage, slowdown, strike or other labor
disruption, local access service could be affected. As a result, we could suffer
a decline in revenues or customer loss. If we are unable to market local access
services as a result of any labor disruptions, our revenues could decline.
ICM AND ACCESS HAVE RECENTLY BEGUN ACTING AS A SALES AGENT FOR LONG DISTANCE,
WIRELESS AND INTERNET SERVICES, AND WE MAY NOT BE SUCCESSFUL IN SELLING OR
GENERATING SUBSTANTIAL REVENUES FROM THESE SERVICES.
Until 1998, the only communications services that ICM and Access
marketed to customers were U S WEST's local access services. In January 1998,
ICM and Access each began offering U S WEST Internet services. In December 1998,
ICM and Access each began offering U S WEST wireless services. ICM began
offering Qwest long distance services in October 1998 and AT&T long distance
services in April 1999. In January 1999, Access began offering Qwest long
distance services. In June 1998, ICM began offering Epoch Internet services. We
do not know if our current customers or future customers will purchase these
services through us or if we will be successful in marketing these services. If
we are unable to establish additional agency relationships with providers or
sell these additional services to our customers, our revenues would not increase
as we anticipate.
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WITH LARGER COMMUNICATIONS COMPANIES
AND OTHER COMMUNICATIONS SERVICE PROVIDERS AND AGENTS, AND THE VALUE OF YOUR
INVESTMENT MAY DECLINE AS A RESULT.
The market for communications services is extremely competitive. We
expect that this competition will continue to intensify as new communications
services agents and ISPs enter the market. The local access, long distance,
wireless and Internet services we market compete for customer recognition with
other providers offering similar services. We compete directly with other
communications services agents and indirectly with national, regional and local
communications providers of local access, long distance, wireless and Internet
services. Many of our competitors have greater name recognition and financial,
marketing and other resources. As a result, we may be unable to successfully
compete against our competitors' pricing strategies, technology advances,
advertising campaigns and other initiatives. We will need to distinguish
ourselves by our communications services knowledge, our ability to offer a range
of services and our responsiveness. We cannot assure you that we will be able to
distinguish ourselves from our competitors or survive in this intensely
competitive market.
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<PAGE> 18
SOME OF THE COMMUNICATIONS SERVICES WE SELECT FOR OUR CUSTOMERS ARE SUBJECT TO
GOVERNMENT REGULATION AND CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS COULD
ADVERSELY AFFECT OUR BUSINESS, AND THE VALUE OF YOUR INVESTMENT COULD DECLINE.
A significant portion of the communications services that we select for
our customers are subject to regulation at the federal, state or local levels.
Future federal state or local regulations may be less favorable to us than
current regulations. This could cause a decrease in demand for our services or
increase our cost of doing business.
The RBOC agency programs were developed by the RBOCs as a way to comply
with a 1982 federal district court antitrust decree that mandated the breakup of
AT&T and with the FCC's requirement that the RBOCs provide enhanced services and
equipment through separate subsidiaries. The FCC has accepted the use of agents
as a way of meeting these requirements. Changes in the requirements or
regulations regarding the RBOCs could result in a change in the way RBOCs use
agents or result in the RBOCs no longer using agents. If the RBOCs cease using
agents, our business, financial condition and operating results would be
materially adversely impacted. In addition, the government has promoted, and is
currently taking regulatory action to promote, greater competition in the local
access markets. As a result of any increased competition due to these local
services market regulations, prices could be eroded which would result in us
earning less commission revenues on our agency contracts.
Since our communications services strategy is dependent on the RBOCs
and regulatory activities are chiefly aimed at fostering competition with and
among the RBOCs, regulatory activities could have a negative effect on our
ability to sell communications services.
RISKS RELATED TO INTERNET SERVICE PROVIDERS
As part of our growth strategy, we plan to acquire ISPs that provide
Internet access across telephone lines in small, high growth markets. As of the
date of this prospectus, we have not acquired any ISPs. We may not be able to
acquire any ISPs for the reasons set forth elsewhere in this prospectus. If we
do acquire any ISPs, our ISP business will be subject to the following risks in
addition to those set forth elsewhere in this prospectus, and those not
presently known to us.
THE INTERNET SERVICE MARKET CHANGES RAPIDLY AND WE MAY NOT BE SUCCESSFUL IN
ADOPTING NEW TECHNOLOGIES OR ALTERNATIVE INTERNET ACCESS SYSTEMS.
The ISP industry is characterized by rapid changes in technology,
evolving industry standards, emerging competition and frequent new service
introductions. We are not able to predict if we will have the necessary
resources to adapt and compete in this changing marketplace. If the Internet
becomes easily accessible in other ways, we would need to change our anticipated
method of providing Internet access, which would require substantial time and
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<PAGE> 19
expense. If we are unable to change our methodology, we would not be able to
effectively compete.
IF COMMUNICATIONS CARRIERS DO NOT PROVIDE US WITH ADEQUATE COMMUNICATIONS
CAPACITY TO DELIVER OUR INTERNET SERVICES, WE MAY LOSE SUBSCRIBERS AND FAIL TO
ATTRACT NEW SUBSCRIBERS, WHICH WOULD RESULT IN REDUCED REVENUES AND
PROFITABILITY.
We will rely on local and long-distance communications companies to
provide communications capacity to deliver our Internet services. These
providers may experience disruptions of service or may have limited capacity,
which could disrupt our services or limit Internet access for subscribers of
ISPs we may acquire. We may not be able to replace or supplement these services
on a timely basis or at all. In addition, because we will rely on third-party
communications service providers for our connection to the Internet, we will
face the following limitations on our ability to serve Internet subscribers and
add additional subscribers:
o we will not control decisions regarding availability of service at
any particular time;
o we may not be able to deploy new technologies when we wish to
because our communications service providers may not be able to
support that technology on their infrastructure;
o we may not be able to increase access capacity sufficiently to
respond to increased subscriber demand; and
o we may not be able to negotiate favorable interconnect agreements
with other communications service providers.
Communications carriers may also supply their services to ISPs that
will be our competitors and these carriers may be, or in the future may become,
competitors themselves. Communications carriers with whom we do business may
enter into exclusive arrangements with our competitors or stop supplying their
services to us at commercially reasonable prices or at all.
A DROP IN DEMAND FOR INTERNET ACCESS MAY RESULT IN A REDUCTION OF ANTICIPATED
REVENUES.
Our anticipated ISP business will rely on demand for access to the
Internet and for services related to the Internet. Although the Internet has
experienced rapid growth in recent years, commerce and communication over the
Internet may not continue to develop and expand. Even if they do, the Internet
access and communications services we anticipate offering may not become widely
adopted for these purposes.
Our anticipated business and revenues will not grow as we expect and
may decline if:
o the market for Internet access services fails to continue to
develop;
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<PAGE> 20
o the Internet market develops more slowly than expected; or
o the Internet market becomes saturated with competitors.
OUR PLAN TO INCREASE REVENUES BY MARKETING ADDITIONAL COMMUNICATIONS SERVICES TO
THE BUSINESS SUBSCRIBERS OF THE ISPS WE ACQUIRE MAY NOT SUCCEED.
Part of our strategy to increase revenues is to use the sales force of
the ISPs we acquire to sell local access, long distance and wireless services to
business subscribers of the ISPs. If these additional sales efforts are not
successful, the increase in revenues we anticipate will not be realized.
INTERNET SYSTEMS FAILURES AND DELAYS COULD RESULT IN A LOSS OF SUBSCRIBERS AND A
CONSEQUENT REDUCTION IN ANTICIPATED REVENUES OF OUR PROPOSED ISP BUSINESS.
We will face capacity constraints both at the level of particular
points of presence, affecting subscribers attempting to use that point of
presence, and in connection with system-wide services like e-mail. We may
experience delayed delivery from suppliers of new telephone lines, modems,
routers, terminal servers and other equipment. If we experience significant
delays of this nature, all our incoming modem lines may become full during peak
times, resulting in busy signals for subscribers who are trying to connect to
our network. We may experience similar problems if we are unable to expand the
capacity of our information servers for e-mail, news and the World Wide Web fast
enough to keep up with demand from a growing subscriber base. If the capacity of
our servers is exceeded, subscribers will experience delays when trying to use a
particular service. If we do not maintain sufficient capacity in our network
connections, subscribers will experience a general slowdown of all ISP services.
If we fail to expand or enhance our network on a timely basis or to adapt to
changing subscriber requirements or evolving industry standards, we could lose
subscribers, which could result in a reduction in anticipated revenues.
The occurrence of a natural disaster or other unanticipated problems at
one of our points of presence could cause service interruptions for subscribers.
In addition, if communications service providers fail to provide the
communications capacity we require as a result of a natural disaster,
operational disruption or for any other reason, subscribers could experience
service disruptions. We do not anticipate maintaining fully redundant or back-up
Internet services or infrastructure or other fully redundant computing and
communications facilities. Any accident, incident or system failure that causes
interruptions in operations could limit our ability to provide Internet services
to subscribers.
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<PAGE> 21
IF THE SECURITY MEASURES OF ISPS WE ACQUIRE WERE TO FAIL, WE MAY LOSE
SUBSCRIBERS OR BE SUED, RESULTING IN ADDITIONAL EXPENSES.
Fixing problems caused by computer viruses, other inappropriate uses or
security breaches may require interruptions, delays or stops in service to
Internet subscribers, which could cause them to seek Internet access from other
providers. In addition, we expect subscribers will increasingly use the Internet
for commercial transactions in the future. Any network malfunction or security
breach could cause these transactions to be delayed, not completed at all or
completed with compromised security. Our subscribers or others may sue us as a
result of a failure, which could result in additional expenses.
IMPLEMENTATION OF NEW GOVERNMENT REGULATIONS MAY INCREASE OUR EXPECTED COSTS OF
THE ISP BUSINESS.
Changes in the regulatory environment relating to the Internet access
market, including changes that affect communications costs or increase
competition from RBOCs or other communications service providers, could
adversely affect the prices at which we may sell ISP services. For example, the
imposition of interstate access charges or the elimination of reciprocal
compensation for local telephone companies may increase the cost of serving
subscribers.
The FCC may, in the future, reconsider its past ruling that Internet
access service is not "interstate telecommunications" and that ISPs are not
subject to the requirement to pay a percentage of their gross revenues as a
"universal service contribution." If the FCC were to require universal service
contributions from providers of Internet access or Internet infrastructure
services, our expected costs of doing business could increase substantially, and
we may not be able to recover these costs from our customers.
WE COULD INCUR LIABILITY FOR INFORMATION DISSEMINATED BY THE
ISPS THAT WE MAY ACQUIRE OR BY SUBSCRIBERS OF THOSE ISPS.
We may be subject to lawsuits claiming damages arising out of the
dissemination of information by the ISPs that we may acquire, or by subscribers
of those ISPs. For example, lawsuits have been brought against ISPs seeking
damages for the dissemination by their subscribers of defamatory speech and for
copyright infringement. ISPs have also been sued for alleged violations of the
Electronic Communication Privacy Act, which imposes conditions on the
unauthorized disclosure of the contents of an electronic communication. The law
regarding the extent to which ISPs can be held liable for disseminating
information originating with their subscribers or for disclosing information
about or communications by their subscribers is still developing. However, if
lawsuits such as those described were brought against the ISPs that we may
acquire, we would incur expenses defending these lawsuits and might be required
to pay monetary damages.
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<PAGE> 22
AS A RESULT OF AN INCREASE IN THE NUMBER OF COMPETITORS, AND VERTICAL AND
HORIZONTAL INTEGRATION IN THE ISP INDUSTRY, WE EXPECT TO FACE SIGNIFICANT
COMPETITION.
Our competitors will include ISPs and on-line service providers with a
significant national presence available in small, high growth regions, including
America Online, Microsoft Network, Prodigy, MindSpring and EarthLink. Most of
these competitors have significantly greater market presence, brand recognition
and financial, technical and personnel resources than we will. They also have
extensive coast-to-coast access to Internet infrastructure, which may provide
them with the ability to provide better service quality. We will also compete
with independent regional and local ISPs. We expect increased competition over
time in small, high-growth markets as national on-line service providers and
other ISPs enter and increase their focus on these markets.
All of the major long-distance companies, including AT&T, MCI/WorldCom
and Sprint, offer Internet access services and will compete with us. Local
access carriers, including RBOCs and competitive local exchange carriers, or
CLECs, also have entered the ISP market. We believe long-distance and local
carriers are moving toward horizontal integration through acquisitions of, and
joint ventures with, ISPs. Accordingly, we expect we will experience increased
competition from the traditional communications carriers both for Internet
subscribers and potential ISP acquisitions.
In addition, AT&T and Time Warner, among other cable companies, offer
high speed Internet access via cable modem in a growing number of markets,
either directly or through alliances with Internet access providers such as At
Home Corporation. Other alternative service companies are approaching the
Internet access market with various newer wireless terrestrial- and
satellite-based service technologies. These companies will have substantially
greater financial and other resources than we anticipate having.
RISKS RELATED TO OUR STOCK AND THIS OFFERING
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION OF APPROXIMATELY $7.62 PER
SHARE AND MAY EXPERIENCE CONTINUED DILUTION IN THE FUTURE.
The initial public offering price is substantially higher than the net
tangible book value per share of the outstanding common stock immediately
following this offering. As a result, if you purchase common stock in this
offering you will incur immediate and substantial dilution of approximately
$7.62, or 76%, in the net tangible book value per share of the common stock from
the price you pay for the common stock in this offering.
In addition, upon this offering we will issue warrants for 150,000
shares of common stock to the representative and options for 375,000 shares of
common stock to a director, two executive officers, some employees of ICM and
Access and a consultant. You may experience
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<PAGE> 23
further dilution to the extent that our common stock is issued upon the exercise
of the warrants and options.
MANAGEMENT HAS BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING AND
SHAREHOLDERS WILL HAVE NO OPPORTUNITY TO REVIEW ANY ACQUISITION.
Our management will have broad discretion over the use of proceeds we
raise in this offering. You will not have the opportunity to evaluate the
economic, financial or other information on which the management bases its
decisions on how to use the proceeds. In particular, you will not have an
opportunity to review the financial statements or any other information of any
agent or ISP business that we may propose to acquire and you will not be able to
vote on any of these acquisitions. You must rely on the judgment of management
in the application of the proceeds.
THERE IS NO EXISTING MARKET FOR OUR COMMON STOCK AND AN ACTIVE TRADING MARKET
MAY NOT DEVELOP.
Before this offering, there has not been a public market for our common
stock. We have applied for listing on the Nasdaq SmallCap Market of our common
stock, but we do not know whether active trading in the common stock will
develop and continue after this offering. We will determine the initial public
offering price for the common stock through negotiations with the underwriters.
You may not be able to resell your shares at or above the initial public
offering price.
OUR STOCK PRICE MAY BE VOLATILE, WHICH MAY AFFECT YOUR INVESTMENT.
Following this public offering, our common stock price may fluctuate
significantly as a result of:
o variations and fluctuations in our operating results, revenues and
pace of acquisitions, and related public announcements by us;
o failure to meet analyst and investor expectations with respect to
our operating results, revenues and acquisitions;
o changes in our industry, including regulatory conditions;
o general economic and market conditions that impact the needs of
customers and potential customers for communications services; and
o our common stock being held by relatively few owners, which could
result in a relatively small number of trades having a significant
impact on our stock price.
The securities of many companies have experienced extreme price and
volume fluctuation in recent years that is often unrelated to their operating
performance. In addition, the market prices for securities of communications,
Internet-related and technology companies have frequently reached elevated
levels following their initial public offerings. These levels are often
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<PAGE> 24
not sustainable and may not bear any relationship to that company's operating
performance. If the market price of our common stock reaches an elevated level
following this offering, it is likely to materially decline. In the past,
companies that have experienced volatility in the market price of their stock
have been the object of securities class action litigation. If we were the
object of securities class action litigation, it could result in substantial
costs and diversion of management's attention and resources.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE OUR STOCK
PRICE TO FALL AND DECREASE THE VALUE OF YOUR INVESTMENT.
Following this offering, only 30% of our common stock, or 1,500,000
shares, will be held by the public and publicly traded. As a result, the market
price of our common stock could fall if our public shareholders sell substantial
amounts of common stock, or if shares not presently available for public
trading, including those issued upon the exercise of outstanding warrants and
options, are sold into the public market following this offering. These sales
might impede our ability to raise capital through the sale of equity securities
in the future at a time and price that we deem appropriate.
OUR ANTI-TAKEOVER PROVISIONS AND STOCK OWNERSHIP BY BACE INVESTMENTS AND BLACK
DIAMOND COULD NEGATIVELY IMPACT OUR SHAREHOLDERS.
Some of the provisions of our certificate of incorporation, bylaws and
Delaware law could make it more difficult for a third party to acquire us. These
provisions may adversely affect the price of our common stock, discourage third
parties from making bids for us and reduce premiums paid to our shareholders for
their common stock. For example, we may issue one or more series of preferred
stock without the approval of the shareholders. After consummation of this
offering, the members of BACE Investments, LLC (who are also the members of BACE
Industries) will beneficially own 33.5% of the outstanding shares of our common
stock (32.1% if the representative's over-allotment option is exercised in full)
and Craig J. Zoellner and Richard M. Tyler, the members of BACE Investments and
BACE Industries, will continue to serve on our board of directors. After
completion of this offering, the member of Black Diamond will beneficially own
14.6% of the outstanding shares of our common stock (14.0% if the
representative's over allotment option is exercised in full). BACE Investments
and Black Diamond will be able to significantly influence the composition of our
board of directors and the approval or disapproval of matters requiring
shareholder approval and will continue to have significant influence over our
affairs.
This significant ownership by BACE Investments and Black Diamond of our
capital stock could have the effect of delaying or preventing a change of our
control or otherwise discouraging a potential acquiror from attempting to obtain
control of us. This could result in a material adverse effect on the market
price of our common stock or prevent our shareholders from realizing a premium
over the market prices for their shares of common stock.
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<PAGE> 25
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form SB-2 under the Securities Act of 1933
with respect to the common stock offered by this prospectus. This prospectus
does not contain all of the information in the registration statement and the
related exhibits and schedules. For further information about us and our common
stock, please refer to the registration statement and the exhibits and schedules
filed with the registration statement. Statements contained in this prospectus
as to the contents of any contract or document filed as an exhibit or schedule
to the registration statement are qualified by reference to the filed exhibit or
schedule.
A copy of the registration statement, and the exhibits and schedules to
the registration statement may be inspected without charge at the public
reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the registration statement may be
obtained from these offices upon the payment of the fees prescribed by the SEC.
You may obtain information on the operation of the public reference facility by
calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains
registration statements, reports, proxies and other information regarding
registrants that file electronically with the SEC. The address of this website
is http://www.sec.gov.
FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus are forward-looking
statements that involve risks and uncertainties. These statements relate to our
future plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as "believes," "expects," "estimates,"
"anticipates," "intends," "plans" and similar expressions. Our actual results
could differ materially from those anticipated in the forward-looking statements
as a result of various factors, including all the risks discussed in "Risk
Factors" and elsewhere in this prospectus.
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<PAGE> 26
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $12.4 million, or approximately $14.4 million if the
representative of the underwriters exercises its over-allotment option in full.
Each of these amounts is based on an assumed initial offering price of $10.00
per share.
The principal reasons for this offering are to raise funds to use for
the following purposes and in the following priorities:
<TABLE>
<CAPTION>
USE PROCEEDS PERCENT
--- -------- -------
<S> <C> <C>
Pay the cash portion of the purchase price of the acquisition
of ICM............................................................... $ 1,923,000 15.5
Pay the cash portion of the purchase price for the acquisition
of Access............................................................ 500,000 4.0
Make other complementary acquisitions or investments,
which may include the acquisition of agents and ISPs................. 8,400,000 67.7
Working capital, systems investment and other general
corporate purposes................................................... 1,577,000 12.8
----------- -----
Total.................................................................. $12,400,000 100.0
=========== =====
</TABLE>
Jeffrey A. Veres, who is a founder and minority shareholder of
PentaStar, is the sole shareholder of Access and will receive the purchase price
for the Access acquisition. Under the acquisition agreement with Mr. Veres, the
cash amount actually payable to him will be reduced to the extent that Access
has liabilities at the closing other than current payables and accrued expenses,
and increased by the amount of cash held by Access at the closing. The same
adjustment mechanism applies to the cash amount payable to the shareholders of
ICM. No shareholders of ICM are founders, shareholders, directors or executive
officers of PentaStar.
As noted above, we may acquire or invest in complementary businesses or
services and a portion of the net proceeds may be used for these acquisitions or
investments. However, other than with respect to the pending acquisition of ICM
and Access, we currently have no understandings, commitments or agreements for
any material acquisition or investment.
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<PAGE> 27
Working capital will be used to pay items such as rent, office
expenses, equipment, salaries and PentaStar's other day-to-day costs of doing
business. It will also be used to supportanticipated growth in accounts
receivable as a result of increasing revenues. If the over-allotment option is
exercised by the representative or if warrants are exercised, PentaStar will
allocate the additional proceeds to acquisitions and working capital, provided
that the amounts allocated to working capital will not exceed 15% of the net
proceeds.
The foregoing represents PentaStar's best estimate of the uses of the
net proceeds to be received in this offering, based on current planning and
business conditions. However, PentaStar reserves the right to change such uses
when and if market conditions or unexpected changes in operating conditions or
results of operations occur. The amounts actually expended for each use may vary
significantly depending upon a number of factors including, but not limited to,
future acquisitions and the amount of cash generated by PentaStar's operations.
PentaStar believes that its existing capital resources and the net proceeds of
this offering will be sufficient to maintain its current and planned operations
for a period of at least 12 months from the date of this prospectus.
Because we have not identified specific uses for all of the net
proceeds from this offering, management will have broad discretion over the use
and investment of the proceeds. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
We currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
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<PAGE> 28
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999.
Our capitalization is presented (in thousands, except share data):
o on an actual basis;
o on a pro forma basis to give effect to the issuance of 370,000
shares of common stock upon the closings of the acquisitions of
ICM and Access; and
o on a pro forma as adjusted basis to reflect our receipt of the
estimated net proceeds from the sale of 1,500,000 shares of common
stock at an estimated initial public offering price of $10.00 per
share, after deducting underwriting discounts and estimated
offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------------------
(UNAUDITED)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
CURRENT BORROWINGS .............................. $ 27 $ 2,450 $ --
-------- -------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $.0001 par value per share,
1,000,000 authorized, no shares issued and
outstanding ................................... $ -- $ -- $ --
Series A preferred stock, $1,000 par value per
share, 86 shares authorized and outstanding... -- -- 86
Common stock (1), $.0001 par value per share,
20,000,000 shares authorized, 3,129,997 shares
issued and outstanding, actual; 3,499,997
shares issued and outstanding, pro forma;
4,999,997 shares issued and outstanding, pro
forma as adjusted ............................ -- -- --
Additional paid-in capital ...................... -- 3,330 15,730
Retained earnings (loss) ........................ (2) (2) (2)
-------- -------- --------
Total shareholders' equity ................... (2) 3,328 15,728
-------- -------- --------
TOTAL CAPITALIZATION ............................ $ 25 $ 5,778 $ 15,814
======== ======== ========
</TABLE>
(1) Common stock has been restated for a 3,417.96 for one stock split.
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<PAGE> 29
The foregoing discussion and table assume no exercise of the
representative's over-allotment option or of any warrants or stock options after
June 30, 1999. You will suffer further dilution to the extent any warrants or
options are exercised in the future.
Based on the number of shares outstanding as of the date of this
prospectus after giving pro forma effect to the acquisitions of ICM and Access,
we expect there to be 4,999,997 shares of common stock outstanding after this
offering. In addition to the shares outstanding after the offering, we have
reserved 1,000,000 shares for issuance pursuant to the exercise of options
granted under our stock option plan. Upon this offering, we will grant options
to purchase 375,000 shares of our common stock to a director, two executive
officers, some employees of ICM and Access and a consultant at an exercise price
per share equal to the initial public offering price. No other options have been
granted by PentaStar.
DILUTION
Our pro forma net tangible book value (deficit) as of June 30, 1999 was
approximately $(486,000), or approximately $(0.14) per share. Pro forma net
tangible book value (deficit) per share represents the amount of our total
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding, assuming the issuance of 370,000 shares of common
stock upon the closings of the acquisitions of ICM and Access.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to the sale
of the 1,500,000 shares of common stock offered at an assumed initial public
offering price of $10.00 per share, and after deducting the underwriting
discounts and estimated offering expenses payable by us, our pro forma net
tangible book value at June 30, 1999 would have been approximately $12,000,000,
or $2.40 per share. This represents an immediate increase in pro forma net
tangible book value of $2.54 per share to existing shareholders and an immediate
dilution in pro forma net tangible book value of $7.60 per share, or 76%, to
purchasers of common stock in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Per Share
- ---------
Assumed initial public offering price per share...................................................... $10.00
Pro forma net tangible book value (deficit) per share
before this offering................................................................... $ (0.14)
Increase per share attributable to new investors....................................... 2.54
Pro forma net tangible book value per share after this offering...................................... 2.40
------
Dilution in pro forma net tangible book value per share to new
investors........................................................................................ $ 7.60
======
</TABLE>
The following table sets forth, on a pro forma basis after giving
effect to the acquisitions of ICM and Access, the differences between the number
of shares of common stock purchased
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<PAGE> 30
from PentaStar, the total consideration paid and the average price per share
paid by existing holders of common stock and by the new investors at the assumed
initial public offering price of $10.00 per share, before deducting underwriting
discounts and other estimated offering expenses payable by PentaStar.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders................... 3,499,997 70 $ 1,000 - $ 0.01
New investors........................... 1,500,000 30 15,000,000 100 10.00
--------- ----------- ---
Total.......................... 4,999,997 100 $15,001,000 100
--------- --- ----------- ---
</TABLE>
Based on the number of shares outstanding as of the date of this
prospectus after giving pro forma effect to the acquisitions of ICM and Access,
we expect there to be 4,999,997 shares of common stock outstanding after this
offering. In addition to the shares outstanding after the offering, we have
reserved 1,000,000 shares for issuance pursuant to the exercise of options
granted under our stock option plan. Upon this offering, we will grant options
to purchase 375,000 shares of our common stock to a director, two executive
officers, some employees of ICM and Access and a consultant at an exercise price
per share equal to the initial offering price. No other options have been
granted by PentaStar.
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<PAGE> 31
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes beginning on page F-1. The
historical statements of operations data set forth below for the periods ended
December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999 and
the historical balance sheet data at June 30, 1999 are derived from and
qualified by reference to our financial statements included elsewhere in this
prospectus. The historical results are not necessarily indicative of results to
be expected for any future period.
ICM COMMUNICATIONS INTEGRATION, INC.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- --------------------
1997 1998 1998 1999
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Advanced communication services ........... $ 2,910 $ 3,681 $ 1,638 $ 1,795
Basic dial tone services .................. 611 594 197 348
------- ------- ------- -------
Total revenues ............................ 3,521 4,275 1,835 2,143
Total operating expenses .................. 2,669 3,698 1,586 1,802
Income from operations .................... 852 577 249 341
Income before provision for income taxes .. 855 585 251 338
Net income ................................ 517 385 155 205
BALANCE SHEET DATA:
Total assets .............................. $ 1,239 $ 2,035 (2) $ 2,405
Long-term borrowings ...................... -- -- (2) --
Total shareholders' equity ................ 486 833 (2) 1,038
CASH FLOW DATA:
EBITDA (1) ................................ $ 862 $ 614 $ 267 $ 366
Cash flows provided by operating activities 309 291 291 298
Cash flows used in investing activities ... 137 321 172 220
Cash flows used in financing activities ... 9 13 6 6
OTHER FINANCIAL DATA:
Depreciation and amortization ............. $ 10 $ 37 $ 18 $ 25
Capital expenditures ...................... 106 96 66 7
</TABLE>
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<PAGE> 32
(1) EBITDA represents the income (loss) from operations before interest, other
expense (income), income tax expense (benefit), depreciation and
amortization. PentaStar considers EBITDA an important indication of the
operational performance of its business. EBITDA is presented to enhance an
understanding of operating results. EBITDA does not represent cash flow for
the periods presented and should not be considered as an alternative to net
income (loss) or as an indicator of operating performance or as an
alternative to cash flows as a measure of liquidity, in each case
determined in accordance with generally accepted accounting principles.
PentaStar's definition of EBITDA may not be comparable to EBITDA as defined
by other companies.
(2) Not provided.
DMA VENTURES, INC.
(DBA ACCESS COMMUNICATIONS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1997 1998 1998 1999
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Advanced communication services ..................... $ 1,921 $ 2,038 $ 683 $ 784
Basic dial tone services ............................ 1,040 344 226 69
------- ------- ------- -------
Total revenues ...................................... 2,961 2,382 909 853
Total operating expenses ............................ 2,141 1,778 959 941
Income (loss) from operations ....................... 820 604 (50) (88)
Income (loss) from continuing operations before
provision for income taxes ........................ 736 555 (97) (112)
Net income from continuing operations ............... 427 343 (63) (70)
Discontinued operations, net of tax (1) ............. (198) (370) (225) (76)
Net income (loss) .............................. 229 (27) (288) (146)
BALANCE SHEET DATA:
Total assets ........................................ $ 1,561 $ 916 (3) $ 868
Long-term borrowings ................................ 248 185 (3) 156
Total shareholders' equity ............................. 240 145 (3) 112
CASH FLOW DATA:
EBITDA(2) ........................................... $ 875 $ 683 $ (9) $ (48)
Cash flows provided by (used in) operating
activities ........................................ 559 (224) (369) (161)
Cash flows used in investing activities ............. 42 13 -- 50
Cash flows provided by (used in) financing activities (96) (271) (153) 132
OTHER FINANCIAL DATA:
Depreciation and amortization ..................... $ 55 $ 79 $ 41 $ 40
Capital expenditures .............................. 42 13 -- 50
</TABLE>
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<PAGE> 33
(1) Represents the results of operations of the hardware business which was
discontinued in April 1999.
(2) EBITDA represents the income (loss) from operations before interest, other
expense (income), income tax expense (benefit), depreciation and
amortization. PentaStar considers EBITDA an important indication of the
operational performance of its business. EBITDA is presented to enhance an
understanding of operating results. EBITDA does not represent cash flow for
the periods presented and should not be considered as an alternative to net
income (loss) as an indicator of operating performance or as an alternative
to cash flows as a measure of liquidity, in each case determined in
accordance with generally accepted accounting principles. PentaStar's
definition of EBITDA may not be comparable to EBITDA as defined by other
companies.
(3) Not provided.
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<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that
involve risks and uncertainties. PentaStar's actual results could differ
materially from those discussed in the forward-looking statements as a result of
these factors, including those set forth under "Risk Factors" and elsewhere in
this prospectus. The following discussion and analysis should be read in
conjunction with "Selected Financial Data" and the financial statements and
notes thereto appearing elsewhere in this prospectus.
GENERAL
PentaStar was incorporated on March 15, 1999 under Delaware law.
Immediately prior to this offering, PentaStar amended and restated its
certificate of incorporation to:
o effect the 3,417.96 for 1 split of its common stock described
elsewhere in this prospectus;
o provide for a classified board of directors;
o cause its authorized capital stock to conform to the "Description
of Capital Stock" section of this prospectus; and
o otherwise cause our certificate of incorporation to contain
provisions we believe appropriate for a public company.
PentaStar's activities to date have consisted of:
o organizing PentaStar;
o developing PentaStar's business plan, management and corporate
structure;
o pursuing the acquisitions of two agents, ICM and Access; and
o conducting activities in connection with this offering.
PentaStar itself has not engaged in any business operations and has not
generated any revenues. PentaStar, ICM and Access have no combined operating
history and have not generated any revenues from their combined operations. Upon
the closing of this offering and the acquisitions of ICM and Access, we will
commence our business operations.
PentaStar will design, procure and facilitate the installation and use
of communications and Internet services for small to medium-sized businesses.
The services we will offer come from third-party communications service
providers. Substantially all of ICM's and Access' combined revenues reflected in
the financial statements included in this prospectus originate from the sale of
U S WEST communications services. ICM and Access also have agent relationships
with other communications service providers for long distance and Internet
services. Our goal is to acquire communications services agents in various RBOC
territories and sell
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<PAGE> 35
comprehensive service solutions that include local access, long-distance,
wireless and Internet services of various communications service providers.
We intend to acquire communications agents in major metropolitan areas.
We have also formed PentaStar Internet, Inc., which is a Delaware corporation
and wholly-owned subsidiary of PentaStar, to acquire ISPs in small, high-growth
areas. Our goal is to use the staff and customer relationships of these ISPs to
market a comprehensive local access, long distance and wireless solution to
subscribers of the ISPs.
Recent Acquisitions
On August 13, 1999 we entered into agreements with the shareholders of
ICM and Access to acquire all of the shares of ICM and Access concurrently with
the completion of this offering. The agreements are subject to customary closing
conditions and termination provisions. The closings of the acquisitions of ICM
and Access are conditions imposed by underwriters of this offering to the
closing of this offering.
ICM is a U S WEST agent, which means ICM has been accepted by U S WEST
to sell, order and assist in the implementation of U S WEST communications
services. PentaStar expects to retain its agent relationship with U S WEST
indefinitely. PentaStar believes that the loss of ICM's agent relationship with
U S WEST would have a material adverse effect on PentaStar. Of ICM's revenues in
1998, 99% were from U S WEST. According to information provided to us by
U S WEST, PentaStar believes that ICM is one of U S WEST's leading agents. ICM's
president, Dennis W. Schillinger, will remain with PentaStar as manager of our
Northwest region after our acquisition of ICM. ICM, located in Bellevue,
Washington, was founded in 1990.
Access is also a U S WEST agent. PentaStar expects to retain its agent
relationship with U S West indefinitely. PentaStar believes that the loss of
Access' agent relationship with U S WEST would have a material adverse effect on
PentaStar. All of Access' revenues in fiscal 1998 were from U S WEST. According
to information provided to us by U S WEST, PentaStar believes Access is one of
U S WEST's leading agents in Colorado. Access' president, Jeffrey A. Veres, will
remain with PentaStar as manager of our Colorado region after our acquisition of
Access. Access, located in Denver, Colorado, was founded in 1995.
The aggregate purchase price for ICM consists of $1.923 million in cash
and 165,000 shares of our common stock, subject to adjustment as described
below. Of those amounts, Mr. Schillinger will receive $200,000 in cash and
120,000 shares of common stock. Of the shares of common stock received by Mr.
Schillinger, 40,000 will be subject to escrow and adjustment as described
elsewhere in this prospectus. If the per share initial offering price of
PentaStar common stock in this offering is less than $9.00 per share or more
than $11.00, 30,000 of the 165,000 shares to be issued to ICM will be increased
or decreased in number pursuant to a formula so that the minimum value of such
number of shares will be $270,000 and the maximum
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<PAGE> 36
value will be $330,000 based upon the initial public offering price. Of the cash
payable under the ICM agreement, $500,000 will be held in escrow for one year
after closing and will be available for application against indemnification
obligations.
The aggregate purchase price for Access consists of $500,000 in cash
and 205,000 shares of our common stock. Mr. Veres will receive all of the cash
and shares of common stock. Of the shares received by Mr. Veres, 68,265 will be
subject to escrow and adjustment as described elsewhere in this prospectus.
Jeffrey A. Veres is the sole shareholder of Access.
The amount of cash payable under both of these agreements will be
reduced to the extent that the acquired company has liabilities at the closing
other than current payables and accrued expenses, and increased by the amount of
cash held by the acquired company at the closing.
The board of directors of PentaStar valued ICM and Access based
primarily upon PentaStar's determination of the adjusted historical earnings
from continuing operations of ICM and Access. The purchase prices and other
acquisition terms for ICM and Access were negotiated at arm's length by
PentaStar's board of directors and the owners of ICM and Access. At that time,
Craig J. Zoellner and Richard M. Tyler were the only directors of PentaStar.
They unanimously approved the terms, including the purchase prices, of the
acquisition agreements with ICM and Access. Those terms were subsequently
ratified by Carleton A. Brown, the independent director of PentaStar.
PentaStar's board believes the purchase prices and other terms relating to the
ICM and Access acquisitions are fair and reasonable to PentaStar. Dennis A.
Schillinger, the principal shareholder of ICM, is not a founder, shareholder,
director or executive officer of PentaStar. Jeffrey A. Veres, the shareholder of
Access, is a founder and minority shareholder of PentaStar but is not a director
or executive officer of PentaStar. Mr. Schillinger and Mr. Veres will become
employees of PentaStar following the acquisitions of ICM and Access.
The shareholders of ICM and Access contributed their stock into a
limited liability company in July 1999 in order to begin cooperating together on
"best practices" in sales and marketing, operations and order processing,
accounting and overall customer and vendor management in anticipation of their
acquisition by PentaStar.
We will use the purchase method of accounting for the acquisitions.
With the completion of the acquisitions of ICM and Access, we expect
our general and administrative expenses to grow significantly, due to the
amortization of goodwill associated with the acquisitions. We expect this
amortization expense to approximate $191,000 on an annual basis for a 20-year
period.
Any reference in the following discussion to information on a pro forma
basis assumes the acquisitions of ICM and Access were completed as of January 1,
1998. We have presented this information to give you a better picture of what
our business might have looked like if we
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<PAGE> 37
had owned these companies since January 1, 1998. These companies may have
performed differently if they had actually been combined at that time. You
should not rely on the unaudited pro forma information as being indicative of
the historical results that we would have had or the future results that we will
experience after the acquisitions are completed.
Overview of ICM and Access Operations
The following table presents financial information, expressed as
percentages, as if ICM and Access had operated on a combined basis for the year
ended December 31, 1998. This table provides a brief summary of the relative
sizes of ICM and Access.
OPERATIONS AS A PERCENTAGE OF ICM AND ACCESS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ICM ACCESS
---- ------
<S> <C> <C>
Revenues
Advanced communications
services.................................... 64.4% 35.6%
Basic dial tone services....................... 63.3 36.7
---- ----
Costs and expenses
Salaries and commissions....................... 69.6 30.4
Other.......................................... 62.3 37.7
---- ----
Income from operations.............................. 48.9% 51.1%
==== ====
Earnings before interest, taxes,
depreciation, and
amortization (EBITDA).......................... 47.3% 52.7%
==== ====
</TABLE>
The line item entitled "Earnings before interest, taxes, depreciation
and amortization (EBITDA)" represents the income (loss) from operations before
interest, other expense (income), income tax expense (benefit), depreciation and
amortization. PentaStar considers EBITDA an important indication of the
operational performance of its business. EBITDA is presented to enhance an
understanding of operating results. EBITDA does not represent cash flow for the
periods presented and should not be considered as an alternative to net income
(loss) as an indicator of operating performance or as an alternative to cash
flows as a measure of liquidity, in each case determined in accordance with
generally accepted accounting principles. PentaStar's definition of EBITDA may
not be comparable to EBITDA as defined by other companies.
Substantially all of the revenues of ICM and Access are derived from
the commissions they receive from selling communications services as agents for
communications service providers. ICM and Access are paid a commission by each
service provider based on a percentage of each customer's cost of services. ICM
and Access sell advanced communications and basic dial tone services for the
local access market to facilitate data, voice and video
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<PAGE> 38
communications. ICM and Access expect that, over time, the percentage of
advanced communications services revenues will increase as a percentage of
revenues because of increased demand for, and availability of, these services.
Basic dial tone services in general are telephone connections, voice messaging
and call management. Advanced communications services are all other voice and
data communications services, including:
o data transmission oriented services;
o dedicated high capacity transmission services;
o high speed real time communications access, including digital
subscriber line, or DSL;
o packet-based transmission for wide area networks, including frame
relay service; and
o advanced digital network for data, video, voice and Internet
traffic, including ISDN.
In the ordinary course of business, ICM and Access experience delays in
payments on commissions earned from U S WEST, commonly known as disputed items.
Disputed items represent accounts receivable in dispute for installed services
and arise primarily from differences in documentation between ICM or Access and
U S WEST relating to:
o the commission percentages earned;
o the type of services sold; and
o the service installation dates.
In 1997 and 1998, the gross amounts of disputed items represented 10.0% and
12.5% of ICM's and Access' combined revenues in those years. U S WEST does not
pay any portion of the commission when an amount is in dispute. PentaStar
believes, based upon an extensive review of the disputed items, that the actual
amounts in dispute are substantially less than the gross amount of the
commissions being withheld as a result of the disputes. ICM and Access have
established allowances to reduce the disputed accounts receivable to an amount
each of them believes represents the estimated net realizable value of their
disputed items. The allowances were established through an extensive review by
ICM and Access of commissions due on installed services, and PentaStar believes
the allowances are adequate.
ICM's and Access' salaries and commissions expenses consist principally
of salary and incentive compensation that they pay their sales and marketing,
operations and engineering support and administrative staff.
ICM's and Access' other expenses include communications expenses,
office rent and utilities, travel, professional fees and depreciation.
ICM and Access have experienced some seasonal variations in their
businesses. Orders for communications services tend to slow in the last quarter
of the calendar year due to customers' budgetary constraints. Generally, orders
increase in the first quarter of the following
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<PAGE> 39
year. Because of the time lag between order and installation, revenues of ICM
and Access in the first four months of each calendar year are below the average
of their revenues for the remaining portion of the year.
SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
When we obtain an order for U S WEST communications services, we
receive an upfront payment of a portion of the commission we are entitled to
receive for the whole order. That up-front portion was 35% in 1998, but was
increased to 55% for orders received after June 1, 1999. Those initial payments
are accounted for as deferred revenue. After the services are fully installed,
which usually takes three to 12 weeks from order, we become entitled to receive
the remaining portion of the commission. It is not until the final installation
is completed by U S WEST that we recognize the revenue for the total commission,
including the initial payment and the final payment. We generally receive final
payment within 90 days of final installation.
We will incur goodwill in an estimated amount of $3,814,000 in the
acquisitions of ICM and Access. The goodwill amount will be amortized over 20
years. The annual goodwill amortization expense will be approximately $191,000.
We anticipate that we will acquire additional agents and ISPs in the future and
we expect to incur goodwill in those acquisitions.
ICM COMMUNICATIONS INTEGRATION, INC.
ICM is located in Bellevue, Washington and has an additional office in
Portland, Oregon. As of June 30, 1999, ICM had a total of 37 employees,
consisting of 17 in sales and marketing, 12 in operations and engineering
support and eight in administration.
Results of Operations
The following table sets forth selected financial data for ICM for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------------- --------------------------------------
1997 1998 1998 1999
----------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Advanced communications
services .......... $2,910 82.6% $3,681 86.1% $1,638 89.3% $1,795 83.8%
Basic dial tone services 611 17.4 594 13.9 197 10.7 348 16.2
------ ----- ------ ----- ------ ----- ------ -----
Total revenues ..... 3,521 100.0 4,275 100.0 1,835 100.0 2,143 100.0
Costs and expenses
Salaries and commissions 1,858 52.8 2,746 64.2 1,227 66.9 1,364 63.6
Other .................. 811 23.0 952 22.3 359 19.6 438 20.4
------ ----- ------ ----- ------ ----- ------ -----
</TABLE>
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<PAGE> 40
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------------- --------------------------------------
1997 1998 1998 1999
----------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from operations ...... $ 852 24.2% $ 577 13.5% $ 249 13.5% $ 341 16.0%
====== ===== ====== ===== ====== ===== ====== =====
Earnings before interest,
taxes, depreciation and
amortization (EBITDA) .. $ 862 24.5% $ 614 14.4% $ 267 14.6% $ 366 17.1%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The line item entitled "Earnings before interest, taxes, depreciation
and amortization (EBITDA)" represents the income (loss) from operations before
interest, other expense (income), income tax expense (benefit), depreciation and
amortization. PentaStar considers EBITDA an important indication of the
operational performance of its business. EBITDA is presented to enhance an
understanding of operating results. EBITDA does not represent cash flow for the
periods presented and should not be considered as an alternative to net income
(loss) as an indicator of operating performance or as an alternative to cash
flows as a measure of liquidity, in each case determined in accordance with
generally accepted accounting principles. PentaStar's definition of EBITDA may
not be comparable to EBITDA as defined by other companies.
Six-month period ended June 30, 1998 compared to the six-month period
ended June 30, 1999
Revenues. Advanced communications services revenues increased $157,000,
or 9.6%, from $1,638,000 for the period ended June 30, 1998 to $1,795,000 for
the period ended June 30, 1999. This increase was primarily attributable to
increased focus on selling advanced communications services, primarily for data.
Basic dial tone services revenues increased $151,000, or 76.6%, from $197,000
for the period ended June 30, 1998 to $348,000 for the period ended June 30,
1999. This increase was primarily attributable to the creation of a specific
group dedicated to selling basic dial tone services.
Costs and expenses. Salaries and commissions increased $137,000, or
11.2%, from $1,227,000 for the period ended June 30, 1998 to $1,364,000 for the
period ended June 30, 1999. This increase was primarily attributable to
increased staffing in sales, operations and accounting and additional
commissions due to increased revenues. Other expenses increased $79,000, or
22.0%, from $359,000 for the period ended June 30, 1998 to $438,000 for the
period ended June 30, 1999. This was primarily due to increases in general
overhead expenses such as supplies and utilities and a minor increase in rent.
Income from operations. Income from operations increased $92,000, or
36.9%, from $249,000 for the period ended June 30, 1998 to $341,000 for the
period ended June 30, 1999.
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<PAGE> 41
This increase was primarily attributable to the increase in revenues discussed
above. Income from operations increased from 13.5% of revenues for the period
ended June 30, 1998 to 16.0% of revenues for the period ended June 30, 1999 as a
result of the above discussed changes in revenues and costs and expenses.
Other income (expense), net. Other income (expense), net, decreased
$5,000, or 250%, from income of $2,000 for the period ended June 30, 1998 to an
expense of $3,000 for the period ended June 30, 1999. Interest income, net of
expense, consists of interest on available cash balances less interest expense
associated with a line of credit.
Income taxes. Provision for income taxes increased $37,000, or 38.5%,
from $96,000 for the period ended June 30, 1998 to $133,000 for the period ended
June 30, 1999. The effective tax rate was 38.2% in the 1998 period and increased
to 39.3% in the 1999 period.
Net income (loss). For the reasons discussed above, net income
increased $50,000, or 32.3%, from $155,000 for the period ended June 30, 1998 to
$205,000 for the period ended June 30, 1999.
Year ended December 31, 1997 compared to the year ended December 31,
1998
Revenues. Advanced communications services revenues increased $771,000,
or 26.5%, from $2,910,000 for the year ended December 31, 1997 to $3,681,000 for
the year ended December 31, 1998. This increase was primarily attributable to
increased focus on advanced communications services, primarily for data. Basic
dial tone services revenues decreased $17,000, or 2.8%, from $611,000 for the
year ended December 31, 1997 to $594,000 for the year ended December 31, 1998.
This decrease was primarily attributable to ICM's reduced focus on basic
communications services and ICM's increased focus in 1998 on advanced
communications services, primarily for data.
Costs and expenses. Salaries and commissions increased $888,000, or
47.8%, from $1,858,000 for the year ended December 31, 1997 to $2,746,000 for
the year ended December 31, 1998. This increase was primarily attributable to
increased staffing in sales, operations and accounting and additional
commissions due to increased revenues. Other expenses increased $141,000, or
17.4%, from $811,000 for the year ended December 31, 1997 to $952,000 for the
year ended December 31, 1998. This was primarily due to increases in general
expenses, primarily rent, communications and depreciation.
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<PAGE> 42
Income from operations. Income from operations decreased $275,000, or
32.3%, from $852,000 for the year ended December 31, 1997 to $577,000 for the
year ended December 31, 1998. This decrease was primarily attributable to the
decrease in basic dial tone revenues and the increase in salaries, commissions
and other expenses discussed above. Income from operations decreased from 24.2%
of revenues for the year ended December 31, 1997 to 13.5% of revenues for the
year ended December 31, 1998 as a result of the above discussed changes in
revenues and costs and expenses
Other income (expense), net. Other income (expense), net, increased
$5,000, or 166.7%, from $3,000 for the year ended December 31, 1997 to $8,000
for the year ended December 31, 1998. Interest income, net of expense, consists
of interest on available cash balances less interest expense associated with a
line of credit.
Income taxes. Provision for income taxes decreased $138,000, or 40.8%,
from $338,000 for the year ended December 31, 1997 to $200,000 for the year
ended December 31, 1998. The effective tax rate was 39.5% in 1997 and decreased
to 34.2% in 1998.
Net income (loss). Net income decreased $132,000, or 25.5%, from
$517,000 for the year ended December 31, 1997 to $385,000. The decrease is
primarily attributable to the increase in salaries and commissions.
Liquidity and Capital Resources
ICM's operations provided net cash of $298,000 for the first six months
of 1999, which is a slight increase over the $291,000 provided for the first six
months of 1998. ICM used net cash in investing activities of $220,000 in the
first six months of 1999 to purchase property, plant and equipment as well as to
fund advances to related parties of ICM. During the first six months of 1998,
ICM used net cash of $172,000 to purchase property, plant and equipment as well
as fund advances to related parties of ICM.
ICM's operations provided net cash of $291,000 for the year ended
December 31, 1998, a decrease of $18,000 from the year ended December 31, 1997.
Net cash used in investing activities of $321,000 for the year ended December
31, 1998 reflected an increase in the use of cash of $184,000 from the year
ended December 31, 1997 and is primarily attributable to an increase in advances
to related parties of ICM. Net cash used in financing activities increased
$4,000 from $9,000 for the year ended December 31, 1997 to $13,000 for the year
ended December 31, 1998.
EBITDA from operations increased $99,000, or 37.1%, from $267,000 for
the period ended June 30, 1998 to $366,000 for the period ended June 30, 1999.
This increase was primarily attributable to the increase in revenues discussed
above.
EBITDA from operations decreased $248,000, or 28.8%, from $862,000 for
the period ended December 31, 1997 to $614,000 for the year ended December 31,
1998. This decline was
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<PAGE> 43
primarily attributable to the decrease in basic dial tone revenues and the
increase in salaries, commissions and other expenses discussed above.
ICM expects to be able to fund its cash needs such as working capital
through cash it generates from operations. It generally funds its purchases of
property, plant and equipment with internally generated cash or debt. ICM
maintains a $150,000 line of credit with a bank. At June 30, 1999, it had no
outstanding balance under this line of credit. PentaStar will repay any interest
bearing indebtedness and terminate the line of credit when it acquires ICM. The
cash portion of the purchase price otherwise payable to the shareholder of ICM
at the closing will be reduced by the amount of interest bearing indebtedness so
repaid.
ACCESS COMMUNICATIONS
Access Communications is located in Denver, Colorado and has an
additional office in Colorado Springs, Colorado. As of June 30, 1999, Access
Communications had a total of 26 employees, consisting of 13 in sales and
marketing, seven in operations and engineering support and six in
administration.
Results of Operations
The following table sets forth certain financial data for Access for
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------------- -----------------------------------------
1997 1998 1998 1999
---------------- ---------------- ----------------- -----------------
(dollars in thousands) (unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Advanced communications
services ................ $1,921 64.9% $2,038 85.6% $ 683 75.1% $ 784 91.9%
Basic dial tone services .... 1,040 35.1 344 14.4 226 24.9 69 8.1
------ ----- ------ ----- ------ ----- ------ -----
Total revenues ........... 2,961 100.0 2,382 100.0 909 100.0 853 100.0
Costs and expenses
Salaries and commissions .... 1,504 50.8 1,201 50.4 647 71.1 661 77.5
Other ....................... 637 21.5 577 24.2 312 34.3 280 32.8
------ ----- ------ ----- ------ ----- ------ -----
Income from operations ......... $ 820 27.7% $ 604 25.4% $ (50) (5.5)% $ (88) (10.3)%
====== ===== ====== ===== ====== ===== ====== =====
Earnings before interest, taxes,
depreciation and
amortization (EBITDA) ...... $ 875 29.6% $ 683 28.7% $ (9) (1.0)% $ (48) (5.6)%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
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<PAGE> 44
The line item entitled "Earnings before interest, taxes, depreciation
and amortization (EBITDA)" represents the income (loss) from operations before
interest, other expense (income), income tax expense (benefit), depreciation and
amortization. PentaStar considers EBITDA an important indication of the
operational performance of its business. EBITDA is presented to enhance an
understanding of operating results. EBITDA does not represent cash flow for the
periods presented and should not be considered as an alternative to net income
(loss) as an indicator of operating performance or as an alternative to cash
flows as a measure of liquidity, in each case determined in accordance with
generally accepted accounting principles. PentaStar's definition of EBITDA may
not be comparable to EBITDA as defined by other companies.
Six-month period ended June 30, 1998 compared to the six-month period
ended June 30, 1999
Revenues. Advanced communications services revenues increased $101,000,
or 14.8%, from $683,000 for the period ended June 30, 1998 to $784,000 for the
period ended June 30, 1999. This increase was primarily attributable to
increased focus on advanced communications services, primarily for data. Basic
dial tone services revenues decreased $157,000, or 69.5%, from $226,000 for the
period ended June 30, 1998 to $69,000 for the period ended June 30, 1999. This
decline was primarily attributable to a decreased focus on basic communications
services and increased focus on advanced communications services, primarily for
data.
Costs and expenses. Salaries and commissions remained relatively
constant for the period ended June 30, 1998 as compared to the period ended June
30, 1999. Other expenses decreased $32,000, or 10.3%, from $312,000 for the
period ended June 30, 1998 to $280,000 for the period ended June 30, 1999.
Income (loss) from operations. Loss from operations increased $38,000,
or 76.0%, from a loss of $50,000 for the period ended June 30, 1998 to a loss of
$88,000 for the period ended June 30, 1999. This increase in loss is primarily
attributable to the decrease in revenues from basic dial tone services more than
offsetting decreases in administrative staffing and occupancy expenses. Loss
from operations increased from (5.5%) of revenues for the period ended June 30,
1998 to (10.3%) of revenues for the period ended June 30, 1999 as a result of
the above discussed changes in revenues and expenses.
Other income (expense), net. Other income (expense), net, decreased
$23,000, or 48.9%, from expense of $47,000 for the period ended June 30, 1998 to
an expense of $24,000 for the period ended June 30, 1999. Other expenses in
these periods primarily reflect interest on a line of credit and long-term
borrowings.
Income taxes. Access provided an income tax benefit that increased
$8,000, or 23.5%, from $34,000 for the period ended June 30, 1998 to $42,000 for
the period ended June 30, 1999. The effective tax rate increased from 35.1% to
37.5% between periods.
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<PAGE> 45
Loss from discontinued operations. Loss from discontinued operations
decreased $149,000, or 66.2%, from $225,000 for the period ended June 30, 1998
to $76,000 for the period ended June 30, 1999. The loss from discontinued
operations is net of income tax benefits of $129,000 for the period ended June
30, 1998 and $40,000 for the period ended June 30, 1999. The loss from
discontinued operations relates to the disposition of Access' hardware business
in April 1999.
Net income (loss). For the reasons discussed above, net loss decreased
$142,000, or 49.3%, from a net loss of $288,000 for the period ended June 30,
1998 to a net loss of $146,000 for the period ended June 30, 1999.
Year ended December 31, 1997 compared to the year ended December 31,
1998
Revenues. Advanced communications services revenues increased $117,000,
or 6.1%, from $1,921,000 for the year ended December 31, 1997 to $2,038,000 for
the year ended December 31, 1998. This increase was primarily attributable to
increased focus on advanced communications services, primarily for data. Basic
dial tone services revenues decreased $696,000, or 66.9%, from $1,040,000 for
the year ended December 31, 1997 to $344,000 for the year ended December 31,
1998. This decrease was primarily attributable to a reduced focus on basic
communications services and increased focus on advanced communications services,
primarily for data.
Costs and expenses. Salaries and commissions decreased $303,000, or
20.1%, from $1,504,000 for the year ended December 31, 1997 to $1,201,000 for
the year ended December 31, 1998. This decrease was primarily attributable to
decreased commissions expense in sales and decreased staffing in operations and
administration. Other expenses decreased $60,000, or 9.4%, from $637,000 for the
year ended December 31, 1997 to $577,000 for the year ended December 31, 1998.
This decrease was primarily due to reduced administrative staff and overall
corporate cost control measures.
Income from operations. Income from operations decreased $216,000, or
26.3%, from $820,000 for the year ended December 31, 1997 to $604,000 for the
year ended December 31, 1998. This decline is primarily attributable to the
reduction in revenues more than offsetting the decrease in costs and expenses
discussed above. Income from operations decreased from 27.7% of revenues for the
year ended December 31, 1997 to 25.4% of revenue for the year December 31, 1998,
as a result of the above discussed decline in revenues more than offsetting the
decrease in costs and expenses.
Other income (expense), net. Other income (expense), net, decreased
$35,000, or 41.7%, from expense of $84,000 for the year ended December 31, 1997
to an expense of $49,000 for the year ended December 31, 1998. Interest income,
net of expense, consists of interest on available cash balances less interest
expense associated with a line of credit and long-term borrowings.
Income taxes. Provision for income taxes decreased $97,000, or 31.4%,
from $309,000 for the year ended December 31, 1997 to $212,000 for the year
ended December 31, 1998. The effective tax rate was 42.0% in 1997 and decreased
to 38.2% in 1998.
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<PAGE> 46
Loss from discontinued operations. Loss from discontinued operations
increased $172,000, or 86.9%, from $198,000 for the year ended December 31, 1997
to $370,000 for the year ended December 31, 1998. The loss from discontinued
operations is net of income tax benefits of $129,000 for the year ended December
31, 1997 and $219,000 for the year ended December 31, 1998.
Net income (loss). For the reasons discussed above, net income
decreased $256,000 or 112%, from net income of $229,000 for the year ended
December 31, 1997 to a net loss of $27,000 for the year ended December 31, 1998.
Liquidity and Capital Resources
Access' operations used $161,000 of net cash for the first six months
of 1999, a decrease of $208,000 from 1998, primarily due to a reduced investment
in accounts receivable between years. Access used net cash in investing
activities of $50,000 in the first six months of 1999, all of which it spent on
property, plant and equipment. No cash was used in investing activities during
the first six months of 1998. In the first six months of 1999, Access generated
net cash of $132,000 in its financing activities, which reflected net proceeds
from capital contributions of $113,000. During the first six months of 1998,
Access used cash of $153,000 in financing activities, primarily to fund payments
on borrowings of a party related to Access and capital lease obligations, as
well as to make distributions to its shareholder.
Access' operations used $224,000 of net cash for the year ended
December 31, 1998, a decrease of $783,000 from $559,000 provided by operations
in the year ended December 31, 1997, primarily due to a decrease in accrued
expenses and income tax payables and an increase in accounts receivable. Net
cash used in investing activities of $13,000 for the year ended December 31,
1998 and $42,000 for the year ended December 31, 1997 was spent on the purchase
of property and equipment. Access used net cash of $271,000 for the year ended
December 31, 1998 and net cash of $96,000 for the year ended December 31, 1997
to fund repayments on Access' related party borrowings, repay long term debt and
capital leases as well as to make distributions to its shareholder.
Additionally, during 1997 Access received net proceeds of $300,000 in long-term
borrowings and made principal payments of $238,000 on long-term borrowings.
EBITDA from operations decreased $39,000 from a $9,000 deficit for the
period ended June 30, 1998 to a $48,000 deficit for the period ended June 30,
1999. This decrease is primarily attributable to the decrease in revenues from
basic dial tone services more than offsetting decreases in administrative
staffing and occupancy expenses.
EBITDA from operations decreased $192,000, or 21.9%, from $875,000 for
the year ended December 31, 1997 to $683,000 for the year ended December 31,
1998. This decrease is primarily attributable to the decrease in revenues more
than offsetting the decrease in costs and expenses discussed above.
Access expects to be able to fund its cash needs such as working
capital through cash it generates from its operations. It generally funds its
purchases of property, plant and equipment with internally generated cash or
debt. Access maintains a $350,000 line of credit with a bank. At June 30, 1999,
it had $95,000 outstanding under this line of credit. PentaStar will repay any
interest bearing indebtedness and terminate the line of credit when it acquires
Access. The cash
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<PAGE> 47
portion of the purchase price otherwise payable to the shareholder of Access at
the closing will be reduced by the amount of interest bearing indebtedness so
repaid.
PENTASTAR COMMUNICATIONS, INC.
PentaStar is located in Denver, Colorado. After this offering and the
acquisitions of ICM and Access are completed, PentaStar will be the parent
company of ICM and Access as well as the parent of the subsidiary formed to
acquire ISPs. PentaStar was founded in March 1999 to pursue the strategies in
this prospectus. It has incurred approximately $2,000 of expenses through June
30, 1999.
PRO FORMA COMBINED
Results of Operations
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. In our opinion, the pro forma information presented in this
prospectus, when finalized, should not materially change from the preliminary
estimates. The unaudited pro forma financial data does not purport to represent
what the financial position or results of operations would actually have been if
such transactions in fact had occurred on those dates and is not necessarily
representative of our financial position or results of operations for any future
period. The pro forma combined financial information in this prospectus covers
periods during which ICM and Access operated independently of each other. Since
the acquired companies were not under common control or management, historical
combined results may not be comparable to, or indicative of, future performance.
The unaudited pro forma combined condensed financial statements should be read
in conjunction with the other financial statements and notes thereto included
elsewhere in the prospectus.
Our pro forma combined statements of operations include pro forma
adjustments to our salaries and commissions expenses to reflect the salary
differential to owners of the businesses we initially will acquire that will
take effect when we acquire them. The decrease is approximately $255,000 in
1998, $127,000 in the first six months of 1998 and $141,000 in the first six
months of 1999.
The pro forma combined statements of operations also include pro forma
adjustments to our selling, general and administrative expenses for rent for our
headquarters and for consulting fees. The increase is $180,000 in 1998, $90,000
in the first six months of 1998 and $90,000 in the first six months of 1999.
Our pro forma combined statements of operations include pro forma
adjustments to our amortization expenses to reflect the amortization of goodwill
associated with the acquisition of the two companies discussed in this
prospectus. We amortize goodwill evenly over a 20-year
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<PAGE> 48
period. The increase is approximately $191,000 in 1998 on a pro forma basis,
$95,000 in the first six months of 1998 and $95,000 in the first six months of
1999.
Our pro forma combined statements of operations do not reflect the cost
savings or incremental costs we expect, but cannot quantify.
The following table sets forth unaudited pro forma combined condensed
financial information for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
1998 1999
---------------- ----------------
<S> <C> <C> <C> <C>
Revenues
Advanced communications services ......... $2,321 84.6% $2,579 86.1%
Basic dial tone services ................. 423 15.4 417 13.9
------ ----- ------ -----
2,744 100.0 2,996 100.0
Costs and expenses
Salaries and commissions .................. 1,747 63.7 1,884 62.9
Other general and administrative expenses . 761 27.7 810 27.0
Goodwill amortization ..................... 95 3.5 95 3.2
------ ----- ------ -----
Income from operations ...................... $ 141 5.1% $ 207 6.9%
====== ===== ====== =====
Earnings before interest, taxes, depreciation
and amortization (EBITDA) ................ $ 295 10.8% $ 367 12.2%
====== ===== ====== =====
</TABLE>
The line item entitled "Earnings before interest, taxes, depreciation
and amortization (EBITDA)" represents the income (loss) from operations before
interest, other expense (income), income tax expense (benefit), depreciation and
amortization. PentaStar considers EBITDA an important indication of the
operational performance of its business. EBITDA is presented to enhance an
understanding of operating results. EBITDA does not represent cash flow for the
periods presented and should not be considered as an alternative to net income
(loss) as an indicator of operating performance or as an alternative to cash
flows as a measure of liquidity, in each case determined in accordance with
generally accepted accounting principles. PentaStar's definition of EBITDA may
not be comparable to EBITDA as defined by other companies.
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<PAGE> 49
Pro forma combined results for the six-month period ended June 30, 1998
compared to the six-month period ended June 30, 1999
Revenues. Advanced communications services revenues increased $258,000,
or 11.1%, from $2,321,000 for the period ended June 30, 1998 to $2,579,000 for
the period ended June 30, 1999. This increase was primarily attributable to
increased focus on advanced communications services, primarily for data. Basic
dial tone services revenues remained relatively constant between the six months
ended June 30, 1998 and 1999.
Costs and expenses. Salaries and commissions increased $137,000, or
7.8%, from $1,747,000 for the period ended June 30, 1998 to $1,884,000 for the
period ended June 30, 1999. This increase was primarily attributable to
increased staffing in sales and marketing, operations and engineering support
and administration and to increased commissions on higher revenues. Other
expenses remained relatively constant between the six months ended June 30, 1998
and 1999.
Income from operations. Income from operations increased $66,000, or
46.8%, from $141,000 for the period ended June 30, 1998 to $207,000 for the
period ended June 30, 1999. This increase is primarily attributable to the
increase in advanced communications services revenues discussed above.
Net income (loss) from continuing operations. For the reasons discussed
above, net income from continuing operations increased $124,000, or 134% from
$10,000 for the period ended June 30, 1998 to $134,000 for the period ended June
30, 1999.
In the ordinary course of business, ICM and Access have experienced
delays in payment for disputed items from a communications service provider due
to documentation deficiencies and discrepancies in payment amounts. In 1997 and
1998, the aggregate amounts were $647,000 and $835,000, representing
approximately 10.0% and 12.5% of ICM's and Access' combined revenues in those
years. We expect that disputed items with this provider due to documentation
deficiencies and discrepancies in payment amounts will continue to adversely
impact our cash flows in future periods.
FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
We believe the following significant factors may affect our future
operating results:
o our ability to successfully implement our acquisition strategy;
o continued reliance on RBOCs and other service providers for
communications services; and
o our ability to increase revenues from service providers other than
local access service providers.
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<PAGE> 50
Our future operating results are materially dependent upon our ability
to complete suitable acquisitions at acceptable prices, integrate the acquired
companies and implement our business strategy through the acquired companies.
Our strategy is to acquire agents in RBOC territories. Those agents
will be primarily reliant on RBOCs for revenues. If the agent programs or agent
relationships are discontinued, or significant reductions in commission rates
are made, we may have difficulty in remaining a viable business and would need
to establish agent relationships with other communications service providers.
We intend to expand our sales of long distance, wireless and Internet
services, and will incur additional costs in salaries, commissions and selling
and general and administrative expenses to implement this strategy. We will need
to increase revenues to offset these increased expenses.
We believe that we may be able to increase our revenues in the future
by providing new services to our customers and obtaining higher sales commission
rates. In addition, we believe we can reduce costs as a percentage of sales by
consolidating administrative functions and obtaining company-wide purchasing
agreements with our suppliers. However, we cannot assure you that we will be
able to increase our revenues or reduce our expenses or quantify such increases
or savings. Additionally, we will incur new costs associated with:
o our corporate management team;
o executing our acquisition strategy; and
o being a publicly-held company.
LIQUIDITY AND CAPITAL RESOURCES
On a historical combined basis, the acquired companies generated cash
flows from operating activities of $137,000 in the first six months of 1999 as a
result of an increase in tax related items which was partially offset by an
increase in the accounts receivable balance. During the first six months of
1998, the acquired companies used $78,000, which was primarily attributable to
an increase in Access accounts receivable as of June 30, 1998. Net cash used in
investing activities of $270,000 during the first six months of 1999 resulted
primarily from the purchase of property and equipment. During the first six
months of 1998, the acquired companies used $172,000, all of which is
attributable to the purchase of property, plant and equipment and advances by
ICM to related parties of ICM. Net cash provided by financing activities of
$126,000 during the first six months of 1999, resulted primarily from draws on
the line of credit and capital contributions. Net cash used in financing
activities during the first six months of 1998 of $159,000 was comprised
primarily of principal payments on borrowings of a related party of Access and
capital leases, as well as distributions to the shareholder, all by Access.
During the first six months of 1999, the acquired companies generated $367,000
of pro forma
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<PAGE> 51
EBITDA, a $72,000 increase over the first six months of 1998 of $295,000.
The increase is primarily attributable to increased revenues of ICM. On a
long-term basis, the acquired companies cash provided by operating activities
will not likely be sufficient to fund the acquisition strategy of PentaStar.
Upon completion of this offering, we will realize net proceeds of
approximately $12.4 million. We will use $2.423 million of the net proceeds to
complete the acquisitions of ICM and Access. We expect to use the remaining net
proceeds of approximately $10.0 million to make complimentary acquisitions or
investments, to repay certain indebtedness and for working capital, systems
investment and other general corporate purposes.
We intend to fund future acquisitions through the issuance of
additional common stock, the proceeds of this offering and internally generated
cash flow. However, other than the acquisitions of ICM and Access, we do not
have any understandings, agreements or commitments with respect to any
acquisition.
Upon completion of this offering, PentaStar will have no outstanding
debt. We believe we will be able to obtain a working capital line of credit or
other debt financing following completion of this offering. However, we may not
be able to obtain this financing, or, if available, the terms of the financing
may not be favorable to us or our shareholders without substantial dilution of
ownership rights.
We anticipate that the net proceeds from this offering and our cash
flow from operations will be sufficient to satisfy our anticipated cash
requirements for the 12-month period following this offering. We will likely
require additional equity or debt financing beyond that period. We have not yet
identified any sources of long-term liquidity.
YEAR 2000 RISKS
Many software applications and computer hardware and related equipment
and systems that use embedded technology, such as microprocessors, rely on two
digits rather than four to represent years in performing computations and
decision-making functions. These programs, hardware items and systems may fail
beginning on January 1, 2000, or earlier, because they misinterpret "00" as the
year 1900 rather than 2000. These failures could have a material effect on us
because of our direct dependence on our own software, equipment and systems and
our indirect dependence on those of third parties. Our year 2000 program
consists of the following phases:
o identifying all items that may be affected by the year 2000;
o investigating those items for year 2000 compliance;
o assessing the potential impact of year 2000 non-compliance;
o identifying solutions for non-compliant items;
o repairing and replacing any non-compliant items;
o testing those repairs and replacements; and
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<PAGE> 52
o contingency planning.
Upon completion of this offering, our chief financial officer will be
assigned the overall responsibility to track and coordinate the year 2000
efforts of the individual companies we acquire. Although we are following the
general steps we outlined above, we do not consider preparation and maintenance
of formal inventories and risk rankings, detailed test plans and documentation
of results as being necessary because of the small number of information
technology systems each acquired company uses.
Prior to this offering, ICM and Access have each maintained their own
year 2000 program. PentaStar has not conducted any operations. Subsequent to the
offering, PentaStar will utilize computer software and hardware. As PentaStar
will be acquiring new software and hardware, management anticipates all software
and hardware purchased will be year 2000 compliant.
The following table depicts the status of each year 2000 program phase
for ICM and Access:
<TABLE>
<CAPTION>
ICM ESTIMATED ACCESS
ICM % DATE OF ACCESS % ESTIMATED DATE
PROGRAM PHASE COMPLETE COMPLETION COMPLETE OF COMPLETION
------------- -------- ------------- -------- --------------
<S> <C> <C> <C> <C>
Identify Risks 98% 10/31/99 100% N/A
Investigate Compliance 98% 10/31/99 100% N/A
Assess Impacts 100% N/A 80% 10/31/99
Identify Solutions 98% 10/31/99 60% 10/31/99
Repair/Replace 95% 10/31/99 0% 11/30/99
Test Repairs/Replacement 95% 10/31/99 0% 11/30/99
Contingency Planning 0% As Necessary 0% As Necessary
</TABLE>
We have contacted our primary service provider, U S WEST, and have
obtained representations and assurances that their hardware, embedded technology
systems and software, which we use or which may otherwise impact us, has been or
will be modified on a timely basis to be year 2000 compliant. We do not believe
that any other third parties we utilize will have a significant impact on our
operations based upon year 2000 compliance issues.
All of the systems ICM and Access currently use include "off the shelf"
software which can easily be replaced. After the acquisitions of ICM and Access,
we will replace some of their financial and other computer systems in order to
obtain internal consistency. Some systems that
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<PAGE> 53
are being replaced as a result of these inconsistencies are not year 2000
compliant. We will replace these systems prior to December 31, 1999.
We estimate that the costs of the year 2000 programs of ICM and Access
total approximately $5,000 to date and we expect that the additional costs of
these programs after completion of this offering, including replacing software,
will be less than $20,000. We expect to pay these additional costs from the cash
flow from our consolidated operations.
If we identify significant risks related to year 2000 compliance or if
our progress deviates from our anticipated program, we will develop contingency
plans as necessary.
We do not anticipate any material adverse effect to our business from
year 2000 failures, but we can offer no guarantee that we will achieve total
compliance. Factors that give rise to this uncertainty include our possible
failure to identify all susceptible systems, non-compliance by third parties
whose systems and operations impact us and a possible loss of technical
resources to perform the work.
Our most likely worst-case year 2000 non-compliance scenarios are:
o an interruption in our ability to collect amounts due from U S
WEST and other vendors;
o loss of sales due to customers focusing on year 2000 issues rather
than new communications services;
o loss of accurate accounting records;
o loss of phone service; and
o office equipment failures.
Depending on the length of any non-compliance or system failure, any of
these situations could have a material adverse impact on our ability to serve
our customers in a timely manner and result in lost business and revenues or
increased costs. This disclosure is subject to protection under the Year 2000
Information and Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year
2000 Statement" and "Year 2000 Readiness Disclosure" as that Act defines those
terms.
INFLATION
As a result of the relatively low levels of inflation during the last
three years, inflation did not have a significant impact on the results of
operations in those periods of any of the businesses we initially will acquire.
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<PAGE> 54
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." PentaStar is required to adopt SFAS No. 133
in the year ended December 31, 2001. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. To date, we have not
entered into any derivative financial instruments or hedging activities and have
no plans to do so.
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BUSINESS
INTRODUCTION
PentaStar was formed on March 15, 1999 to become a communications
services agent. PentaStar's activities to date have consisted of:
o organizing PentaStar;
o developing PentaStar's business plan, management and corporate
structure;
o pursuing the acquisitions of ICM and Access; and
o conducting activities in connection with this offering.
PentaStar has not yet engaged in any business operations and has not generated
any revenues.
Upon the closing of this offering and the acquisitions of ICM and
Access, we will commence our business operations as a communications services
agent. We will design, procure and facilitate the installation and use of
communications and Internet services for small to medium-sized businesses that
generally cannot afford in-house communications management resources. Our goal
is to provide our customers with a comprehensive communications solution,
utilizing the infrastructure of existing communications service providers. By
analyzing and selecting from a variety of available communications services
providers and technologies, other than for local access where we will offer only
RBOC service, we plan to provide our customers a custom-designed, cost-effective
solution for local access, long distance, wireless and Internet services for
voice and data communications. As the communications industry becomes
increasingly complex, we believe our services will become more valuable to our
customers.
At the present time,
o ICM and Access are agents for U S WEST for local access and other
services, including wireless and Internet;
o Access is an agent for Qwest for long distance services; and
o ICM can sell AT&T and Qwest long distance services and Epoch
Internet services utilizing the agent relationships of a company
owned by the former shareholders of ICM.
PentaStar plans to enter into agent relationships with other long distance,
wireless and Internet service providers that will cover ICM, Access and all
other agents acquired by PentaStar.
We service customers in a broad range of industries, including retail,
wholesale, manufacturing, service, distribution and professional services. Some
of the major benefits we will provide our customers are:
o assistance in sorting through the abundance of confusing
technology options;
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o management of the ordering and installation of communications
services;
o more effective and timely responses to problems encountered with
communications service providers than can generally be obtained by
an individual customer;
o ongoing evaluation of new solutions that could better suit the
future communications needs of our customers;
o development and maintenance of customer-specific databases that
allow us to better apply our knowledge and experience to each
customer's communications needs; and
o payment of most of our fees by the communications service
provider.
We believe that we offer compelling reasons for communications service
providers to view us as a strategic partner. Those reasons are as follows:
o we are an effective sales force for our service providers, with a
competitive, variable cost to them;
o we provide the ability to retain customers and increase revenues
from customers;
o we provide a professional staff to handle the installation of
services and ongoing interface between the customer and the
service provider;
o we can sell into markets that may not be economical for the
service providers to support directly; and
o we can act as a sales agent for communications services that some
service providers, the RBOCs in particular, are prohibited by law
from offering. This provides their customers with a complete
communications solution.
ICM was formed in 1990 as a division of ICM, Inc., a corporation that
provided training for communications service providers. ICM was formed to
provide communications consulting and sell communication services to small to
medium-sized businesses. In January 1995, the division was spun off into a
separate corporation owned by ICM, Inc. In July 1997, ICM was spun off to the
shareholders of ICM, Inc. ICM has been a U S WEST agent since 1991.
Approximately 99% of ICM's 1998 revenues were from commissions paid by U S WEST.
The balance was comprised of revenues from the sale of long distance and
Internet services procured from a former affiliate of ICM. ICM has sold U S
WEST's local access service since 1991, and has marketed U S WEST'S wireless
services since December 1998 and U S WEST's Internet services since January
1998.
Access was formed in 1995 by Jeffrey A. Veres. Originally, Access acted
as an agent for U S West and sold local area network and wide area network
hardware for computer systems. In November 1998, Access determined to
discontinue its hardware business to focus on selling U S WEST's communications
services. Access has been a U S WEST agent since 1995. While all of Access' 1998
revenues were from commissions paid by U S WEST, Access has recently begun
offering Qwest long distance services and is beginning to develop other
relationships. Access has sold U S WEST's local access services since 1995, has
marketed U S WEST'S wireless services since December 1998 and U S WEST's
Internet services since January 1998. Access has also been an agent for Qwest
long distance services since January 1999.
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We intend to acquire communications agents in major metropolitan areas.
We have also formed PentaStar Internet, Inc., a wholly-owned subsidiary, to
acquire ISPs in small, high-growth areas. Our goal is to use the staff and
customer relationships of these ISPs to implement comprehensive local access,
long distance, wireless and Internet solutions for customers in these small
markets.
OUR STRATEGY
Our objective is to be a leading national provider of custom-designed
communications solutions to small and medium-sized businesses. Our strategy to
achieve this objective is to:
Provide Comprehensive Communications Solutions
We plan to offer comprehensive communications solutions by providing
customers with the benefit of our independent analysis of multiple technologies
and pricing plans, except in local access where we intend to work exclusively
with U S WEST and other RBOCs with whom we may establish agency relationships.
We believe that by purchasing a package of local access, long distance, wireless
and Internet services from one communications service provider, the customer may
not have the opportunity to choose the solutions that best meet its
communications needs. By engaging our services, the customer will be able to
select different providers for each type of service to best meet its needs.
We will establish a team of technology experts to analyze existing and
developing technologies on a continual basis. This team will also evaluate
continually changing pricing programs of various service providers. We will seek
technology and pricing solutions that best address the needs of our customers.
This will facilitate our field sales personnel customizing the services that we
recommend for each customer.
Grow Through Acquisitions
We intend to build a national presence in the communications market by
acquiring RBOC agents in major metropolitan areas and ISPs in small, high-growth
areas. We strive to acquire companies that are well managed, have a strong
customer base, are profitable and would benefit from the additional resources
that we intend to provide. Our goal is to structure these acquisitions so that
the owners who manage the business of each acquired agent receive the majority
of their portion of the purchase price in our common stock.
We believe the agents and ISPs we target for acquisition will be
attracted to, and benefit from, the opportunity to join us because we plan to
offer them:
o access to ongoing analysis of available communications and
Internet technologies and pricing plans;
o shared systems, administration and infrastructure support;
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o lower costs resulting from planned economies of scale;
o availability of multiple long distance, wireless and Internet
options;
o access to other acquired companies' "best practices" models;
o greater access to capital for future growth;
o improved commission structures resulting from aggregating sales;
o add-on sales to local operations of regional customers; and
o consolidated order entry and processing.
Increase Revenues of Acquired Companies
We intend to increase revenues of agents and ISPs we acquire as
follows:
Introduce New Agent Services. ICM, Access and the agents we intend
to acquire primarily sell local access services for RBOCs. We also intend to
sell long distance, wireless, and Internet services for voice and data
communications through other agent relationships. This will enable our customers
to use PentaStar as the one resource for all their communications needs.
Increase Revenues Through Commission Strategies. As a result of
creating a larger organization, we expect to enhance our commission rates by
meeting volume minimums in some existing commission contracts. We also expect to
negotiate more favorable commission arrangements than are available to
individual agents. We believe the impact of this strategy will increase as we
grow.
Enhance Selling and Advertising Efforts. We expect to attract new
customers by increasing our direct selling and advertising efforts. We expect to
accomplish this in part by allowing the managers of acquired agents and ISPs to
have more time to focus on selling as a result of relieving them of the
administrative functions that will be consolidated into our headquarters or
regional centers. We believe advertising has not been used in any significant
way by agents or small ISPs. We will provide management assistance and financial
resources to implement a significant advertising program. We will also develop
marketing materials and presentations to be used by management and the sales
personnel of our agents and ISPs.
Sell Communications Services Through ISP Sales Channel. We believe
the limited population of small markets makes it more difficult for service
providers to justify a local sales presence. We intend to increase our revenues
by utilizing the sales force of the ISPs we acquire to sell providers' local
access, long distance and wireless services for voice and data communications to
business subscribers of the ISPs. These ISPs will offer a unique sales channel
for us to serve small markets, in addition to providing us with the value of
their Internet business.
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Utilize our Size to Increase Efficiencies in the Operating Regions
Over time, we plan to consolidate functions that are not critical to
control at the local level into our corporate headquarters. These functions
include human resources, information systems, legal services and tax matters.
Additionally, we plan to consolidate some aspects of accounting, order
processing and after-sales management into regional centers to be established at
designated local sites. Purchasing of insurance, supplies, equipment and
external services will be managed from our corporate headquarters. Also, our
acquired ISPs will aggregate their service provider traffic onto a unified
Internet connection, which we believe should result in lower access costs to us.
Implement a Best Practices Program
The agents and ISPs we acquire will continue to operate with a high
degree of autonomy in their regions. However, we will implement a best practices
program under which each acquired company will be able to adopt successful
business practices developed by our other agents and ISPs. This will allow each
acquired company to develop a best practices model that works for it. Our
corporate management team will actively facilitate this process.
Create Strong Incentives for Management to Increase Earnings
Our agent managers, who will generally be the former owners of the
acquired agents, will have two strong incentives to increase their area's
earnings. The first incentive is the opportunity to earn a greater percentage of
the total shares of our common stock issued to acquire the agents based on each
agent's future performance. The second incentive is a bonus plan pursuant to
which each agent manager may receive a cash bonus of up to 5% of their area's
operating earnings before amortization expense. Managers of acquired ISPs will
participate in bonus programs based upon their operating earnings before
amortization expense and in our stock option plan.
INDUSTRY
The Communications Services Agent Industry
General. Communications services agents are organizations that are
authorized to sell and facilitate the use of communications services of one or
more communications service providers. A full-service agent:
o establishes relationships with customers;
o assists the customer in analyzing its communications needs;
o arranges for the communications service providers to provide the
customer with the communications services that best suit the
customer's needs; and
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o facilitates the installation of communications services by the
various communications service providers.
Agents have been successful in obtaining new sales as a result of
existing relationships with customers and potential customers. We believe agents
have a sales cost that is competitive with that of the direct sales forces of
service providers. By utilizing agents to sell their services, service providers
can outsource a difficult and costly function.
Communications services agents are generally paid a commission by each
communications service provider based on a percentage of the customer's cost of
services sold by the agent. This commission typically ranges from 7% to 16% of
the contract value for an individual agent. It is paid upon either the execution
of the contract and installation of the services or pro-rata over the contract's
life, depending upon the service provider.
The communications services agent industry is highly fragmented and
characterized by hundreds of local companies with no large national competitors.
According to the 1999 MultiMedia Telecommunications Association Market Review
and Forecast, the core communications market segments, other than the Internet,
in which we compete had sales of $200.6 billion in 1998 and are expected to grow
to $283.8 billion by the end of 2002, a 9.0% compound annual growth rate. Sales
in these market segments are made directly by service providers and by agents.
We are not aware of any data that breaks down these sales between service
providers and agents. According to the Telecommunications and Information
Highways-Internet Market Report by Paul Budde Communication, the U.S.-based
Internet services market was $6.6 billion in 1998 and is expected to grow to
$24.7 billion in 2002, a compound annual growth rate of 39.1%. The total market
for all services that PentaStar sells was $207.2 billion in 1998 and is
projected to grow to $308.5 billion in 2002, a compound annual growth rate of
10.5%.
Communications service providers include:
o RBOCs;
o CLECs;
o long distance service providers;
o wireless service providers; and
o ISPs.
Most communications service providers use agents to augment their
direct sales force. Generally, communications service providers select agents
that they believe have the knowledge and expertise to effectively sell
communications services and facilitate the installation process.
Local Access Market. According to the 1999 MultiMedia
Telecommunications Association Market Review and Forecast, local access services
revenues were $56.4 billion in 1998 and are expected to reach $70.4 billion by
2002, a 5.7% compound annual growth rate. ICM and Access derived approximately
$6.6 million, or 98.5%, of their combined revenues in
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1998 and $2.9 million, or 96.6%, of their combined revenues for the six months
ended June 30, 1999 from this market. We believe the RBOCs have continued to
dominate the local access market. The Modified Final Judgment that required the
break-up of AT&T and the concurrent FCC decisions that permitted the RBOCs to
use affiliated and nonaffiliated entities to act as sales agents on a commission
basis for the local telecommunications services offered by the RBOCs, led to the
development of agency programs. The Telecommunications Act of 1996 which changed
the Modified Final Judgment's line-of-business restrictions, permits the RBOCs
to enter the in-region long distance market upon the satisfaction of a statutory
checklist of market-opening criteria and other requirements. The
Telecommunications Act of 1996 also allows long distance carriers to provide
local services in the RBOCs' territories. Large long distance carriers were
permitted to offer combined packages of long distance and resold RBOC local
services in the states where the RBOC has not received in-region long distance
authorization beginning February 8, 1999. These long distance carriers are not
permitted to market long distance and RBOC resold local services through a
"single transaction," meaning those carriers may not use the same sales agent to
market both products to the same customer in the same communication. Also, the
long distance carriers may not offer long distance and RBOC resold local
exchange services as a bundled package under an integrated pricing schedule. The
Telecommunications Act of 1996 also required the RBOCs to allow other
communications service providers to interconnect with the RBOC's facilities and
equipment. This has made the local access market more competitive.
We believe that the RBOCs continue to have a distinct competitive
advantage in the local access market because they:
o control the line to customer locations;
o have an established customer base; and
o have greater financial and other resources to deploy new
technologies.
As the local access market continues to offer greater service choices and faces
increased competition, we believe that agents which are:
o cost effective,
o offer an efficient method of attracting and retaining customers,
and
o have the ability to provide comprehensive communications services
will be in demand by both RBOCs and customers.
Long Distance Market. According to the 1999 MultiMedia
Telecommunications Association Market Review and Forecast, long distance
revenues were $106 billion in 1998 and are expected to reach $142.6 billion by
2002, a 7.7% compound annual growth rate. ICM and Access derived $36,000, or
0.5%, of their combined revenues in 1998 and $47,000, or 1.6% of their combined
revenues for the six months ended of June 30, 1999 from this market. The
long-distance market is highly price competitive and is dominated by large
national companies such as
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AT&T, MCI/WorldCom, Qwest and Sprint. These large national carriers compete
aggressively for market share and most have established agency programs that
enhance their overall sales efforts. The RBOCs will also be allowed to offer
long distance service upon satisfaction of the statutorily mandated criteria
which determine when the local market has become sufficiently competitive.
Wireless Market. According to the 1999 MultiMedia Telecommunications
Association Market Review and Forecast, the wireless communications services
market was $38.2 billion in 1998 and is expected to reach $70.8 billion by 2002,
a 16.7% compound annual growth rate. ICM and Access derived $3,836, or 0.1%, of
their combined revenues in fiscal 1998 and $16,546, or 0.5%, of their combined
revenues for the six months ended June 30, 1999 from this market. Although much
of the early growth in wireless communications has occurred in the consumer
sector, in particular cellular phones, we believe an increasing share of
wireless communications services will be used by business customers in the
future.
The development of personal communication service, or PCS, and its
ability to facilitate voice, Internet, e-mail and other wireless services has
ushered in the increasing use of wireless technologies for the business market.
According to the 1999 MultiMedia Telecommunications Association Market Review
and Forecast, the PCS services market was $3.7 billion in 1998 and is expected
to reach $16.6 billion in 2002, a 45.4% compound annual growth rate. The
integration of computer applications and wireless technologies is anticipated to
also fuel future market growth.
We expect that small to medium-sized businesses will increasingly use
wireless communications for voice and data applications.
Internet Services Market. The Internet has grown rapidly since its
introduction to the public in the early 1990s, allowing millions of people
worldwide to communicate and conduct business electronically. The April 1999
Internet Demographics Survey, conducted by CommerceNet and Neilsen Media
Research, estimated the number of Internet users in the United States and Canada
at 92 million. According to the Telecommunications and Information
Highways-Internet Market Report by Paul Budde Communication, the U.S.-based ISP
market was $6.6 billion in 1998 and is expected to grow to $24.7 billion in
2002, a compound annual growth rate of 39.1%. ICM and Access derived $61,820, or
0.9%, of their combined revenues in fiscal 1998 and $38,969, or 1.3%, of their
combined revenues for the six months ended June 30, 1999 from this market. The
growth in the number of Internet users is being fueled by a number of factors,
including the increased use of personal computers, the speed and reduction in
cost of computer hardware and the increasing importance of the Internet as a
means of communication and commerce.
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The Internet Service Provider Industry
Businesses are becoming more "virtual," which allows individuals to be
less concerned with proximity to the office and more concerned with
communications and Internet access to the office. The Internet has allowed many
businesses and individuals to conduct their business away from the traditional
commercial centers to regions and cities that have not previously been viable
locations for business. This trend is spurring growth in both Internet users and
ISPs, as well as in the use of the Internet for communications.
ISPs are organizations that offer a range of Internet and World Wide
Web-based services to customers. The Internet services market in the areas we
are targeting currently consists primarily of basic Internet access. The rapid
development and growth of the Internet has resulted in a highly fragmented
market. According to the 1999 Boardwatch Directory of Internet Service
Providers, there are over 5,000 ISPs in the United States. Most of these ISPs
are small and local businesses, and currently very few ISPs have a regional or
national market coverage. This industry is currently undergoing substantial
consolidation.
OUR SERVICES
Local Access
We currently act as a sales agent for U S WEST's comprehensive local
access services. Basic dial tone services are telephone connections, voice
messaging and call management. More advanced communications services we act as a
sales agent for include:
o data transmission oriented services;
o dedicated high capacity transmission services;
o high speed real time communications access, including digital
subscriber line, or DSL;
o packet-based transmission for wide area networks, including frame
relay service; and
o an advanced digital network for data, video, voice and Internet
traffic, including ISDN.
Long Distance
ICM began offering Qwest long distance services in October 1998 and
AT&T long distance services in April 1999. These services are offered utilizing
the agent relationships that an affiliate of the former shareholders of ICM has
with Qwest and AT&T. Access has been an agent of Qwest for long distance
services since January 1999. These relationships allow us to offer our customers
the pricing, quality and add-on features that they require for their specific
long distance communications. We are seeking to establish similar relationships
with MCI/WorldCom and Sprint.
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Wireless
We plan to concentrate on providing our customers with services and
capabilities that will allow them to better utilize wireless technology and make
this technology an integral part of their voice and data communications
strategy. ICM and Access each began offering U S WEST's wireless services in
December 1998. These wireless services include cellular, paging and integrated
voice and data communications services. We intend to provide our customers with
competitive pricing, coverage and access to add-on features.
Internet
We find that customers are often confused by the process of selecting
an ISP, connecting to the ISP and integrating the service into their internal
systems. Many ISPs do not provide installation and start-up assistance or
assistance in internal cabling and networking for their customers. As a result,
the customers must coordinate with local access providers, networking/cabling
consultants and the ISP to obtain service. To address this problem, we plan to
offer a turnkey solution to our customers through our agent relationships,
connection expertise and relationships with networking/cabling companies. ICM
and Access each began offering U S WEST's Internet services in January 1998. In
June 1998, ICM began selling Epoch Internet services through an affiliate of the
former shareholders of ICM.
Project Management
The combination of wireless technologies, computer networking
integration, phone system integration and Internet technologies creates
significant challenges for small to medium-sized businesses attempting to
implement an overall communications solution. We believe that some of our
customers will benefit from our project management capabilities. We intend to
offer comprehensive communications services, assistance in the selection of
hardware and cabling providers, and supervision of the installation and
integration of all the communications services components. However, we do not
plan to offer computer network implementation or hardware installation. As our
size and geographic coverage expand, we believe we will be able to offer project
management to customers who have larger, more complex projects requiring
significant planning, resource management and coordination.
Analysis of New Technologies and Developments
We believe that over the course of the next few years the
communications industry will see the introduction and expanded use of a wide
range of new technologies and services. These new technologies will include the
use of:
o Internet and wireless technologies for voice and data
communications;
o wireless receptor technologies, such as dish relay, satellite and
radio towers and cable networks for communications; and
o intra-company networks.
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There are also several private companies developing satellite networks that will
be used for providing new services and capabilities. Many of these new
technologies will be valuable additions to the overall communications strategies
of our customers. However, this abundance of new options may add to the
confusion our customers face in making their communications choices. We intend
to offer our customers, at no charge to the customer, ongoing analysis of these
new technologies and services and assist them in their determination of which
technologies may be applicable to their needs.
Our Proposed Internet Services
The core product expected to be offered by our ISPs will be dial-up
access to the Internet. Although individuals typically use slower, less
expensive Internet access methods, business customers often benefit from
dedicated, high-speed Internet access. We expect to have the ability to procure
the communications services necessary to provide our customers with the highest
speed access available in a particular market. We also plan to offer e-mail
applications, file transfer protocol, World Wide Web hosting, Web design,
project management of Web-based services and assistance with electronic
commerce. Our goal is to increase the use of these more advanced services by
customers of ISPs we may acquire.
Other Services
It is not currently common in the agent industry to provide customers
with post-sales support beyond installation. Additionally, our small to
medium-size business customers typically do not have communications departments
to deal with post-sales issues. Since post-sales services have not been
customarily offered by agents, we do not know whether we can sell these services
at a price that is acceptable to the customer and economical to us. To fill this
need we may eventually offer customers:
o on-going contract maintenance, including service and billing
problem dispute resolution with the communications service
provider;
o 7-day a week emergency assistance for service interruption or
degradation;
o ongoing audits and needs analysis to ensure that all services are
functioning appropriately;
o regular audits and analysis of the services in place and the need
for new services; and
o audits of billings and consolidation of billings.
We believe that providing these additional services may add significant
incremental revenues and further strengthen our customer relationships.
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SALES AND MARKETING
Our direct sales efforts are conducted at the local level by our direct
sales force of approximately 24 full-time employees. Members of our direct sales
team meet face-to-face with prospective customers, discuss their communications
needs and use our local project management staff to design a comprehensive
package of communications services. We will continually focus on improving our
project management staff and capabilities and developing programs to recruit and
train motivated sales people with good technical and customer skills. Our goal
is to establish a long-term relationship as the customer's total solution
provider.
Our agents also establish additional customer referral relationships by
working directly with:
o interconnect companies;
o value-added resellers;
o computer network integrators;
o telephone system integrators; and
o ISPs and equipment vendors.
We customarily pay a referral fee to these companies or reciprocate in the
sharing of market opportunities.
In addition, we intend to maintain a comprehensive database for
significant customers that will document their communications service plans and
providers, historical usage and anticipated future needs. We believe that this
database will become a valuable tool for providing enhanced services to these
customers.
COMPETITION
Agent Business
The market for communications services is extremely competitive and
rapidly changing. We expect competition to increase as communications service
providers expand their traditional service offerings. Many of our largest
competitors are national communications service providers that have
significantly greater financial, marketing and other resources. These
competitors may adopt more aggressive pricing policies and offer more attractive
terms to customers than we can. We may face increasing price pressure from our
larger competitors. In addition, some of our current and potential competitors
have established, or may establish, cooperative relationships among themselves
or with third parties to compete more effectively. We cannot assure you of our
survival in this intensely competitive and rapidly evolving market. Within this
market, we encounter multiple competitors that include:
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o the direct sales forces of communications service providers, such
as U S WEST, AT&T, Qwest, MCI/WorldCom and numerous CLECs;
o other communications services agents;
o customer infrastructure out-sourcers, such as Convergent
Technologies, which buy a customer's computers, servers and
telephone equipment and lease them back to the customer along with
providing the customer CLEC-type services; and
o communications consultants, such as groups within Electronic Data
Systems and Andersen Consulting.
We believe the primary competitive factors in our market include:
o the ability to provide a solution that satisfies all the
customer's communications needs;
o pricing;
o customer service during and after installation;
o quality and reliability of communications services;
o access to multiple communications service provider options; and
o development of customer loyalty.
Although we face a broad range of competition from a variety of
communications service providers, we will seek to compete effectively by acting
as a sales agent for RBOC services in the local access market, along with long
distance, wireless and Internet services from providers in those markets, with a
strong focus on customer service.
Proposed ISP Business
Our target market for Internet access is extremely competitive. We
expect competition to increase as Internet use grows and ISPs expand their
traditional services and new start-ups emerge in the marketplace. Barriers to
entry are minimal and competitors can enter the market at a relatively low cost.
Many of our competitors have greater financial, marketing and other resources
than we. We cannot guarantee you that we will be able to compete effectively in
this market. Our competitors include:
o other local and regional ISPs;
o national ISPs such as MindSpring and Verio;
o on-line information providers, such as America Online and Prodigy;
o large national communications providers, such as AT&T, Qwest,
MCI/WorldCom and the RBOCs; and
o traditional cable television providers.
In our target ISP market, we believe that the following are the
principal competitive factors:
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o maintaining high-speed access options and adequate capacity;
o affordable pricing;
o the ability to assist customers in implementing services and
resolving problems; and
o offering a variety of services in addition to basic access.
GOVERNMENT REGULATION
Agent Business
PentaStar is not, and following our acquisition of ICM and Access will
not be, directly subject to any government regulations other than normal
business regulations. However, the communications service providers for whom we
act as a sales agent are subject to varying degrees of federal, state and local
regulation. Generally, the FCC exercises jurisdiction over all communications
service providers to the extent they provide services involving the supplying of
interstate or international communications. The Telecommunications Act of 1996
expanded the FCC's jurisdiction to include certain interconnection and related
issues that traditionally have been considered subject primarily to state
regulation. The state regulatory commissions also retain jurisdiction over
significant aspects of the provision of intrastate communications services. The
Telecommunications Act of 1996 was intended ultimately to permit service
providers in the long distance and local communications services markets, as
well as cable television providers, to compete freely in all communications
markets. For example, the Telecommunications Act of 1996 eventually will permit
the RBOCs to compete fully in the provision of in-region long distance services
upon the satisfaction of statutorily mandated criteria. The 1996 Act also allows
long distance carriers to provide local services in the RBOCs' territories.
Large long distance carriers are permitted to offer combined packages of long
distance and resold RBOC local services in states where the RBOC has not
received in-region long distance authorization. These long distance carriers are
not permitted to market long distance and resold RBOC local services through a
"single transaction" meaning that these carriers may not use the same sales
agent to market both products to the same customer in the same communication.
Also, the telecommunications carrier may not offer long distance and RBOC resold
local exchange services as a bundled package under an integrated pricing
schedule. The Telecommunications Act of 1996 also generally requires RBOCs to
provide competitors with interconnection and nondiscriminatory access to their
local exchange network on more favorable terms than have been available in the
past. As required by the Telecommunications Act of 1996, the FCC adopted in
August 1996 new rules implementing the interconnection and resale provisions of
the Telecommunications Act of 1996, which are intended to minimize regulatory,
economic and operational impediments to full competition for local services.
In general, we are unable to determine what effect the
Telecommunications Act of 1996 and other laws and regulations will have on the
communications industry in general and on us in particular. Numerous FCC, state
and local regulatory decisions are expected regarding issues that may materially
affect us because they will have an impact on:
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o the services and the pricing that can be offered by RBOCs; and
o who can compete with RBOCs in various markets and the prices they
will be able to offer.
Also, the communications service providers whose services we will
market are affected by the laws and changes in the laws affecting the provision
of telecommunications. These laws and changes may have an indirect effect on
PentaStar. For instance, on February 26, 1998, the FCC established rules that
restricted telecommunications carriers' use of customer proprietary network
information, or CPNI. The rules prohibit carriers from using information gleaned
from providing one type of service (local, long distance or wireless) to market
another type of service without first obtaining that customer's consent. This
means that a carrier could not give PentaStar a local service customer's
marketing information in order for PentaStar to market that carrier's long
distance, wireless or Internet services without first obtaining that customer's
consent to use his or her CPNI. However, the U.S. Court of Appeals for the Tenth
Circuit recently overturned most of the FCC's CPNI rules. The FCC will file a
petition for rehearing of this case on October 4, 1999.
The communications service providers for which we act as sales agent
must also comply with the FCC's verification requirements enacted to prevent
slamming, the unauthorized change of a customer's prescribed carrier selection.
The slamming rules govern the manner in which telecommunications carriers
effectuate and verify selection by consumers of preferred providers of local
exchange and interexchange services. When we successfully sell a customer a
service that replaces that customer's local access or long distance service, the
provider of the new service must comply with the verification procedures in
order to switch our customer's service.
Proposed ISP Business
We anticipate providing Internet access, in part, through transmissions
over public telephone lines. These transmissions are governed by regulatory
policies establishing charges and terms for communications. As an ISP, we will
not be directly regulated by the FCC or any other agency, other than regulations
applicable to businesses generally. We could, however, become subject in the
future to regulation by the FCC or other regulatory agencies as a provider of
basic telecommunications services.
These regulations could affect the charges that we pay to connect to
the local telephone network or for other purposes. We, like other ISPs, will not
be required to pay carrier access charges. Access charges are assessed by local
telephone companies to long-distance companies for the use of the local
telephone network to originate and terminate long-distance calls, generally on a
per minute basis. Access charges have been a matter of continuing dispute
between local telephone companies and long-distance carriers. In May 1997, the
FCC reaffirmed its decision that ISPs should not be required to pay carrier
access charges.
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To the extent that an end user's call to an ISP is local rather than
long distance, the local telephone company that serves the ISP may be entitled
to reciprocal compensation from the end user's local telephone company.
Reciprocal compensation is a reimbursement from one local telephone company to a
second one for handling calls that originate with the first local telephone
company and terminate with the second one. To the extent that a call from an end
user to an ISP is considered intrastate, the local telephone company serving an
ISP would be entitled to reciprocal compensation. This payment of reciprocal
compensation reduces the local telephone company's costs and ultimately reduces
the ISP's costs. The FCC recently determined that most, but not all, traffic to
an ISP is interstate in nature rather than local. This determination could
potentially eliminate the payment of reciprocal compensation to the local
telephone company. The FCC has yet to rule on the specific issue of reciprocal
compensation and ISP traffic; however, the FCC has stated that state commissions
may determine whether, in some circumstances, reciprocal compensation should be
paid.
The FCC's current position is that Internet access providers should not
be required to contribute to a new universal service fund established to replace
current local rate subsidies and to meet other public policy objectives, such as
enhanced communications systems for schools, libraries and health care
providers. As a result, unlike telecommunications carriers and other
telecommunications providers, ISPs do not have to contribute a percentage of
their revenues to the federal universal service fund and are not expected to be
required to contribute to similar funds being established at the state level.
Both the access charge and universal service treatment of ISPs, however, are the
subjects of further FCC proceedings and could change. Telephone companies are
actively seeking reconsideration or reversal of the FCC decisions, and their
arguments are gaining more support as Internet-based telephony begins to compete
with conventional telecommunications companies.
We are not in a position to predict how these matters will be resolved,
but we could be adversely affected if, in the future, we and other ISPs are
required to pay access charges, contribute to universal service support or our
local telephone companies no longer receive reciprocal compensation for our
traffic.
The law relating to the liability of ISPs and on-line services
companies for information carried on or disseminated through their networks is
unsettled. As the law in this area develops, the potential imposition of
liability upon us for information carried on and disseminated through our
network could require us to implement measures to reduce our exposure to this
liability, which may require the expenditure of substantial resources or the
discontinuation of some of our products or service offerings. Any costs that are
incurred as a result of contesting any asserted claims or the consequent
imposition of liability could materially adversely affect our profitability.
Due to the increasing popularity and use of the Internet, a number of
laws and regulations have been adopted in recent months, and may be adopted in
the future, by federal and state governments, as well as by foreign governments
with respect to the Internet. These laws cover
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or may cover issues such as content, user privacy, pricing and copyright
infringement. We cannot predict the impact, if any, that recent and any future
regulatory changes or developments may have on the business, financial condition
and results of operations of any ISPs we acquire. Changes in the regulatory
environment relating to the Internet access industry, including regulatory
changes that directly or indirectly affect telecommunication costs or increase
the likelihood or scope of competition from access providers or others, could
have a material adverse effect on the ISP business.
EMPLOYEES
As of June 30, 1999, ICM and Access had 63 employees, all of whom were
full-time employees. Of our full-time employees, 30 were in sales and marketing,
19 were in operations and engineering support, and 14 were in administration.
Upon this offering, we will hire three executive officers, who will be
PentaStar's first employees.
We believe that our relations with our employees are satisfactory. We
are not a party to any collective bargaining agreements and we have never
experienced a work stoppage. As we continue to grow and acquire new companies,
we expect to hire additional personnel.
PROPERTIES
We maintain our corporate headquarters at 1522 Blake Street, Denver,
Colorado. We lease 1,875 square feet under a lease which expires August 31,
2002. Additionally, our agents lease the following facilities:
<TABLE>
<CAPTION>
Location Sq. Ft. Term
-------- ------- ----
<S> <C> <C>
Denver, Colorado 9,050 4,250 sq. ft. expires 7/31/00
4,800 sq. ft. expires 12/31/01
Colorado Springs, Colorado 300 Expires 3/31/00
Bellevue, Washington 9,902 5,213 sq. ft. expires 11/30/02
4,689 sq. ft. expires 11/30/02
Portland, Oregon 3,238 Expires 6/28/01
</TABLE>
We believe additional space is available for expansion.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors upon completion of this offering
and the acquisitions of ICM and Access will be:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert S. Lazzeri 38 Chief Executive Officer and Director
R. Neal Tomblyn 44 President and Chief Operating Officer
David L. Dunham 41 Chief Financial Officer
Richard M. Tyler 41 Vice President, Secretary and Director
Craig J. Zoellner 42 Vice President, Treasurer and Director
Carleton A. Brown 57 Director
</TABLE>
KEY EMPLOYEES
Our key employees upon completion of the offering and the acquisitions
of ICM and Access will be:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Dennis W. Schillinger 55 Manager-Northwest Region
Jeffrey A. Veres 45 Manager-Colorado Region
</TABLE>
Robert S. Lazzeri will become PentaStar's chief executive officer and a
director upon this offering. Since October 1989, Mr. Lazzeri has worked for
Daniels & Associates, L.P., a leading international telecommunications
investment banking firm, most recently as a senior vice president. For up to 30
days after this offering, he will assist Daniels & Associates in completing
various transactions currently in process. At that time, his employment by
Daniels & Associates will cease. While at Daniels & Associates, Mr. Lazzeri
specialized in providing merger, acquisition and advisory services to clients in
the wired and wireless telecommunications industry, participating in more than
100 telecommunications transactions. He holds a B.S. degree from the University
of Colorado.
R. Neal Tomblyn will become PentaStar's president and chief operating
officer upon this offering. From July 1998 until the day prior to the date of
this prospectus, he owned and operated NTC Corporation, a company that provided
strategic planning and operational consulting to companies in the
communications, Internet and broadband industries. From January 1997 until its
acquisition in June 1998, Mr. Tomblyn was chief executive officer of IEG, Inc.,
a private Internet based multimedia, software and database company. From May
1995 to January 1997, Mr. Tomblyn was president and chief operating officer of
Ingenius, an educational
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programming joint venture of Reuters and Tele-Communications, Inc. From December
1992 to April 1994, Mr. Tomblyn was the executive director, and from April 1994
to April 1995, Mr. Tomblyn was chief operating officer, of Bell Atlantic Video
Services, a start-up subsidiary of Bell Atlantic Corporation. While at Bell
Atlantic Video, he helped create an interactive multimedia business and founded
the Internet services group for Bell Atlantic Corporation. He has experience
working with RBOCs, ISPs, inter-exchange carriers such as AT&T and MCI/WorldCom,
and cable companies. Mr. Tomblyn holds a B.S. degree from Eastern Kentucky
University.
David L. Dunham will become PentaStar's chief financial officer upon
this offering. From September 1997 to the day prior to the date of this
prospectus, Mr. Dunham was chief financial officer of Strategic Marketing
International, LLC, a PGA Tour licensee company that has developed the Golfwatch
program for tour events nationwide. Golfwatch provides priority access and
hospitality services for PGA Tour spectators for a premium fee. From January
1996 to July 1997, Mr. Dunham was corporate controller for Birner Dental
Management Services, Inc., a company that owns and is acquiring dental
practices. From September 1989 to December 1995, Mr. Dunham was corporate
controller for Gillett Holdings, Inc., a holding company that had 18
subsidiaries in a variety of businesses. Mr. Dunham also worked for Arthur
Andersen for eight years, most recently as an audit manager. Mr. Dunham holds a
B.S. degree from the University of Wyoming and is a licensed CPA.
Richard M. Tyler has been vice president, secretary and a director of
PentaStar since March 1999. Since November 1988 he has been a member (or a
partner in the predecessor partnership), and after this offering will continue
to be, a member of BACE Investments and BACE Industries, a private company that
has completed consolidations in several industries. Mr. Tyler has been an
executive officer or director of various companies for which BACE Industries has
led consolidation efforts. Those companies include BACE Plastics Group, Inc.
from March 1989 to March 1995, SoftWorld Services Corporation from January 1995
to November 1996, and RentX Industries, Inc. from March 1996 to July 1999. He
holds a B.A. degree from The Colorado College.
Craig J. Zoellner has been president, treasurer and a director of
PentaStar since March 1999. Upon this offering, he will cease to be our
president and will become a vice president and continue to be our treasurer and
a director. Since November 1988 he has been a member (or a partner in the
predecessor partnership), and after this offering will continue to be, a member
of BACE Investments and BACE Industries. Mr. Zoellner has been an executive
officer or director of various companies for which BACE Industries has led
consolidation efforts. Those companies include BACE Plastics Group, Inc. from
March 1989 to March 1995, SoftWorld Services Corporation from January 1995 to
November 1996, and RentX Industries, Inc. from March 1996 to July 1999. He holds
a B.A. degree from The Colorado College and an M.B.A. from the Stanford Graduate
School of Business.
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Carleton A. Brown has served as a director of PentaStar since August
1999. Since July 1998, Mr. Brown has served as executive vice
president-corporate development of Orion Systems, Inc., a start-up CLEC and
Internet telephony company. From October 1996 to January 1998, Mr. Brown served
as senior vice president of global sales and marketing for Intergram
International, Inc., an Internet-based telecommunications messaging company.
From November 1994 to September 1996, Mr. Brown served as president and chief
executive officer of American Lightwave Systems, Inc., a worldwide provider of
broadband video solutions. From January 1994 to November 1994, Mr. Brown served
as president and chief executive officer of ATx Telecom Systems, Inc., a network
technology solutions company. From January 1992 to January 1994, Mr. Brown
served as senior vice president and general manager of Teleport Communications
Group, a national CLEC. Mr. Brown also was president and chief operating officer
of Alcatel Network Systems, a communications technology company, and served as
president, Southwest division, of MCI. He holds a B.S. degree from Norwich
University and an M.B.A. from Fairleigh Dickinson University.
Dennis W. Schillinger will become the regional manager of the Northwest
region of our agent business upon completion of the ICM acquisition. He was a
founder of ICM in 1990, when it was formed as a division of ICM, Inc. Mr.
Schillinger served as a vice president of ICM, Inc., in charge of ICM's
business, until ICM was spun-off from ICM, Inc. in January 1995. He has been
president and a director of ICM since January 1995. Mr. Schillinger was also a
founder in May 1997 of Network Communications, Inc., or NCI, a communications
services agent for services other than U S WEST's services, and from May 1997 to
August 12, 1999 was president and a director of NCI. NCI is owned by the
persons, including Mr. Schillinger, who owned ICM prior to ICM's acquisition by
PentaStar. NCI has agent relationships with Qwest and AT&T that are currently
utilized by ICM. From August 1965 to February 1990 Mr. Schillinger was engaged
in various administration, sales and technology management positions for U S
WEST and its predecessors in Seattle, Washington, most recently as director of
technical support for U S WEST's agents. Mr. Schillinger has an A.A. degree from
Southern Junior College.
Jeffrey A. Veres will become the regional manager of the Colorado
region of our agent business upon completion of the Access acquisition. Mr.
Veres has been the president and owner of Access since November 1995. From April
1994 to October 1995 Mr. Veres served as senior vice president of technology
services for Random Access, Inc., a LAN/WAN systems integrator. From April 1987
to March 1994, Mr. Veres owned and operated JLV Enterprises, Inc., a regional
data communications equipment provider and communications network integrator.
Mr. Veres also has been employed in the roles of sales and territory management
by different entities of the Bell system, including Mountain Bell, AT&T
Information Systems, Mountain Bell Technologies, and U S WEST Information
Systems. Mr. Veres has an A.A. degree from Arapahoe Community College.
There is no family relationship among any of our directors, executive
officers or key employees.
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DIRECTOR AND OFFICER INVOLVEMENT IN LEGAL PROCEEDINGS
From January 1995 until November 1996, Richard M. Tyler and Craig J.
Zoellner were vice president and secretary and vice president, assistant
secretary and director, respectively, of SoftWorld Services Corporation, which
provided turnkey manufacturing and fulfillment services to software developers.
In April 1997, SoftWorld filed a petition for relief under the Federal
Bankruptcy Code and has been liquidated.
From October 1996 to January 1998, Carleton A. Brown served as a senior
vice president of global sales and marketing for Intergram International, Inc.
In July 1998, Intergram filed a voluntary petition for relief under Chapter 7 of
the Federal Bankruptcy Code. The case is currently pending.
BOARD OF DIRECTORS
Upon this offering, we will have four directors. Our certificate of
incorporation provides for, among other things, a classified board of directors.
The certificate of incorporation states that the terms of office of the board of
directors will be divided into three classes: class I, whose term will expire at
the annual meeting of shareholders to be held in 2000, class II, whose term will
expire at the annual meeting of shareholders to be held in 2001 and class III,
whose term will expire at the annual meeting of shareholders to be held in 2002.
Mr. Brown is the class I director, Mr. Lazzeri will be the class II director and
Mr. Tyler and Mr. Zoellner are the class III directors. Within 90 days after the
completion of this offering, we will appoint an additional independent director.
He will be a class I director and will be appointed to the audit committee. At
each annual meeting of shareholders beginning with the 2000 annual meeting, the
successors to directors whose terms expire will be elected to serve from the
time of election and qualification until the third annual meeting following
election and until their successors have been elected.
COMMITTEES OF THE BOARD OF DIRECTORS
The compensation committee consists of Mr. Brown, Mr. Zoellner and Mr.
Tyler. The compensation committee makes recommendations to the board of
directors regarding compensation and benefits for PentaStar's executive
officers.
The audit committee consists of Mr. Brown, Mr. Zoellner and the
independent director to be added as described above. The functions of the audit
committee are to:
o review the scope of the audit procedures utilized by our
independent auditors;
o review with the independent auditors our accounting practices and
policies;
o consult with PentaStar's independent auditors during the year;
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o approve the audit fee charged by the independent auditors; and
o report to the board of directors with respect to these matters and
to recommend the selection of independent auditors.
DIRECTOR COMPENSATION
Directors who are not receiving compensation as officers, employees or
consultants are entitled to receive an annual retainer fee of $5,000 and to be
reimbursed for expenses incurred in connection with each meeting of the board
attended in person. In addition, each of these directors receives a grant of
options to acquire 10,000 shares of common stock under our stock option plan
upon becoming a director and an annual grant of options to purchase 5,000 shares
of common stock on each annual meeting date on which the individual is still a
director.
STOCK OPTION PLAN
PentaStar's stock option plan was adopted on August 13, 1999. The plan
will terminate on the tenth anniversary of the date of its adoption, unless
earlier terminated by the board pursuant to the terms of the plan. The plan is
administered by the board or a committee appointed by the board.
Grants may be made to full-time employees of PentaStar or any of its
subsidiaries and non-employees selected by the board or the committee
administering the plan, in their discretion, whose judgment, initiative and
efforts are, or will be, important to the successful conduct of its business.
Grants under the plan may consist of:
o options intended to qualify as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code; and
o stock options that are not intended to so qualify.
We have reserved 1,000,000 shares for issuance pursuant to the exercise
of options granted under our stock option plan. Upon this offering, we will
grant options to purchase 375,000 shares of our common stock to a director, two
executive officers, some employees of ICM and Access and a consultant at an
exercise price per share equal to the initial public offering price. No other
options have been granted under our stock option plan.
The board or a committee appointed by the board determines the exercise
price of options granted under the plan in accordance with the guidelines set
forth in the plan. The exercise price of incentive stock options granted
pursuant to the plan cannot be less than 100% of the fair market value of the
common stock on the date of the grant and the term of these options cannot
exceed ten years. The exercise price of incentive stock options granted to any
person who at the time of grant owns stock representing more than 10% of the
total combined voting power of all
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classes of PentaStar's capital stock or any of its affiliates must be at least
110% of the fair market value of PentaStar's common stock on the date of grant
and the term of these incentive stock options cannot exceed five years.
PentaStar has agreed that for a period of at least one year following the date
of this prospectus non-qualified options will not be granted at an exercise
price of less than 100% of the fair market value of PentaStar's common stock on
the date of grant and the terms will not exceed five years. The board or a
committee appointed by the board determines the exercise price of nonqualified
stock options. Options granted under the plan vest at the rate specified in the
option agreement.
Upon a change of control (as defined in the plan) of PentaStar, the
board or a committee appointed by the board in its sole discretion, without
obtaining shareholder approval unless otherwise required by the plan, may take
any or all of the following actions:
o accelerate or partially accelerate the vesting and exercise date
of any outstanding options or make all such options fully vested
and exercisable;
o grant a cash bonus award to any option holder in an amount
necessary to pay the option price of all or any portion of the
options then held by each option holder;
o pay cash to any or all option holders in exchange for the
cancellation of their outstanding options in an amount equal to
the difference between the option price of such options and the
greater of the per share tender offer price, the per share value
of the consideration to be paid in the change of control
transaction for the underlying stock or the fair market value of
the underlying stock on the date of the cancellation of the
options;
o cause the surviving or acquiring corporation to substitute or
assume the options; and
o make any other adjustments or amendments to the outstanding
options.
EXECUTIVE COMPENSATION
PentaStar was founded in March of 1999 and has had no significant
operations. No compensation has been paid to any executive officer.
We anticipate entering into employment agreements with Messrs. Lazzeri
and Tomblyn following completion of this offering. We believe that the
employment agreements will contain provisions for compensation, severance
payments, confidentiality and restrictions on competing with PentaStar for a
reasonable period of time subsequent to termination of their employment.
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LIMITATION OF LIABILITY AND INDEMNIFICATION
Our bylaws provide that we will indemnify our directors and officers,
and may indemnify employees and agents, to the fullest extent permitted by
Delaware law. In addition, our certificate of incorporation provides that, to
the fullest extent permitted by Delaware law, our directors will not be liable
for monetary damages for breach of the directors' fiduciary duty to PentaStar
and its shareholders. This provision of the certificate of incorporation does
not eliminate the duty of care. In appropriate circumstances, equitable remedies
such as an injunction or other forms of non-monetary relief are available under
Delaware law. This provision also does not affect a director's responsibilities
under any other laws, such as the federal securities laws.
Each director will continue to be subject to liability for:
o breach of the director's duty of loyalty to PentaStar;
o acts or omissions not in good faith or involving intentional
misconduct;
o knowing violations of law;
o any transaction from which the director derived an improper
personal benefit;
o improper transactions between the director and PentaStar; and
o improper distributions to shareholders and improper loans to
directors and officers.
We intend to enter into indemnity agreements with each of our directors
and executive officers to indemnify them against expenses and losses incurred
for claims brought against them in their capacities as directors or executive
officers. PentaStar's board of directors has authorized its officers to
investigate and obtain directors' and officers' liability insurance.
There is no pending litigation or proceeding involving a director or
officer as to which indemnification is being sought. We are not aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and control persons of
PentaStar pursuant to the foregoing provisions, or otherwise, PentaStar has been
advised that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act of 1933, and is, therefore,
unenforceable.
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CERTAIN TRANSACTIONS
Craig J. Zoellner, Richard M. Tyler, Blair W. McNea, Robert S. Lazzeri
and Jeffrey A. Veres are the founders of PentaStar. Mr. Zoellner and Mr. Tyler,
who are directors and executive officers of PentaStar, are the members of BACE
Investments and BACE Industries. Mr. McNea is the sole member of Black Diamond.
Mr. Lazzeri will become PentaStar's chief executive officer and a director upon
this offering. Mr. Veres is the shareholder of Access and will become an
employee of PentaStar upon our acquisition of Access.
Pursuant to a consulting agreement, effective September 1, 1999, BIBD
provides consulting services to PentaStar concerning acquisitions. BIBD is owned
60% by BACE Industries and 40% by Black Diamond, and is managed by BACE
Industries. BIBD was created for the purpose of entering into the consulting
agreement with, and rendering services, to PentaStar and does not have any other
activities. BIBD is compensated by a monthly fee that varies from $12,000 per
month to $21,000 per month depending on PentaStar's annualized revenue. This fee
is also subject to increase based on the Consumer Price Index. PentaStar is
obligated to reimburse BIBD for expenses incurred in providing services under
the consulting agreement and to provide medical, dental, disability and other
similar benefits for up to six employees or members of BIBD, BACE Industries and
Black Diamond. BIBD, BACE Industries and Black Diamond are subject to
non-competition provisions expiring one year after the termination of the
consulting agreement and are subject to confidentiality provisions. The
consulting agreement continues in effect until the earliest of:
o PentaStar's termination of the consulting agreement for cause;
o BIBD's termination of the consulting agreement on 30 days prior
notice; or
o automatic termination upon PentaStar's sale of all or
substantially all of its assets or its acquisition for cash by an
unaffiliated party, or upon PentaStar becoming the subject of a
proceeding under Chapter 11 of the Federal Bankruptcy Code.
On March 17, 1999, PentaStar issued 1,708,979 shares of common stock to
BACE Investments for $500.
On March 31, 1999, PentaStar issued 732,419 shares of common stock to
Black Diamond, for $321; 469,499 shares of common stock to Robert S. Lazzeri for
$206; and 219,100 shares of common stock to Jeffrey A. Veres for $96.
On March 31, 1999, Mr. Lazzeri, entered into agreements with each of
BACE Investments and Black Diamond pursuant to which Mr. Lazzeri has purchased
for $10.00 options to buy 167,480 shares of PentaStar's common stock held by
BACE Investments and 73,242 shares of PentaStar's common stock held by Black
Diamond. These options become effective
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upon the completion of this offering and can be exercised upon the earlier of a
sale of all or substantially all of PentaStar's assets or stock or March 31,
2000. The options terminate on March 31, 2004. The exercise price per share is
equal to the public offering price per share in this offering.
Since March 15, 1999, PentaStar has issued promissory notes to BACE
Industries for funds loaned by BACE Industries to PentaStar for its use to pay
expenses associated with the organization of PentaStar, the acquisitions of ICM
and Access and this offering. The notes bear interest at 5% per annum and are
payable upon completion of this offering. At September 23, 1999, the outstanding
principal amount of the notes was $86,000. On September 23, 1999 the promissory
notes were assigned from BACE Industries to BACE Investments. PentaStar and BACE
Investments have agreed that, immediately prior to this offering, PentaStar will
issue 86 shares of Series A preferred stock to BACE Investments as payment in
full of the aggregate principal amount of the notes. The issuance has been
approved by the existing shareholders and by our sole independent director. The
Series A preferred stock will:
o have a $1,000 par value per share;
o bear dividends at the rate of 5% per year, payable annually;
o be non-voting (except for the limited voting rights mandated by the
Delaware General Corporation Law);
o not be convertible into common stock or any other capital stock of
PentaStar;
o not be redeemable or callable; and
o be junior to all other preferred stock.
PentaStar leases 1,875 square feet of office space from BACE Real
Estate, LLC, which is owned by BACE Industries, for $3,000 per month (subject to
increases based on the Consumer Price Index and increases in operating
expenses). This lease agreement has a 36-month term commencing September 1,
1999.
PentaStar and Mr. Veres are parties to an agreement pursuant to which
PentaStar will acquire Access concurrently with the closing of this offering for
$500,000 in cash and 205,000 shares of our common stock. Mr. Veres will receive
all of the cash and common stock.
We have also entered into an employment agreement with Mr. Veres that
will be effective upon our acquisition of Access. Mr. Veres' employment
agreement has a term from the completion of this offering until the earlier of
the date of a change of control of PentaStar (as defined in the agreement) or
five years after the completion of this offering, provided that it can be
earlier terminated for cause (as defined in the agreement). Mr. Veres' annual
salary will be $120,000 and he will be eligible to receive an annual cash bonus
of up to 5% of his area's operating income before amortization expense. This
agreement generally restricts Mr. Veres from competing with us for a period that
is the greater of three years from the date of the agreement or one year after
his termination date. We will also reimburse Mr. Veres for reasonable
out-of-pocket expenses and he will be eligible to participate in our benefit
plans and programs.
Commencing upon the acquisition of Access, PentaStar will lease 4,800
square feet of office space from Mr. Veres for $3,000 per month. Access
presently occupies this space. This lease expires on December 31, 2001.
PentaStar believes that the transactions summarized above were made on
terms no less favorable than terms PentaStar could have obtained from
unaffiliated third parties. At the time these transactions were entered into, we
lacked sufficient disinterested independent directors to ratify these
transactions. They were subsequently ratified by Carleton A. Brown, the
independent director of PentaStar. The board of directors has determined that
any future transactions between PentaStar and its officers, directors or
principal shareholders will be
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approved by a majority of the disinterested directors who had access, at
PentaStar's expense, to PentaStar's counsel or independent legal counsel and
will be on terms no less favorable than PentaStar could obtain from an
unaffiliated third party. We currently have only one independent director.
Within 90 days after the completion of this offering, we will appoint an
additional independent director. The board of directors may obtain independent
counsel or other independent advice to assist in that determination.
PRINCIPAL SHAREHOLDERS
GENERAL
The following table details information with respect to the beneficial
ownership of PentaStar's common stock as of the date of this prospectus, prior
to and after giving effect to the issuance of shares of common stock in
connection with the ICM and Access acquisitions and this offering, by:
o each shareholder known by PentaStar to beneficially own more than
5% of our common stock;
o each person who is or will be an executive officer following
completion of this offering;
o each director; and
o all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES PRIOR TO SHARES AFTER
ACQUISITIONS AND OFFERING ACQUISITIONS AND OFFERING
-------------------------------- ------------------------------
SHARES OWNED PERCENT SHARES OWNED PERCENT
<S> <C> <C> <C> <C>
BACE Investments, LLC 1,674,800 53.5 1,674,800 33.5
Craig J. Zoellner 1,674,800 53.5 1,674,800 33.5
Richard M. Tyler 1,674,800 53.5 1,674,800 33.5
Black Diamond Capital, LLC 732,419 23.4 732,419 14.6
7101 LaVista Place, Suite 100
Niwot, Colorado 80503
Blair W. McNea 732,420 23.4 732,420 14.6
7101 LaVista Place, Suite 100
Niwot, Colorado 80503
</TABLE>
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<PAGE> 82
<TABLE>
<CAPTION>
SHARES PRIOR TO SHARES AFTER
ACQUISITIONS AND OFFERING ACQUISITIONS AND OFFERING
-------------------------------- ------------------------------
SHARES OWNED PERCENT SHARES OWNED PERCENT
<S> <C> <C> <C> <C>
Robert S. Lazzeri 469,499 15.0 469,499 9.4
Jeffrey A. Veres
7076 S. Alton Way, Bldg. A 219,100 7.0 424,100 8.5
Englewood, Colorado 80112
R. Neal Tomblyn 0 * 55,000 1.1
David L. Dunham 0 * 18,750 *
Carleton A. Brown 0 * 10,000 *
All directors and 2,144,299 68.5 2,228,049 43.8
executive officers as a
group (6 persons)
</TABLE>
Asterisks on the foregoing table indicate beneficial ownership of less
than 1%.
Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are currently exercisable or will become exercisable
within 60 days after the date of this prospectus are deemed outstanding, while
these shares are not deemed outstanding for purposes of computing percentage
ownership of any other person. Applicable percentages are based on 3,129,997
shares of common stock outstanding as of the date of this prospectus and
4,999,997 shares of common stock outstanding after completion of this offering.
Unless otherwise indicated in the following paragraphs, the persons and entities
named in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws where applicable.
Unless otherwise indicated in the table above, the address of each person who
beneficially owns or will own more than 5% of our common stock is 1522 Blake
Street, Denver, Colorado 80202.
The shares listed as being owned by BACE Investments include 140,000
shares that will be placed in escrow pursuant to an agreement with the
representative of the underwriters, as to which BACE Investments will have
voting but not dispositive power until certain events described in the "Shares
Eligible for Future Sales" section. The shares listed as being owned by Messrs.
Zoellner and Tyler, the members of BACE Investments, include the shares listed
as being owned by BACE Investments. The shares listed as being owned by BACE
Investments do not include 34,179 shares owned by an employee of BACE Industries
which BACE Investments has the right to acquire upon termination of the
employee's employment.
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<PAGE> 83
The shares listed as being owned by Black Diamond include 60,000 shares
that will be placed in escrow pursuant to an agreement with the representative
of the underwriters, as to which Black Diamond will have voting but not
dispositive power until certain events described in the "Shares Eligible for
Future Sales" section. The shares listed as being owned by Mr. McNea, the sole
member of Black Diamond, include shares listed as being owned by Black Diamond.
Shares listed as being owned by Mr. Veres after the acquisition of
Access include 68,265 shares that will be subject to the escrow and contingent
stock agreement described below, as to which he will have voting but not
dispositive power until the earlier of the sale of all or substantially all of
the assets or stock of PentaStar or the fifth anniversary of the acquisition of
Access.
The shares listed for Mr. Tomblyn include 55,000 shares that will be
subject to a stock option to be granted upon this offering. The stock option
will be exercisable within 60 days of this offering.
The shares listed for Mr. Dunham include 18,750 vested shares that will
be subject to a stock option to be granted upon this offering. The stock option
will be exercisable within 60 days of this offering.
The shares listed for Mr. Brown include 10,000 shares that will be
subject to a stock option to be granted upon this offering. The stock option
will be exercisable within 60 days of this offering.
ESCROW AND CONTINGENT STOCK AGREEMENTS
Each of Mr. Schillinger and Mr. Veres, as principal owners of ICM and
Access, will enter into escrow and contingent stock agreements on closing of the
acquisitions. These agreements adjust the final consideration paid to those
shareholders in return for their interests in ICM and Access. Under these
agreements, Mr. Schillinger and Mr. Veres will place 40,000 and 68,265 shares of
the PentaStar common stock each receives upon the acquisition of his company
into escrow. Based upon the earnings performance of an acquired company relative
to that of all other acquired companies for the 12-month period prior to the
earlier of a sale of substantially all of the assets or stock of PentaStar or
five years, the shareholder associated with that company will receive back from
escrow all, some or none of the shares he placed in escrow. In addition, based
again upon the relative earnings performance of the acquired company, that
shareholder may receive additional shares of common stock from PentaStar. The
agreements are designed, however, so that there will be no net change to the
total number of shares of PentaStar common stock outstanding after the combined
adjustments are made for all of the acquired companies. We expect that the
owners who manage other agent companies that we acquire will be required to
receive the majority of the purchase price in PentaStar common stock and place
into escrow from 25% to 50% of their PentaStar common stock pursuant to similar
arrangements.
-79-
<PAGE> 84
DESCRIPTION OF CAPITAL STOCK
The following description summarizes some of the terms of our capital
stock and provisions of our certificate of incorporation and bylaws. Please
refer to our certificate of incorporation and bylaws, which have been filed as
exhibits to our registration statement.
On the closing of this offering, our authorized capital stock will
consist of 20,000,000 shares of common stock, $.0001 par value per share, and
1,000,000 shares of preferred stock, $.0001 par value per share, 86 shares of
which have been designated Series A preferred stock. As of the date of this
prospectus, without giving effect to the shares to be issued in the ICM and
Access acquisitions, there were 3,129,997 shares of common stock outstanding
held of record by five shareholders, and 86 shares of Series A preferred stock
outstanding held of record by one shareholder.
COMMON STOCK
The holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the shareholders. The
holders of common stock are not entitled to cumulative voting rights with
respect to the election of directors, and as a consequence minority shareholders
will not be able to elect directors on the basis of their votes alone. Subject
to preferences that may be applicable to any then outstanding shares of
preferred stock, holders of common stock are entitled to receive ratably such
dividends as may be declared by the board out of funds legally available.
In the event of a liquidation, dissolution or winding up, holders of
the common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any then outstanding
preferred stock. Holders of common stock have no preemptive rights and no right
to convert their common stock into any other securities. There are no redemption
provisions applicable to the common stock. All outstanding shares of common
stock are, and all shares of common stock to be outstanding on completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without further action by the
shareholders, to issue up to 1,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including:
o dividend rights;
o conversion rights;
o voting rights;
o terms of redemption;
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<PAGE> 85
o liquidation preferences;
o sinking fund terms; and
o the number of shares constituting any series or the designation of
such series.
Any such issuance could adversely affect the voting power of holders of common
stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation could have the effect of delaying, deferring or
preventing a change in control of PentaStar. We will not offer any shares of
preferred stock to promoters except (1) on the same terms offered to all other
existing shareholders or to new shareholders or (2) upon the approval of a
majority of our independent directors.
WARRANTS
Upon completion of this offering, we will sell to the representative of
the underwriters for $10 warrants to purchase 150,000 shares of common stock.
These warrants will become exercisable one year after the effective date of the
offering at a per share exercise price of 120% of the initial public offering
price and will expire five years from the effective date of the offering. The
common stock issuable on exercise of the representative's warrants is subject to
adjustment in some circumstances to prevent dilution.
REGISTRATION RIGHTS
The holders of the representative's warrants are entitled to demand and
incidental registration rights with respect to the shares of common stock
issuable upon exercise of those warrants. We are required to bear all
registration expenses in connection with the registration of registrable
securities.
DELAWARE ANTI-TAKEOVER LAW AND RELATED CHARTER PROVISIONS
PentaStar is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested shareholder" for a period of three years after the date of
the transaction in which the person became an interested shareholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested shareholder, and an
"interested shareholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock. The existence of this provision would be expected to
have anti-takeover effects with respect to transactions not approved in advance
by the board of directors, such as discouraging takeover attempts that might
result in a premium over the market price of the common stock.
-81-
<PAGE> 86
Our certificate of incorporation provides for a board of directors that
is divided into three classes:
o the directors in class I will hold office until the first annual
meeting of shareholders following this offering;
o the directors in class II will hold office until the second annual
meeting of shareholders following this offering; and
o the directors in class III will hold office until the third annual
meeting of shareholders following this offering or, in each case,
until their successors are duly elected and qualified or until
their earlier resignation, removal from office or death.
After each election, the directors in each class will then serve in
succeeding terms of three years and until their successors are elected. The
classification system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of
PentaStar and may maintain the incumbency of the board of directors, as the
classification of the board of directors generally increases the difficulty of
replacing a majority of the directors.
Our corporate documents contain other provisions that might discourage,
delay or prevent a change in control of PentaStar or of our management. These
provisions could also limit the price that investors might be willing to pay for
shares of our common stock. These provisions provide that:
o shareholders may not act by written consent;
o special meetings of shareholders may be called by the board of
directors, the chairman of the board or the chief executive
officer;
o only the board of directors may change the authorized number of
directors;
o no director can be removed without cause, subject to the right of
any holders of preferred stock; and
o directors may be removed for cause only by a majority vote of the
shareholders.
LISTING
We have applied for listing of our common stock on the Nasdaq SmallCap
Market under the trading symbol "PNTA."
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<PAGE> 87
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust, Inc. has been appointed as the
transfer agent and registrar for our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for PentaStar's
common stock, and there can be no assurance that a significant public market for
our common stock will develop or be sustained after this offering. Future sales
of substantial amounts of common stock in the public market could adversely
affect market prices prevailing from time to time.
After this offering, PentaStar will have a total of 4,999,997 shares of
common stock outstanding assuming that 370,000 shares are issued in the
acquisitions of ICM and Access. Of these shares, the 1,500,000 shares sold in
this offering will be freely tradable in the public market without restriction
under the Securities Act, except for any shares held by "affiliates" of
PentaStar, as that term is defined in Rule 144 under the Securities Act. The
remaining 3,499,997 shares of common stock held by existing shareholders and
persons who will acquire shares in the acquisitions of ICM and Access are
"restricted securities," as that term is defined in Rule 144 under the
Securities Act. All restricted shares were issued and sold by PentaStar in
private transactions, which relied on the registration exemptions detailed in
the Securities Act. Restricted shares may be sold in the public market only if
they are registered or if they qualify for an exemption from registration, such
as Rule 144 or Rule 701 under the Securities Act.
PentaStar's executive officers, directors and existing shareholders and
persons who will acquire shares in the acquisitions of ICM and Access
collectively hold an aggregate of 3,499,997 restricted shares. These persons
have each agreed with Schneider Securities, Inc., as representative of the
underwriters, not to sell, offer to sell, consent to sell, grant any option for
the sale of, grant any security interest in, pledge, hypothecate or otherwise
sell or dispose of any of those shares, for a period of twelve months from the
date of this prospectus.
Persons who receive in connection with this offering options to acquire
an aggregate of 375,000 shares of common stock will agree with Schneider
Securities, Inc., as representative of the underwriters, not to sell the common
stock issued upon exercise of an option pursuant to the exemption under Rule 701
of the Securities Act for a period of 12 months after the effectiveness of this
offering. Rule 701, as currently in effect, permits resales of shares in
reliance upon Rule 144 but without compliance with some of the restrictions in
Rule 144, including the holding period requirement of Rule 144. Any employee,
officer or director of or consultant to PentaStar who purchased shares pursuant
to a written compensatory plan or contract may be entitled to rely on the resale
provisions of Rule 701. Rule 701 further provides that non-affiliates may sell
shares acquired pursuant to Rule 701 in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144.
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<PAGE> 88
Beginning 12 months following the effectiveness of this offering,
PentaStar will be permitted to file a registration statement on form S-8
registering shares of common stock subject to outstanding options or reserved
for future issuance under its stock option plan. We have reserved 1,000,000
shares for issuance pursuant to the exercise of options granted under our stock
option plan. Upon this offering, we will grant options to purchase 375,000
shares of our common stock to a director, two executive officers, some employees
of ICM and Access and a consultant at an exercise price per share equal to the
initial per share offering price.
The representative has undertaken that it will not shorten or waive the
lock-up period. PentaStar has undertaken that it will not, for a period of one
year following the date of this offering, issue or reserve for issuance options
or warrants to purchase common stock that in the aggregate exceeds 15% of the
shares of common stock outstanding on completion of this offering except for
some limited exclusions.
Excluded from the 15% limitation are:
o the representative's warrants and any other warrants or options
exercisable at or above the public offering price of the common
stock;
o options that are issued or reserved for issuance to employees or
consultants that are not promoters under a qualified stock option
plan;
o options or warrants granted to unaffiliated institutional
investors in connection with loans, subject to satisfaction of
certain additional conditions; and
o options and warrants granted in connection with acquisitions,
mergers and certain other transactions to persons unaffiliated
with PentaStar that will not materially dilute PentaStar earnings.
In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
restricted securities for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (1) 1%
of the number of shares of common stock then outstanding (which number of
outstanding shares will equal 4,999,997 shares immediately after this offering);
or (2) the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144. Sales under Rule 144 are also
subject to the manner of sale provisions under Rule 144 and notice requirements
and to the availability of current public information about PentaStar. Under
Rule 144(k), a person who is deemed not to have been an affiliate of PentaStar
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years (including the holding
period of any prior owner except an affiliate), is entitled to sell those shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
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<PAGE> 89
Taking into account the various lock-up agreements described in this
section, no shares will be available for sale in the public market under the
provisions of Rules 144, 144(k) or 701 during the 365 days after the date of
this prospectus.
Registration of any shares under the Securities Act pursuant to
outstanding registration rights would result in the shares becoming freely
tradable without restriction.
In addition, BACE Investments will deposit 140,000 shares and Black
Diamond will deposit 60,000 shares of common stock of PentaStar owned by those
shareholders in an escrow account pursuant to an escrow agreement with the
representative and American Securities Transfer & Trust, Inc. The common stock
deposited in the escrow account will be subject to release to the shareholders
on the earlier to occur of:
o PentaStar achieving pro forma (based on a full 12-month period for
all acquired operations, giving effect to such acquisitions as if
they had occurred on January 1, 2000) adjusted diluted earnings
per share of $0.50 in fiscal year 2000;
o PentaStar achieving pro forma (based on a full 12-month period for
all acquired operations, giving effect to such acquisitions as if
they had occurred on January 1, 2001) adjusted diluted earnings
per share of $1.25 in fiscal year 2001;
o a merger, acquisition or exchange in which PentaStar is not the
surviving entity or in which the shareholders of PentaStar own
less than 50% of the outstanding capital stock of the surviving
entity following that transaction or the sale of all or
substantially all of the assets of PentaStar that is approved by a
majority of the holders of the outstanding shares, excluding the
shares held in the escrow account; or
o seven years after the date of this prospectus.
The shares of common stock held in escrow are not transferable or
assignable, although they may be voted by the shareholders. The earnings levels
set forth above were determined by negotiation between PentaStar and the
representative of the underwriters and should not be construed to imply or
predict any future earnings by PentaStar or the market price of the common
stock.
Finally, the officers, directors, all existing shareholders and
persons, except as described in the last sentence of this paragraph, who will
acquire shares in the acquisitions of ICM and Access, as well as persons who
acquire our common stock upon exercise of options, are contractually bound by
PentaStar not to sell any of their stock for 18 months after the completion of
this offering. They may sell up to 33.33% of the shares owned by them after 18
months, an additional 16.67% after 24 months and the remaining 50% only at the
earlier of the sale of substantially all of the assets or stock of PentaStar or
five years after the completion of this offering. However, the shareholders of
ICM, other than Mr. Schillinger, may sell up to 33.33% of the 45,000 shares that
will be acquired by them in the acquisition of ICM after 18 months, an
additional 33.33% of those shares after 24 months and the remaining 33.33% of
those shares 30 months after the completion of this offering.
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<PAGE> 90
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement, the underwriters named below, for which Schneider Securities, Inc. is
acting as representative, have severally agreed to purchase from PentaStar the
respective number of shares of common stock set forth opposite each
underwriter's name.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ----------
<S> <C>
Schneider Securities, Inc.................................
----------
Total................................................ 1,500,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in PentaStar's business and the receipt of
certain certificates, opinions and letters from PentaStar, its counsel and
independent auditors. The nature of the underwriters' obligations is that they
are obligated to purchase and pay for all the shares of common stock offered
hereby, if any shares are purchased.
The underwriters propose initially to offer the shares of common stock
directly to the public at the public offering price set forth on the cover page
of this prospectus and to certain dealers at that price less a concession not in
excess of $___ per share. After the initial public offering of the shares, the
offering price and other selling terms may be changed by the representative of
the underwriters. The representative has advised PentaStar that the underwriters
do not expect any sales to accounts for which any of the underwriters will
exercise discretion as to such sale.
PentaStar has granted to the representative an option, expiring at the
close of business on the 45th day after the date of this prospectus, to purchase
up to 225,000 additional shares at the initial public offering price, less the
underwriting discounts, all as set forth on the cover page of this prospectus.
The representative may exercise this option only to cover over-allotments made
in connection with the sale of common stock in this offering.
The offering of the shares is made for delivery when, as and if
accepted by the underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.
-86-
<PAGE> 91
Upon completion of this offering, PentaStar will sell to the
representative for $10 warrants to purchase 150,000 shares of common stock. The
representative's warrants will become exercisable one year from the effective
date of this offering at a per share exercise price equal to 120% of the initial
public offering price and will expire five years from the date of this
prospectus. The representative's warrants and underlying shares of common stock
will be restricted from sale, transfer, assignment or hypothecation for a period
of one year from the effective date of the registration statement, except to the
officers and employees of the representative, underwriters, the selling group
members and their officers, employees or partners. During the exercise period,
holders of the representative's warrants are entitled to demand and incidental
registration rights with respect to the shares of common stock issuable upon
exercise of the representative's warrants. The common stock issuable on exercise
of the representative's warrants is subject to adjustment in some circumstances
to prevent dilution.
PentaStar will pay the representative a nonaccountable expense
allowance of 3% of the gross proceeds of the offering, which will include
proceeds from the over-allotment option, if exercised. The representative's
expenses in excess of the nonaccountable expense allowance, including its legal
expenses, will be borne by the representative. PentaStar has paid $25,000 to the
representative as an advance for expenses.
PentaStar has agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act, and to
contribute to payments which the underwriters may be required to make regarding
these liabilities.
PentaStar has agreed to give notice to the representative of meetings
of the board of directors and to grant access to those meetings to a nominee of
the representative to attend the meetings as an observer.
The underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934. Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the securities in
the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the representative to reclaim a
selling concession from a syndicate member when the securities originally sold
by the syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. These stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the common stock
to be higher than it would otherwise be in the absence of these transactions.
These transactions may be effected on the Nasdaq SmallCap Market or otherwise
and, if commenced, may be discontinued at any time.
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<PAGE> 92
Neither PentaStar nor the underwriters can predict the effect that the
transactions described above may have on the price of the common stock. In
addition, neither PentaStar nor the underwriters represent that the underwriters
will engage in those transactions. If commenced, those transactions may be
discontinued at any time without notice. It is anticipated that certain of the
underwriters will make a market in the common stock on completion of this
offering, as permitted by applicable law. The underwriters are not obligated to
make a market in the common stock and if they do so may discontinue making a
market at any time. There is no assurance an active trading market will ever
develop for the common stock.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between PentaStar and the representative. The principal factors to be considered
in determining the initial public offering price include:
o the information set forth in this prospectus and otherwise
available;
o the history and the prospects for the industries in which
PentaStar will compete;
o the ability of PentaStar's management;
o the prospects for future earnings of PentaStar;
o the present state of PentaStar's development and its current
financial condition;
o the general condition of the securities markets at the time of
this offering; and
o the recent market prices of, and the demand for, publicly traded
stock of generally comparable companies.
The estimated initial public offering price per share range set forth
on the cover of this preliminary prospectus is subject to change as a result of
the above and other factors.
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<PAGE> 93
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
PentaStar by Sherman & Howard L.L.C., Denver, Colorado. Certain legal matters
will be passed upon for the representative by Berliner Zisser Walter & Gallegos,
P.C., Denver, Colorado.
EXPERTS
The audited financial statements included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
-89-
<PAGE> 94
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PENTASTAR COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction of Unaudited Pro Forma Combined Financial Statements F-2
Unaudited Pro Forma Combined Balance Sheet F-3
Unaudited Pro Forma Combined Statement of Operations F-4
Notes to Unaudited Pro Forma Combined Financial Statements F-6
PENTASTAR COMMUNICATIONS, INC.
Report of Independent Public Accountants F-9
Balance Sheets F-10
Statement of Operations F-11
Statement of Cash Flows F-12
Notes to Financial Statements F-13
ICM COMMUNICATIONS INTEGRATION, INC.
Report of Independent Public Accountants F-16
Balance Sheets F-17
Statement of Operations F-18
Statement of Shareholders' Equity F-19
Statement of Cash Flows F-20
Notes to Financial Statements F-21
DMA VENTURES, INC., dba. ACCESS COMMUNICATIONS
Report of Independent Public Accountants F-28
Balance Sheets F-29
Statement of Operations F-30
Statement of Shareholder's Equity F-31
Statement of Cash Flows F-32
Notes to Financial Statements F-33
</TABLE>
F-1
<PAGE> 95
PENTASTAR COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
BASIS OF PRESENTATION
The following unaudited pro forma condensed combined financial information gives
effect to (a) the acquisitions by PentaStar Communications, Inc. ("PentaStar"),
of the outstanding capital stock and other equity interests of ICM
Communications Integration, Inc., ("ICM") and DMA Ventures, Inc., dba Access
Communications ("Access") (together, the Acquired Companies) and (b) the closing
of PentaStar's initial public offering (the Offering). The acquisitions (the
Acquisitions) will occur simultaneously with the closing of the Offering and
will be accounted for using the purchase method of accounting. The unaudited pro
forma condensed combined financial information is derived from the historical
financial statements of PentaStar, Access and ICM.
The unaudited pro forma combined balance sheet gives effect to the Acquisitions
and related transactions, and the Offering, as if they had occurred on June 30,
1999. The unaudited pro forma combined statements of operations give effect to
these transactions as if they had occurred at the beginning of the earliest
period presented on January 1, 1998. The purchase accounting adjustments made in
connection with the development of the pro forma condensed combined financial
information are preliminary and have been made solely for purposes of developing
such pro forma condensed combined financial information.
PentaStar has analyzed the savings that it expects to realize from reductions in
salaries, bonuses and certain benefits to the owners. To the extent the owners
of the Acquired Companies have contractually agreed to prospective changes in
salary, bonuses, benefits and lease payments, these changes have been reflected
in the unaudited pro forma combined statements of operations. With respect to
other potential cost savings, PentaStar has not and cannot quantify these
savings until completion of the Acquisitions. It is anticipated that these
savings will be partially offset by costs related to PentaStar's new corporate
management and by the costs associated with being a public company. However,
because these costs cannot be accurately quantified at this time, they have not
been included in the pro forma combined financial information of PentaStar.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that PentaStar management deems appropriate
and may be revised as additional information becomes available. Management does
not expect any material adjustments to the preliminary purchase accounting
adjustments. The pro forma financial data do not purport to represent what
PentaStar's combined financial position or results of operations would actually
have been if such transactions in fact had occurred on those dates and are not
necessarily representative of PentaStar's combined financial position or results
of operations for any future period. Since the Acquired Companies were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma combined
financial information should be read in conjunction with the historical
financial statements and notes thereto included elsewhere in this Prospectus.
See also "Risk Factors" included elsewhere herein.
F-2
<PAGE> 96
PENTASTAR COMMUNICATIONS, INC. AND ACQUIRED COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1999
(In thousands)
<TABLE>
<CAPTION>
ICM
ASSETS PentaStar Communications Access Pro Forma
------ Communications, Integration, Communications Acquisition
Inc. (9) Inc. (9) (9) Adjustments Pro Forma
-------------- -------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 210 $ 4 $ (214)(2) $ 1
Accounts receivable, net -- 1,294 271 -- 1,565
Prepaid and other 24 234 184 -- 442
--------- --------- --------- --------- ---------
Total current assets 25 1,738 459 (214) 2,008
PROPERTY AND EQUIPMENT, net -- 160 409 -- 569
GOODWILL -- -- -- 3,814 (2) 3,814
OTHER -- 507 -- -- 507
--------- --------- --------- --------- ---------
Total assets $ 25 $ 2,405 $ 868 $ 3,600 $ 6,898
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current borrowings $ 27 $ 29 $ 206 $ (235)(2) $ 2,450
2,423 (3)
Other current liabilities -- 1,338 394 (612)(2) 1,120
--------- --------- --------- --------- ---------
Total current liabilities 27 1,367 600 1,576 3,570
LONG-TERM BORROWINGS -- -- 156 (156)(2) --
SHAREHOLDERS' EQUITY:
Series A preferred stock -- -- -- -- --
Common stock -- -- 114 (114)(5) --
Additional paid in capital -- -- -- 3,330 (2) 3,330
--
Retained earnings (deficit) (2) 1,038 (2) (1,036)(5) (2)
--------- --------- --------- --------- ---------
Total shareholders' equity (2) 1,038 112 3,328
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity $ 25 $ 2,405 $ 868 $ 3,600 $ 6,898
========= ========= ========= ========= =========
<CAPTION>
ASSETS Pro Forma
------ Offering Pro Forma
Adjustments As Adjusted
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ (2,423)(3) $ 10,037
12,400 (4)
59 (11)
Accounts receivable, net -- 1,565
Prepaid and other -- 442
--------- ---------
Total current assets 10,036 12,044
PROPERTY AND EQUIPMENT, net -- 569
GOODWILL -- 3,814
OTHER -- 507
--------- ---------
Total assets $ 10,036 $ 16,934
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current borrowings $ (2,423)(3) $ --
(27)(11)
Other current liabilities -- 1,120
--------- ---------
Total current liabilities (2,450) 1,120
LONG-TERM BORROWINGS -- --
SHAREHOLDERS' EQUITY:
Series A preferred stock 86 (11) 86
Common stock -- --
Additional paid in capital 12,400 (4) 15,730
Retained earnings (deficit) -- (2)
--------- ---------
Total shareholders' equity 12,486 15,814
--------- ---------
Total liabilities and shareholders' equity $ 10,036 $ 16,934
========= =========
</TABLE>
See accompanying notes to pro forma financial information.
F-3
<PAGE> 97
PENTASTAR COMMUNICATIONS, INC. AND ACQUIRED COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
ICM
PentaStar Communications Access
Communications, Integration, Communications Pro Forma Pro Forma
Inc. (9) Inc. (9) (9) Adjustments Combined
-------------- -------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES:
Advanced communication services $ -- $ 3,681 $ 2,038 $ -- $ 5,719
Basic dial tone services -- 594 344 -- 938
----------- ----------- -------- -------- --------
-- 4,275 2,382 -- 6,657
COSTS AND EXPENSES:
Salaries and commissions -- 2,746 1,201 (6) (255) 3,692
Other general and administrative expenses -- 952 577 (7) 180 1,709
Goodwill amortization -- -- -- (2) 191 191
----------- ----------- -------- -------- --------
Income from operations -- 577 604 (116) 1,065
----------- ----------- -------- -------- --------
OTHER (INCOME) EXPENSE:
Interest expense -- 1 52 (2) (53) --
Other (income) expense -- (9) (3) -- (12)
----------- ----------- -------- -------- --------
Other (income) expense -- (8) 49 (53) (12)
----------- ----------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES: 585 555 (63) 1,077
Provision for income taxes -- 200 212 (8) 48 460
----------- ----------- -------- -------- --------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS $ -- $ 385 $ 343 $ (111) $ 617
=========== =========== ======== ======== ========
EARNINGS PER SHARE - BASIC AND DILUTED:
Net income from continuing operations per share (10) $ 0.18
Shares used in computing net income per share
from continuing operations (10) 3,499,997
</TABLE>
See accompanying notes to pro forma financial information.
F-4
<PAGE> 98
PENTASTAR COMMUNICATIONS, INC. AND ACQUIRED COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
ICM
PentaStar Communications Access
Communications, Integration, Communications Pro Forma Pro Forma
Inc. (9) Inc. (9) (9) Adjustments Combined
-------------- -------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES:
Advanced communication services $ -- $ 1,795 $ 784 $ -- $ 2,579
Basic dial tone services -- 348 69 -- 417
----------- ----------- ------- -------- -------
-- 2,143 853 -- 2,996
COSTS AND EXPENSES:
Salaries and commissions -- 1,364 661 (6) (141) 1,884
Other general and administrative expenses 2 438 280 (7) 90 810
Goodwill amortization -- -- -- (2) 95 95
----------- ----------- ------- -------- -------
Income (loss) from operations (2) 341 (88) (44) 207
----------- ----------- ------- -------- -------
OTHER (INCOME) EXPENSE:
Interest expense -- 4 15 (2) (19) --
Other (income) expense -- (1) 9 -- 8
----------- ----------- ------- -------- -------
Other (income) expense -- 3 24 (19) 8
----------- ----------- ------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES: (2) 338 (112) (25) 199
Provision (benefit) for income taxes -- 133 (42)(8) (26) 65
----------- ----------- ------- -------- -------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS $ (2) $ 205 $ (70) $ 1 $ 134
=========== =========== ======= ======== =======
EARNINGS PER SHARE - BASIC AND DILUTED:
Net income from continuing operations per share (10) $ 0.04
Shares used in computing net income per share from
continuing operations (10) 3,499,997
</TABLE>
See accompanying notes to pro forma financial information.
F-5
<PAGE> 99
PENTASTAR COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
(Dollar amounts in thousands unless otherwise noted)
(1) GENERAL
PentaStar was founded to create a national company to design, sell and
facilitate the installation and usage of communications services for small-
and medium-size business customers. PentaStar plans to implement cost
effective local access, long distance, wireless, and Internet voice and
data communications services for customers in a combined package. PentaStar
has conducted no operations to date and will acquire the Acquired Companies
concurrently with and as a condition to the closing of the Offering.
(2) ACQUISITION OF ACQUIRED COMPANIES
Concurrently with and as a condition to the closing of the Offering,
PentaStar will acquire all of the outstanding capital stock and other
equity interests of the Acquired Companies. The acquisitions will be
accounted for using the purchase method of accounting, with PentaStar being
the accounting acquirer.
The following table sets forth the consideration to be paid (a) in cash and
(b) in shares of common stock to the shareholders of each of the Acquired
Companies. For purposes of computing the purchase consideration, the value
of the shares was determined using an estimated fair value of $9 per share
(or approximately $3.3 million), which represents a discount of 10 percent
from the assumed initial public offering price of $10 per share due to: (1)
restrictions on the sale and transferability of the shares issued and (2)
avoided offering costs for shares issued to the Acquired Companies.
<TABLE>
<CAPTION>
Common
Cash Stock Total
------ ------ ------
<S> <C> <C> <C>
Access $ 500 $1,845 $2,345
ICM 1,923 1,485 3,408
------ ------ ------
Total $2,423 $3,330 $5,753
====== ====== ======
</TABLE>
F-6
<PAGE> 100
The purchase price will be subject to certain working capital adjustments at
closing. These adjustments will exclude certain liabilities (principally
borrowings, taxes and past due obligations) and will provide for the
distribution of excess cash balances. Upon closing of the acquisitions, the
purchase consideration will be allocated to the identifiable assets and
liabilities of the Acquired Companies. A preliminary allocation of the purchase
price has been made below based upon information available to management of
PentaStar at the date of preparation of the accompanying pro forma condensed
combined financial information.
<TABLE>
<S> <C>
Purchase consideration $ 5,753
Historical net book value:
Access (112)
ICM (1,038)
Working capital to be distributed to sellers 214
Excluded liabilities (612)
Excluded borrowings (391)
-------
Goodwill $ 3,814
=======
</TABLE>
PentaStar expects the amount of excess consideration allocated to goodwill to be
amortized over twenty years. The factors considered in determining the
appropriate amortization period included the expected life of the associated
technology, legal and regulatory issues, future changes in technology,
anticipated market demand and competition. The result is annual amortization of
$191 ($95 for six months). PentaStar will evaluate the period of amortization
continually to determine whether events and circumstances warrant revised useful
lives. Annual amortization would increase $63 ($32 for six months) for a five
year reduction in the goodwill amortization period.
Upon the closing of the acquisitions, the step-up in the fair value of the
Acquired Companies' assets and liabilities will be allocated to its specific
identifiable tangible and intangible assets and liabilities. Based upon
information available to management at the date of preparation of the
accompanying pro forma condensed financial information, the allocation to
identifiable intangible assets (if any), is not expected to be significant.
Assuming a 10 year life, each $100 of consideration allocated to intangible
assets other than goodwill would have the effect of decreasing net income in
subsequent periods of approximately $3 annually.
OTHER PRO FORMA ADJUSTMENTS
3. For purposes of presentation the $2,423 adjustment to Current Borrowings
in the Pro Forma Acquisition Adjustments column of the Unaudited Pro
Forma Condensed Combined Balance Sheet, represents the cash portion of
the purchase price for Access and ICM. The adjustment to Current
Borrowings in the Pro Forma Offering Adjustments column represents the
payment of the $2,423 using proceeds from the Offering, as described in
Note 4 below.
4. Reflects the proceeds from the issuance of 1,500,000 shares of common
stock at $10 per share, net of estimated offering costs. Offering costs
consist of underwriting discounts and commissions, accounting fees, legal
fees and printing expenses estimated at $2.
5. To eliminate the historical equity of ICM and Access.
6. Reflects the reduction in salaries, bonuses and benefits derived from
contractual agreements which establish the compensation of the owners and
certain key employees of the Acquired Companies subsequent to the
Offering. The new agreement provides for salaries of $195 and bonuses of
5% of EBIT.
F-7
<PAGE> 101
7. Reflects contractually agreed management and administrative charges due
BIBD subsequent to the acquisition based upon an executed consulting
agreement.
8. Reflects the tax effect of the pro forma adjustments (except goodwill
amortization which will not be tax deductible) at an effective rate of
37.5%. The acquisition will be treated as a tax-free transaction and no
step-up will be allowed for tax purposes. To the extent an allocation is
made to identifiable intangibles in the final purchase price allocation,
deferred taxes and additional goodwill will need to be recorded for the
lack of tax basis.
9 Represents the historical balances of PentaStar, ICM and Access.
10. The number of shares estimated to be outstanding on completion of the
Offering includes the following:
Shares outstanding (as adjusted to
reflect a stock split) 3,129,997
Issued to acquire the Acquired Companies 370,000
---------
Shares estimated to be outstanding 3,499,997
Assuming the 1,500,000 shares issued in the initial public offering were
outstanding for purposes of computing earnings per share, basic and
diluted earnings per share would have been $0.03 for the six months ended
June 30, 1999 and $0.12 for the year ended December 31, 1998.
11. Reflects the conversion of the outstanding borrowings of PentaStar into
Series A preferred stock (see "Certain Transactions").
F-8
<PAGE> 102
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
PentaStar Communications, Inc.:
We have audited the accompanying balance sheets of PentaStar Communications,
Inc. (a Delaware corporation) as of June 30, 1999, and the related statements of
operations, and cash flows for the period from inception (March 15, 1999)
through June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PentaStar Communications as
June 30, 1999, and the results of its operations and its cash flows for the
period from inception (March 15, 1999) through June 30, 1999, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 10, 1999.
F-9
<PAGE> 103
PENTASTAR COMMUNICATIONS, INC.
BALANCE SHEET
AS OF JUNE 30, 1999
(In thousands, except share information)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1
Prepaid expenses 24
----
Total assets $ 25
====
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
RELATED PARTY BORROWINGS $ 27
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $0.0001 par value; 3,417,960 shares
authorized, 3,129,997 outstanding --
Retained earnings (deficit) (2)
----
Total shareholders' equity (deficit) (2)
----
Total liabilities and shareholders' equity (deficit) $ 25
====
</TABLE>
The accompanying notes to financial statements are
an integral part of this balance sheet.
F-10
<PAGE> 104
PENTASTAR COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (MARCH 15, 1999)
THROUGH JUNE 30, 1999
(In thousands)
<TABLE>
<S> <C>
REVENUE $ --
-----------
COSTS AND EXPENSES
General and administrative expenses 2
-----------
Loss from operations (2)
-----------
NET LOSS $ (2)
===========
EARNINGS PER SHARE - BASIC AND DILUTED:
Net income (loss) from continuing
operations per share $ --
===========
Shares used in computing net
income per share 3,129,997
===========
</TABLE>
The accompanying notes to financial statements are
an integral part of this statement.
F-11
<PAGE> 105
PENTASTAR COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (MARCH 15, 1999)
THROUGH JUNE 30, 1999
(In thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2)
Increase in prepaid expenses (25)
----
Net cash used by operating activities (27)
----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party debt 27
Shareholders' contributions 1
----
Net cash provided by financing activities 28
----
NET INCREASE IN CASH AND CASH EQUIVALENTS 1
CASH AND CASH EQUIVALENTS, beginning of period --
----
CASH AND CASH EQUIVALENTS, end of period $ 1
====
</TABLE>
The accompanying notes are an integral part of this statement.
F-12
<PAGE> 106
PENTASTAR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND ORGANIZATION
PentaStar Communications, Inc. a Delaware corporation ("PentaStar" or the
"Company"), was founded in March 1999, to become a national company to design,
sell and facilitate the installation and usage of communications services for
small and medium-size business customers. PentaStar intends to acquire two U.S.
business (the "Acquired Companies"), complete an initial public offering (the
"Offering") of its common stock ("Common Stock") and, subsequent to the
Offering, continue to acquire companies to expand its national and regional
operations.
PentaStar has not conducted any operations, and all activities to date have
related to the Offering and the acquisition of the Acquired Companies. All
expenditures of the Company to date have been funded by loans from related
parties. PentaStar is dependent upon the Offering to execute the pending
acquisitions of the Acquired Companies and to repay PentaStar's borrowings.
There is no assurance that the pending acquisition of the Acquired Companies
discussed below will be completed or that PentaStar will be able to generate
future operating revenues. The ability of PentaStar to generate future operating
revenues is dependent upon PentaStar's ability to manage the effect on the
combined company of changes in demand for communications services and the effect
of business growth, including the availability of key personnel.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
F-13
<PAGE> 107
Income Taxes
Deferred tax assets and liabilities are provided for differences between the
financial statement and tax basis of assets and liabilities using current
enacted tax rates. The provision for income taxes includes the amount due for
the current period and the change in deferred taxes between periods.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The Company is required to
adopt SFAS No. 133 in the year ended December 31, 2001. SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, the Company has not entered into any derivative financial instruments or
hedging activities.
(3) SHAREHOLDERS' EQUITY
Common Stock
PentaStar increased the number of authorized shares of Common Stock to 3,417,960
shares of Common Stock by effecting a 3,417.96-for-1 stock split in 1999, for
each share of Common Stock then outstanding. The effects of the stock split and
the increase in the shares of authorized Common Stock have been retroactively
reflected in these financial statements.
In connection with the organization and initial capitalization of PentaStar, the
Company issued 3,129,997 shares (as restated for the 3,417.96-for-1 stock split)
of Common Stock at $.0001 par value.
(4) ACQUIRED COMPANY ACQUISITIONS
PentaStar has signed definitive agreements to acquire the following entities
(Acquired Companies) to be effective contemporaneously with the Offering. The
entities to be acquired are:
o ICM Communications Integration, Inc.
o DMA Ventures Inc. (dba Access Communications)
The aggregate consideration that will be paid by PentaStar to acquire the
Acquired Companies is approximately $2,423,000 in cash and 370,000 shares of
common stock. The cash portion of the consideration is subject to adjustment
based upon the initial public offering price and certain closing balance sheet
amounts. Additional shares of common stock and cash may be issued to two of the
Shareholders of the Acquired Companies provided certain earnings thresholds are
satisfied after the consummation of the Offering.
F-14
<PAGE> 108
In addition, the Company has entered into employment agreements with certain key
executives of the Acquired Companies. These employment agreements generally
prohibit such individuals from disclosing confidential information and trade
secrets and restrict such individuals from competing with the Company for a
period of one to two years following termination of employment. The initial term
of these employment agreements is the earlier of a change in control of
PentaStar or five years.
(5) BORROWINGS
Notes Payable
At June 30, 1999, notes payable consisted of the following:
<TABLE>
<S> <C>
Note payable to BACE Industries, LLC, Denver,
Colorado; interest at 5.0% per annum; due on
the earlier of the initial public stock offering
of PentaStar or December 31, 2000. $ 27
====
</TABLE>
The carrying amount of the note approximates its fair value due to its
short-term nature.
(6) Prepaid expenses
At June 30, 1999, prepaid expenses are comprised of amounts prepaid to
third parties in connection with the Offering.
F-15
<PAGE> 109
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
ICM Communications Integration, Inc:
We have audited the accompanying balance sheets of ICM Communications
Integration, Inc. (a Washington corporation) as of December 31, 1997 and 1998,
and the related statements of operations, shareholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. 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 audit 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 financial position of ICM Communications Integration,
Inc. as of December 31, 1997 and 1998, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
July 23, 1999.
F-16
<PAGE> 110
ICM COMMUNICATIONS INTEGRATION, INC.
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
---------------------- ----------
1997 1998 1999
------- ------- -------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 181 $ 138 $ 210
Accounts receivable, net 736 1,229 1,267
Related party receivables 40 27 27
Deferred income taxes 37 90 90
Prepaid expenses and other 51 79 144
------- ------- -------
Total current assets 1,045 1,563 1,738
PROPERTY AND EQUIPMENT, net 119 178 160
DEFERRED INCOME TAXES 19 13 13
OTHER ASSETS - Related Party Note Payable 56 281 494
------- ------- -------
Total assets $ 1,239 $ 2,035 $ 2,405
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ -- $ 4 $ --
Current maturities of capital leases 10 -- --
Accounts payable and accrued expenses 128 101 78
Compensation related accruals 284 465 407
Income taxes payable 282 442 575
Deferred revenue 49 159 278
Shareholder note payable -- 31 29
------- ------- -------
Total current liabilities 753 1,202 1,367
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Notes 2, 4 and 8)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 1,000,000
shares authorized; 520,000 shares issued
and 514,000 shares outstanding 10 -- --
Retained earnings 476 833 1,038
------- ------- -------
Total shareholders' equity 486 833 1,038
------- ------- -------
Total liabilities and shareholders'
equity $ 1,239 $ 2,035 $ 2,405
======= ======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-17
<PAGE> 111
ICM COMMUNICATIONS INTEGRATION, INC.
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Six Months
For the Years Ended Ended
December 31, June 30,
----------------------- -----------------------
1997 1998 1998 1999
------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Advanced communication services $ 2,910 $ 3,681 $ 1,638 $ 1,795
Basic dial tone services 611 594 197 348
------- ------- ------- -------
3,521 4,275 1,835 2,143
------- ------- ------- -------
COSTS AND EXPENSES:
Salaries and commissions 1,858 2,746 1,227 1,364
Other general and administrative expenses 811 952 359 438
------- ------- ------- -------
2,669 3,698 1,586 1,802
------- ------- ------- -------
Income from operations 852 577 249 341
------- ------- ------- -------
OTHER (INCOME) EXPENSE:
Interest income (6) (9) (3) (1)
Interest expense 3 1 1 4
------- ------- ------- -------
Other (income) expense (3) (8) (2) 3
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 855 585 251 338
Provision for income taxes 338 200 96 133
------- ------- ------- -------
NET INCOME $ 517 $ 385 $ 155 $ 205
======= ======= ======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-18
<PAGE> 112
ICM COMMUNICATIONS INTEGRATION, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Total
--------------------- Retained Shareholders'
Shares Amount Earnings Equity
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1996 520 $ 10 $ (41) $ (31)
Net income -- -- 517 517
----- ---- ------- -------
BALANCES, December 31, 1997 520 10 476 486
Retirement of repurchased shares (6) (10) (28) (38)
Net income -- -- 385 385
----- ---- ------- -------
BALANCES, December 31, 1998 514 -- 833 833
Net income (unaudited) -- -- 205 205
----- ---- ------- -------
BALANCES, June 30, 1999 (unaudited) 514 $ -- $ 1,038 $ 1,038
===== ==== ======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-19
<PAGE> 113
ICM COMMUNICATIONS INTEGRATION, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended For the Six Months Ended
December 31, June 30,
-------------------- ------------------------
1997 1998 1998 1999
------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 517 $ 385 $ 155 $ 205
Adjustments to reconcile net income to net cash
provided by operating activities-
Provision for disputed items 99 141 61 --
Deferred income tax provision (benefit) (56) (47) -- --
Depreciation 10 37 18 25
Changes in operating assets and liabilities-
Accounts receivable (775) (621) (184) (38)
Prepaid expenses and other (16) (28) (36) (65)
Accounts payable and accrued expenses 238 154 123 (81)
Income taxes 282 160 56 133
Deferred revenue 10 110 98 119
----- ----- ----- -----
Net cash provided by operating activities 309 291 291 298
----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (106) (96) (66) (7)
Advances to related parties (31) (225) (106) (213)
----- ----- ----- -----
Net cash used in investing activities (137) (321) (172) (220)
----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit -- 4 -- (4)
Treasury stock repurchase -- (7) -- (2)
Payments on capital lease obligations (9) (10) (6) --
----- ----- ----- -----
Net cash used in financing activities (9) (13) (6) (6)
----- ----- ----- -----
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 163 (43) 113 72
CASH AND CASH EQUIVALENTS, beginning of year 18 181 181 138
----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end of year $ 181 $ 138 $ 294 $ 210
===== ===== ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 3 $ 1 $ 1 $ 4
===== ===== ===== =====
Cash paid for taxes $ 131 $ 88 $ 44 $ --
===== ===== ===== =====
SUPPLEMENTAL SCHEDULE OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of treasury stock for note payable $ -- $ 38 $ -- $ --
===== ===== ===== =====
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-20
<PAGE> 114
ICM COMMUNICATIONS INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(1) BUSINESS AND ORGANIZATION
ICM Communications Integration, Inc., a Washington corporation (the "Company"),
was incorporated on January 3, 1995. On July 31, 1997, International
Communications Management, Inc. (the former parent of the Company) distributed
its shares in the Company to its shareholders.
Dependence Upon U S WEST
The Company acts as a sales agent for and generates substantially all of its
revenues from U S WEST Communications, Inc. ("U S WEST"), a regional Bell
operating company. The loss of the relationship with U S WEST or a material
diminishment in the volume of business with U S WEST would adversely affect the
Company. Management believes the Company could become a sales agent for another
provider with comparable terms if it were to lose its relationship with U S
WEST.
Interim Financial Information
The financial statements as of and for the six months ended June 30, 1998 and
1999, are unaudited; however, they include all adjustments (consisting of normal
recurring adjustments) considered necessary by management for a fair
presentation of the financial position and results of operations for these
periods. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for the entire year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line
method over its estimated useful lives. Expenditures for repairs and maintenance
are charged to expense when incurred. Expenditures for major renewals and
betterments, which extend the useful lives of existing equipment, are
capitalized and depreciated. Upon retirement or disposition of property
F-21
<PAGE> 115
and equipment, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is recognized in the statement of
operations. Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
Estimated Useful ------------------
Life in Years 1997 1998
---------------------- ------ ------
<S> <C> <C> <C>
Computer and telephone equipment 3-5 $ 118 $ 191
Office furniture and fixtures 7 17 40
----- -----
135 231
Less: Accumulated depreciation (16) (53)
----- -----
Property and equipment, net $ 119 $ 178
===== =====
</TABLE>
Depreciation expense was approximately $10 and $37 for the years ended December
31, 1997 and 1998, respectively.
Revenue Recognition
Revenue and the related commission expense are recognized in the month when
services are installed by U S WEST. Deferred revenue in the accompanying balance
sheets represents cash collected from U S WEST on uninstalled services.
Beginning in 1998, the Company received advanced communication service
commissions from a related entity for telecommunication agency services not
related to U S WEST. The revenue approximated $32 for the year ended December
31, 1998.
The Company has not received payment for 1997 and 1998 installed services of
$333 and $685, at December 31, 1997 and 1998, respectively. The delay in payment
for these disputed items has been due to deficiencies in documentation required
by U S WEST and discrepancies in the amounts believed receivable from U S WEST.
An allowance of $99 and $240 at December 31, 1997 and 1998, respectively, has
been established for these disputed receivables.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates. Significant estimates which
could change in the near future include the allowance provided for disputed
receivables.
F-22
<PAGE> 116
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
investments, accounts receivable, accounts payable and borrowings. The carrying
value of these financial instruments on the accompanying balance sheets
approximates their fair value because of their short-term nature.
Concentration of Credit Risk
The Company's financial instruments exposed to concentrations of credit risk
consist primarily of cash and accounts receivable. The Company maintains their
cash in institutions which the Company considers of high credit quality. The
balances, at times, may exceed federally insured limits. Credit risk with
respect to accounts receivable is limited due to the credit worthiness of the
Company's primary customer, U S WEST. Management does not anticipate significant
credit losses from such financial instruments.
Asset Impairment
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Long-lived assets, which are held and used in operations would
be impaired if the undiscounted future cash flows related to the asset did not
exceed the net book value. If an asset is determined to be impaired, it is
written down to its fair value.
Advertising and Promotion
Advertising and promotional related expenses are charged to operations when
incurred or the first time the advertising occurs. Advertising expense totaled
$6 and $30 for the years ended December 31, 1997 and 1998, respectively.
Income Taxes
Deferred tax assets and liabilities are provided for differences between the
financial statement and tax basis of assets and liabilities using current
enacted tax rates. The provision for income taxes includes the amount due for
the current period and the change in deferred taxes between periods.
Prior to July 31, 1997, the Company was included in the consolidated tax return
of International Communications Management, Inc. (the "Parent"). The Company
paid or received from the Parent, the incremental taxes resulting from its
inclusion in the consolidated tax return. The amounts reported in the Company's
financial statements approximates the amounts which would have been reported had
the Company been a stand-alone tax payor.
F-23
<PAGE> 117
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The Company is required to
adopt SFAS No. 133 in the year ended December 31, 2001. SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, the Company has not entered into any derivative financial instruments or
hedging activities.
(3) BORROWINGS
Line of Credit
In June 1997, the Company established a line of credit with SeaFirst Bank
("SeaFirst"), which permits the Company to borrow up to $50 at a rate equal to
the prime rate plus 3% (8.75% at December 31, 1998). The line of credit expires
on November 5, 1999. A related party, who is a shareholder and director,
guarantees borrowings under the agreement. The line of credit was increased to
$150 in April of 1999 and three additional shareholders and directors became
guarantors.
Capital Lease Obligations
The Company had two capital lease agreements with Ameritech Leasing Services to
purchase computer and telephone equipment. The implicit interest rate was 11%
per annum.
(4) OPERATING LEASES
The Company leases three office facilities in Bellevue, Washington and Portland,
Oregon. The Company has sublet a portion of one of the Bellevue, Washington
leases to a related party. The Company is required to pay executory costs such
as property taxes, maintenance and insurance under its operating leases.
As of December 31, 1998, future minimum lease payments required under operating
leases, net of sublease payments, are as follows:
<TABLE>
<CAPTION>
Minimum
Gross Sublease Net
Years Ended December 31- Obligation Commitments Obligation
---------- ----------- ----------
<S> <C> <C> <C>
1999 $ 195 $ 49 $ 146
2000 199 49 150
2001 182 49 133
2002 150 45 105
------ ------ ------
$ 726 $ 192 $ 534
====== ====== ======
</TABLE>
F-24
<PAGE> 118
Rent expense, net of sublease payments, charged to operations totaled
approximately $71 and $106 for 1997 and 1998, respectively. Sublease charges to
the related party were $19 and $16 for 1997 and 1998, respectively.
(5) PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----- -----
<S> <C> <C>
Current provision:
Federal $ 342 $ 213
State 52 34
----- -----
Total current 394 247
----- -----
Deferred provision:
Federal (48) (41)
State (8) (6)
----- -----
Total deferred (56) (47)
----- -----
Provision for income taxes $ 338 $ 200
===== =====
</TABLE>
A reconciliation of the statutory income tax rate to the provision for income
taxes is as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Federal income tax at statutory rate 34.0% 34.0%
State income taxes, net of federal
tax effect 3.3 3.3
Other 2.2 (3.1)
---- ----
Total provision 39.5% 34.2%
==== ====
</TABLE>
F-25
<PAGE> 119
The tax effects of temporary differences, representing deferred tax assets and
liabilities, result principally from the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Allowance for disputed receivables $ 37 $ 90
Basis difference in property 19 13
Deferred tax asset $ 56 $ 103
</TABLE>
(6) RETIREMENT SAVING PLAN
The Company adopted an IRA plan in October 1997. Under the plan, qualified
employees may elect to defer up to $6 of their calendar year compensation. The
plan provides for contributions by the Company to match the first 3% of the
qualified compensation. The Company may match less than 3%, but not below 1%, in
no more than two out of the past five years. Alternatively, the Company may
contribute 2% of compensation to all eligible employees, whether or not they
participate in the plan. The Company's contributions for the years ended
December 31, 1997 and 1998 were $16 and $24, respectively.
(7) RELATED-PARTY TRANSACTIONS
Noncurrent Receivable
The Company has a note receivable from a related entity. The related entity and
the Company have some common shareholders. The receivable consists of cash
advances, commissions receivable from sales made on behalf of the related entity
and shared expenses. Management believes that the amount is fully collectible
and repayments will begin in the year 2000. The balance was approximately $56
and $281 at December 31, 1997 and 1998, respectively.
Amounts charged to the related entity for the shared expenses, commissions
earned from the sales made on behalf of the related entity and cash advances to
the related entity were as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Six Months Ended
December 31, June 30,
------------------ ------------------------
1997 1998 1998 1999
------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C>
Commissions earned $ -- $ 32 $ 17 $ 52
Salaries and bonuses 20 53 26 46
Other expenses 35 63 29 21
Cash advances -- 102 39 94
</TABLE>
F-26
<PAGE> 120
Current Receivables
The Company has a note receivable from one of its shareholders. Interest accrues
at 12% per annum and the monthly principal and interest payments are $1. The
note matures on July 15, 1999. The principal balances as of December 31, 1997
and 1998 were $15 and $2, respectively.
The Company had a $25 non-interest bearing receivable from a related entity
outstanding at December 31, 1997 and 1998. The advance was repaid in July 1999.
Shareholder Notes Payable
In November of 1998, the Company repurchased six shares of non-par stock from a
Shareholder for $38. Consideration for the repurchase was a note payable with
monthly payments of $3, maturing in October of 1999. Interest accrues at a rate
of 6%. The current balance as of December 31, 1998 was $31.
Sublease Income
In October 1998, the Company sublet space to a related entity. The terms of the
sublease mirror the terms of the master lease. The related entity is responsible
for all lease payments and related property expenses.
Guarantees
In June 1997, a shareholder and director guaranteed the Company's line of credit
from SeaFirst Bank. Subsequent to December 31, 1998, the line of credit was
amended to include among other things, additional shareholders and directors as
guarantors.
(8) COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in litigation which arose in the ordinary course of
business. It is the opinion of management and counsel that the outcome of such
litigation will not have a material effect on the financial statements of the
Company.
(9) SUBSEQUENT EVENT
Subsequent to yearend, the shareholders of the Company entered into a
definitive agreement with PentaStar Communications, Inc. ("PentaStar"), pursuant
to which all outstanding shares of the Company's stock will be exchanged for
cash and shares of PentaStar common stock.
F-27
<PAGE> 121
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
DMA Ventures, Inc.
dba Access Communications:
We have audited the accompanying balance sheets of DMA Ventures, Inc. dba Access
Communications (a Colorado corporation) as of December 31, 1997 and 1998, and
the related statements of operations, shareholder's equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. 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 audit 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 financial position of DMA Ventures, Inc. dba Access
Communications as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 6, 1999.
F-28
<PAGE> 122
DMA VENTURES, INC.
dba ACCESS COMMUNICATIONS
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------- June 30,
1997 1998 1999
------ ------ ----------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 591 $ 83 $ 4
Accounts receivable, net 124 179 271
Prepaid expenses and other 29 46 35
Deferred income taxes 352 149 149
Net current assets of discontinued operations -- 60 --
------ ------ ------
Total current assets 1,096 517 459
PROPERTY AND EQUIPMENT, net 465 399 409
------ ------ ------
Total assets $1,561 $ 916 $ 868
====== ====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Related party borrowings, current maturities $ 67 $ 5 $ 5
Current maturities of long-term borrowings 63 72 65
Current maturities of capital leases 76 63 41
Line of credit -- -- 95
Accounts payable 46 71 76
Accrued expenses 335 161 198
Income taxes payable 273 82 --
Deferred revenue 95 114 120
Net current liabilities of discontinued operations 26 -- --
------ ------ ------
Total current liabilities 981 568 600
------ ------ ------
RELATED PARTY BORROWINGS 5 -- --
LONG-TERM BORROWINGS 243 185 156
CAPITAL LEASE OBLIGATIONS 92 18 --
COMMITMENTS AND CONTINGENCIES (Notes 2, 4 and 9)
SHAREHOLDER'S EQUITY:
Preferred stock, no par value; 10,000,000 shares authorized;
no shares issued and outstanding -- -- --
Common stock, no par value; 25,000,000 shares authorized;
10,000,000 shares issued and outstanding 1 1 114
Retained earnings (deficit) 239 144 (2)
------ ------ ------
Total shareholder's equity 240 145 112
------ ------ ------
Total liabilities and shareholder's equity $1,561 $ 916 $ 868
====== ====== ======
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-29
<PAGE> 123
DMA VENTURES, INC.
dba ACCESS COMMUNICATIONS
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Six Months
For the Year Ended Ended
December 31, June 30,
----------------------- ---------------------
1997 1998 1998 1999
------- ------- ------ ------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Advanced communication services $ 1,921 $ 2,038 $ 683 $ 784
Basic dial tone services 1,040 344 226 69
------- ------- ------ ------
2,961 2,382 909 853
------- ------- ------ ------
COSTS AND EXPENSES:
Salaries and commissions 1,504 1,201 647 661
Other general and administrative expenses 637 577 312 280
------- ------- ------ ------
2,141 1,778 959 941
------- ------- ------ ------
Income (loss) from operations 820 604 (50) (88)
------- ------- ------ ------
OTHER (INCOME) EXPENSE:
Interest income (7) (3) -- --
Interest expense 91 52 35 15
Other expense -- -- 12 9
------- ------- ------ ------
Other (income) expense 84 49 47 24
------- ------- ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 736 555 (97) (112)
Provision (benefit) for income taxes 309 212 (34) (42)
------- ------- ------ ------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS 427 343 (63) (70)
LOSS FROM DISCONTINUED OPERATIONS
(less applicable income tax benefit of $129, $219,
$129 and $40, respectively) (198) (370) (225) (76)
------- ------- ------ ------
NET INCOME (LOSS) $ 229 $ (27) $ (288) $ (146)
======= ======= ====== ======
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-30
<PAGE> 124
DMA VENTURES, INC.
dba ACCESS COMMUNICATIONS
STATEMENTS OF SHAREHOLDER'S EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Retained Total
----------------------- ---------------- Earnings Shareholder's
Shares Amount Shares Amount (Deficit) Equity
---------- ------ ------ ------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 10,000,000 $ 1 -- $ -- $ 90 $ 91
Distributions to shareholder -- -- -- -- (80) (80)
Net income -- -- -- -- 229 229
---------- ----- ---- ---- ---- -----
BALANCES, December 31, 1997 10,000,000 1 -- -- 239 240
Distributions to shareholder -- -- -- -- (68) (68)
Net loss -- -- -- -- (27) (27)
---------- ----- ---- ---- ---- -----
BALANCES, December 31, 1998 10,000,000 1 -- -- 144 145
Contribution from
Shareholder (unaudited) -- 113 -- -- -- 113
Net loss (unaudited) -- -- -- -- (146) (146)
---------- ----- ---- ---- ---- -----
BALANCES, June 30, 1999
(unaudited) 10,000,000 $ 114 -- $ -- $ (2) $ 112
========== ===== ==== ==== ===== =====
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-31
<PAGE> 125
DMA VENTURES, INC.
dba ACCESS COMMUNICATIONS
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months
For the Year Ended Ended
December 31, June 30,
--------------------- ----------------------
1997 1998 1998 1999
------ ------ ------- -------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 229 $ (27) $(288) $(146)
Adjustments to reconcile net income to net cash
provided by operating activities-
Deferred income tax provision (benefit) (262) 203 -- --
Provision for disputed items 130 10 -- --
Depreciation 55 79 41 40
Other -- -- 6 --
Changes in operating assets and liabilities-
Accounts receivable (254) (65) (236) (92)
Prepaid expenses (9) (17) (11) 11
Accounts payable 32 25 (10) 5
Accrued expenses 246 (174) (28) 37
Income tax payable 355 (191) (165) (82)
Deferred revenue 4 19 20 6
Discontinued operations 33 (86) 302 60
----- ----- ----- -----
Net cash provided by (used in)
operating activities 559 (224) (369) (161)
----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (42) (13) -- (50)
----- ----- ----- -----
Net cash used in investing activities (42) (13) -- (50)
----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in line of credit -- -- -- 95
Principal payments on related party borrowings (42) (67) (51) --
Proceeds from long-term borrowings 300 -- -- --
Principal payments on long-term borrowings (238) (49) (2) (36)
Payments on capital lease (36) (87) (44) (40)
Distributions to shareholder (80) (68) (56) --
Capital contribution -- -- -- 113
----- ----- ----- -----
Net cash provided by (used in)
financing activities (96) (271) (153) 132
----- ----- ----- -----
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 421 (508) (522) (79)
CASH AND CASH EQUIVALENTS, beginning of year 170 591 591 83
----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end of year $ 591 $ 83 $ 69 $ 4
===== ===== ===== =====
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest $ 33 $ 67 $ 36 $ 15
===== ===== ===== =====
Cash paid for taxes $ 23 $ 12 $ 12 $ 0
===== ===== ===== =====
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-32
<PAGE> 126
DMA VENTURES, INC.
dba ACCESS COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(1) BUSINESS AND ORGANIZATION
DMA Ventures, Inc., dba Access Communications, a Colorado corporation (the
"Company") was incorporated on August 10, 1993 and acts as a sales agent for U S
WEST Communications, Inc. ("U S WEST"). In addition, the Company is a network
integrator, focused on converging technologies for voice, data and video
communication ("Hardware Business"). Subsequent to year end, the Company decided
to discontinue the operations of the Hardware Business (see Note 10).
Fiscal Year
The Company's fiscal year ends on July 31. The accompanying financial statements
have been conformed to a December 31 year end in connection with the acquisition
of the Company by PentaStar Communications, Inc. ("PentaStar")(see Note 11).
Dependence Upon U S WEST
The Company acts as a sales agent for and generates all of its continuing
revenues from U S WEST, regional Bell operating company. The loss of the
relationship with U S WEST or a material diminishment in the volume of business
with U S WEST would adversely affect the Company. Management believes the
Company could become a sales agent for another provider with comparable terms if
it were to lose its relationship with U S WEST.
Interim Financial Information
The financial statements as of and for the six months ended June 30, 1998 and
1999 are unaudited; however, they include all adjustments (consisting of normal
recurring adjustments) considered necessary by management for a fair
presentation of the financial position and results of operations for these
periods. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for the entire year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
F-33
<PAGE> 127
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements are capitalized and amortized using the straight-line method over
the shorter of the useful lives or the remaining lease term.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statements of operations.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
Estimated Useful ---------------------
Life in Years 1997 1998
---------------- ------ ------
<S> <C> <C> <C>
Computer and telephone equipment 3-6 $ 242 $ 250
Office furniture and equipment 5-10 104 112
Leasehold improvements 3-10 140 140
Vehicles 5 77 74
----- -----
563 576
Less: accumulated depreciation (98) (177)
----- -----
Property and equipment, net $ 465 $ 399
===== =====
</TABLE>
Depreciation expense was $55 and $79 for the years ended December 31, 1997 and
1998, respectively.
Revenue Recognition
Revenue and the related commission expense are recognized in the month when
services are installed by U S WEST. Deferred revenue in the accompanying balance
sheets represents cash collected from U S WEST on uninstalled services.
The Company has not received payment for certain 1997 and 1998 installed
services of $314 and $150, at December 31, 1997 and 1998, respectively, due to a
dispute with U S WEST. The delay in payment for these disputed items has been
due to deficiencies in documentation required by U S WEST and discrepancies in
the amounts believed receivable from U S WEST. Total allowances of $190 and $180
at December 31, 1997 and 1998, respectively, has been established for
receivables.
F-34
<PAGE> 128
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates which could change in the near future include the allowance for
disputed receivables.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and borrowings. The carrying value of
these financial instruments in the accompanying balance sheets approximates
their fair value because of their short-term nature.
Concentration of Credit Risk
The Company's financial instruments exposed to concentrations of credit risk
consist primarily of cash and accounts receivable. The Company maintains their
cash in institutions which the Company considers of high credit quality. The
balances, at times, may exceed federally insured limits. Credit risk with
respect to accounts receivable is limited due to the credit worthiness of the
Company's primary customer, U S WEST. Management does not anticipate significant
credit losses from such financial instruments.
Asset Impairment
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Long-lived assets which are held and used in operations would be
impaired if the undiscounted future cash flows related to the asset did not
exceed the net book value. If an asset is determined to be impaired, it is
written down to its fair value.
Advertising and Promotion
Advertising and promotional related expenses are charged to operations when
incurred or the first time the advertising appears. Advertising expense totaled
$13 and $1 for the years ended December 31, 1997 and 1998, respectively.
Income Taxes
Deferred tax assets and liabilities are provided for differences between the
financial statement and tax basis of assets and liabilities using current
enacted tax rates. The provision for income taxes includes the amount due for
the current period and the change in deferred taxes between periods.
A valuation allowance is provided for a portion or all of the deferred tax asset
when it is more likely than not that the Company will not be able to realize the
benefits of the deferred tax assets in future years.
F-35
<PAGE> 129
Stock-Based Compensation
The Company accounts for its stock-based employee compensation agreements using
the intrinsic value method under which no compensation is generally recognized
for options granted to employees with an exercise price equal to or greater than
the fair market of the underlying stock. Equity instruments granted to
non-employees are recorded at fair value on the date of grant.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
The Company is required to adopt SFAS No. 133 in the year ended December 31,
2001. SFAS No. 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. To date, the Company has not entered into any derivative
financial instruments or hedging activities.
(3) BORROWINGS
Line of Credit
The Company has a line of credit with Colorado Business Bank, N.A. which permits
the Company to borrow up to $350 at a rate equal to the prime rate plus 1%
(8.75% at December 31, 1998). The line of credit is renewed on a yearly basis.
Borrowings under the agreement are collateralized by all accounts, inventory,
equipment and general intangibles of the Company, as well as shareholder owned
marketable securities and the shareholder's life insurance policy. The Company's
borrowings are limited to 75% of the total accounts receivable balance less than
ninety days (approximately $90 borrowing limitation at December 31, 1998). At
December 31, 1997 and 1998, there were no amounts outstanding under this line.
<TABLE>
<CAPTION>
Notes Payable
-------------
1997 1998
------ ------
<S> <C> <C> <C>
At December 31, 1997 and 1998, notes payable consisted of the following:
Note payable to Colorado Business Bank, N.A., Denver, Colorado;
interest at 9.5% per annum; collateralized by all accounts, inventory,
equipment, general intangibles, and shareholder owned marketable
securities; cross collateralized with the line of credit; co-borrower
with the Company's shareholder and an officer; payable in monthly
installments of $6.3; due April 2002. $ 265 $ 220
</TABLE>
F-36
<PAGE> 130
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Note payable to Lexus Financial Services Corporation; interest at
8.5% per annum; collateralized by a vehicle; payable in monthly
principal and interest installments of $.884; due April 2002. $ -- $ 31
Note payable to Colorado Business Bank, N.A., Littleton, Colorado;
interest at 10.5% per annum; collateralized by a vehicle; payable in
monthly principal and interest installments of $.798; due August 1999. 15 6
Note payable to Bank One, Denver, Colorado; interest at 9.25%;
collateralized by a vehicle; payable in monthly principal and interest
installments of $.759; paid April 1998. 26 --
Note payable to shareholder; interest at the annual federal rate (5.1%
at December 31, 1998), unsecured; due July 1999. 72 5
----- -----
378 262
Less: current maturities (130) (77)
Long-term borrowings, net of current maturities $ 248 $ 185
===== =====
</TABLE>
Maturities of long-term borrowings are as follows:
<TABLE>
<CAPTION>
Years Ending December 31-
<S> <C>
1999 $ 77
2000 72
2001 72
2002 41
------
Total $ 262
</TABLE>
Capital Leases
The Company leases certain office furniture and equipment under agreements which
are classified as capital leases. The Company acquired $127 and $0 assets under
capital lease arrangements in 1997 and 1998, respectively. Cost of such assets
at December 31, 1997 and 1998 totaled $237 for each yearend and accumulated
amortization totaled $37 and $76, respectively.
F-37
<PAGE> 131
As of December 31, 1998, future lease payments under capital leases are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31-
<S> <C>
1999 $ 65
2000 22
----
Total future minimum lease payments 87
Less: amount representing interest (6)
----
Present value of future minimum
lease payments 81
Less: current portion (63)
----
Long-term portion $ 18
====
</TABLE>
(4) OPERATING LEASES
The Company leases office and warehouse facilities from its shareholder and
other office space and equipment from unrelated parties under long-term leases
expiring in various years through the year 2016. Generally, the Company is
required to pay executory costs such as property taxes, maintenance and
insurance.
As of December 31, 1998, future minimum lease payments required under operating
leases are as follows:
<TABLE>
<CAPTION>
Related
Others Parties
------ -------
Years Ended December 31-
<S> <C> <C>
1999 $ 81 $ 36
2000 47 36
2001 -- 36
2002 -- 36
2003 -- 36
Thereafter -- 456
----- -----
$ 128 $ 636
===== =====
</TABLE>
Total rent expense charged to income for leases totaled $70 and $79 for the
years ended December 31, 1997 and 1998, respectively, of which, $36 and $36
represents rent expense for the related party leases in 1997 and 1998,
respectively.
F-38
<PAGE> 132
(6) PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Current provision (benefit):
Federal $ 400 $ (182)
State 42 (28)
----- ------
Total current 442 (210)
----- ------
Deferred provision (benefit):
Federal (238) 176
State (24) 27
----- ------
Total deferred (262) 203
----- ------
Provision (benefit) for income taxes $ 180 $ (7)
===== ======
</TABLE>
A reconciliation of the statutory income tax rate to the provision for income
taxes from continuing operations is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
----- -----
<S> <C> <C>
Federal income tax at statutory rate 34.0% 34.0%
State income taxes, net of federal tax effect 3.5 3.3
Other 4.5 .9
----- -----
Total provision 42.0% 38.2%
===== =====
</TABLE>
Deferred income taxes result from differences in the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes. The tax
effects of these temporary differences, representing deferred tax assets and
liabilities, result principally from the following:
F-39
<PAGE> 133
<TABLE>
<CAPTION>
1997 1998
----- ------
<S> <C> <C>
Deferred tax assets (liabilities):
Accounts receivable $ (96) $ (173)
Accrued expenses 184 127
Deferred revenue 129 91
Allowance for disputes 145 121
Other (10) (17)
----- ------
Net deferred tax asset $ 352 $ 149
===== ======
</TABLE>
(7) STOCK OPTION PLAN
In February 1998, the Company adopted a stock option plan which provides for the
granting of options to employees, directors and consultants. A maximum of
700,000 shares of common stock may be issued under the plan. The option price,
number of shares and grant date are determined at the discretion of the
Company's Board of Directors. The exercise price of the options granted have
been established at no less than the fair market value at the date of grant.
Options granted under the plan expire ten years after the grant date and vest
1/12th on the last day of each fiscal quarter.
A summary of option transactions for the year ended December 31, 1998 and
options outstanding at December 31, 1998 are shown below:
<TABLE>
<CAPTION>
Number Exercise
of Shares Price
--------- -----
<S> <C> <C> <C>
Options Granted in 1998 551,500 $0.33
Exercised -- --
------- -----
Outstanding at December 31, 1998 551,500 $0.33
======= =====
Exercisable at December 31, 1998 140,250 $0.33
======= =====
</TABLE>
The remaining contractual life of options outstanding at December 31, 1998, was
9.5 years. All options outstanding and exercisable have an exercise price of
$0.33.
The fair value of the options granted in 1998 was $0.5 per share. Had the
Company's stock based compensation cost been determined using their fair value
at the grant date, the Company's net income would have been reduced to the pro
forma amounts indicated below.
F-40
<PAGE> 134
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
-------------
<S> <C>
Net Income:
As reported $ (27)
Pro forma $ (32)
</TABLE>
The above fair value was determined using the minimum value method (no
volatility assumed), a risk free interest rate of 4.55%, an expected life of
four years and no dividend payout.
(8) RETIREMENT SAVING PLAN
The Company maintains a qualified retirement savings plan under Section 401(k)
of the Internal Revenue Code. Under the plan, employees may elect to defer up to
15% of their compensation, subject to Internal Revenue Service limits. The plan
allows for discretionary contributions to be made by the Company. No Company
contributions were made for the years ended December 31, 1997 and 1998,
respectively. The plan is administered by a third party.
(9) COMMITMENTS AND CONTINGENCIES
Guarantees
In December 1995, the Company, acting as a co-borrower with its shareholder and
an officer, obtained a loan from Key Bank ("Key Bank"). The funds were used to
purchase, among other items, real estate owned by the shareholder and officer.
The loan was secured by the real estate, through a Deed of Trust dated December
28, 1995. In May 1996, the U.S. Small Business Administration ("SBA") guaranteed
the Key Bank loan, which resulted in the Deed of Trust being transferred to the
SBA. In August of 1998, the Key Bank debt balance was paid in full, with
proceeds obtained by the shareholder and officer from the Colorado Business
Bank. The Company is a guarantor on the Colorado Business Bank note. The real
estate securing the note has been leased by the Company since April of 1996.
The Colorado Business Bank note bears interest at 9% and is due in monthly
principal and interest installments of $1. The note is secured by a first deed
of trust and an assignment of rents between the Company and its shareholder. At
December 31, 1998 the balance due on this note is $138. The note is due January,
2016.
Litigation
The Company is involved in litigation arising in the ordinary course of
business. It is the opinion of management that the outcome of such litigation
will not have a material effect on the financial statements of the Company.
F-41
<PAGE> 135
(10) DISCONTINUED OPERATIONS
During February 1999, management approved a formal plan to dispose of the
Company's Hardware Business. Operations related to this business ceased on April
30, 1999, with the completion of all installations. The Company reduced its
labor force, eliminated all inventories, and wrote-down the value of the
property and equipment. As a result of this decision, the Company has reflected
the operations of the hardware business as discontinued operations in the
accompanying financial statements.
Net current assets(liabilities) of discontinued operations as of December 31,
1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----- -----
<S> <C> <C>
Current Assets:
Accounts receivable, net $ 132 $ 284
Inventory 178 178
----- -----
Total current assets 310 462
----- -----
Current Liabilities:
Accounts payable and accrued expenses $ 107 $ 274
Deferred revenue 229 128
----- -----
Total current liabilities 336 402
----- -----
Net assets (liabilities) of discontinued operations $ (26) $ 60
===== =====
</TABLE>
The results of discontinued operations were as follows: December 31,
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Revenues $ 2,411 $ 3,223
Cost and expenses 2,738 3,812
------- -------
Loss from discontinued operations before taxes $ (327) $ (589)
======= =======
</TABLE>
(11) SUBSEQUENT EVENTS
Subsequent to year end, the sole shareholder at the Company entered into a
definitive agreement with PentaStar Communications, Inc. ("PentaStar"), pursuant
to which all outstanding shares of the Company's stock will be exchanged for
cash and shares of PentaStar common stock.
F-42
<PAGE> 136
PENTASTAR COMMUNICATIONS, INC.
1,500,000 SHARES
COMMON STOCK
---------------------------------------
PROSPECTUS
, 1999
----------------------
---------------------------------------
SCHNEIDER SECURITIES, INC.
PROSPECTUS DELIVERY OBLIGATIONS
Until _______, 1999 (25 days after the date of this prospectus), all
dealers effecting transactions in the common stock, whether or not participating
in this distribution, may be required to deliver a prospectus. This is in
addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
<PAGE> 137
PART II
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since March 15, 1999, the date of its formation, PentaStar has sold
unregistered securities as follows:
1. On March 17, 1999, PentaStar issued 1,708,980 shares of common stock
to BACE Investments, LLC for $500.
2. On March 31, 1999, PentaStar issued 732,419 shares of common stock
to Black Diamond Capital, LLC for $321.43; 469,499 shares of common stock to
Robert S. Lazzeri for $206.04; and 219,100 shares of common stock to Jeffrey A.
Veres for $96.15.
3. On August 13, 1999, PentaStar entered into Agreements and Plans of
Merger with the stockholder of DMA Ventures, Inc. and the stockholders of ICM
Communications Integration, Inc. pursuant to which PentaStar will acquire,
concurrently with the closing of this offering, all of the outstanding stock of
DMA for $500,000 cash and 205,000 shares of PentaStar common stock and all of
the outstanding stock of ICM for $1.923 million cash and 165,000 shares (subject
to adjustment) of PentaStar common stock.
The sales and issuance of securities in the transactions described in
paragraphs 1 and 2 above were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2). The purchaser in paragraph 1 is an
accredited investor. The principal of the entity listed in paragraph 2 is a
sophisticated and experienced investor. The individuals listed in paragraph 2
are accredited investors who will become employees of PentaStar in connection
with this offering.
The sales and ultimate issuance of securities in the transactions
described in paragraph 3 above were deemed to be exempt from registration under
the Securities Act by virtue of Rule 506. The stockholder of DMA, Jeffrey A.
Veres, the principal stockholder of ICM, Dennis W. Schillinger, and one other
stockholder of ICM are accredited investors. The other stockholders of ICM who
will receive PentaStar common stock are persons who PentaStar believes, either
alone or with his purchaser representative, has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of the investment in PentaStar common stock.
Item 27. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------- -----------------------
<S> <C>
1.1* Form of Underwriting Agreement.
1.2* Form of Selected Dealers Agreement.
2.1* Agreement and Plan of Merger dated August 13, 1999 among PentaStar
Communications, Inc., OC Mergerco 1, Inc., DMA Ventures, Inc. and its principal
shareholder, Jeffrey A. Veres.
2.2**** Agreement and Plan of Merger dated August 13, 1999 among PentaStar
Communications, Inc., OC Mergerco 2, Inc., ICM Communications Integration,
Inc. and the shareholders of ICM Communications Integration, Inc.
3.1**** Form of Restated Certificate of Incorporation.
3.2**** Form of Restated Bylaws.
4.1** Specimen stock certificate representing shares of common stock of PentaStar
Communications, Inc.
4.2* Form of Warrant for the purchase of common stock to be issued to the
representatives upon the closing of this offering.
5.1** Opinion of Sherman & Howard L.L.C. regarding the legality of the securities
being registered.
10.1* PentaStar Communications, Inc. Stock Option Plan.
10.2*** Strategic Agent Sales Agreement by and between U S WEST
Communications, Inc. and Access Communications dated
February 15, 1998, as amended by memorandum dated
March 24, 1999.
</TABLE>
II-1
<PAGE> 138
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------- -----------------------
<S> <C>
10.3*** Strategic Agent Sales Agreement by and between U S WEST Communications,
Inc. and ICM Communications Integration, Inc. dated February 13, 1998, as
amended by memorandum dated March 24, 1999.
10.4**** Consulting Agreement effective September 1, 1999 between Optimal
Communications, Inc. (nka PentaStar Communications, Inc.) and BIBD, LLC.
10.5* Employment and Noncompetition Agreement entered into as of August 13, 1999
between PentaStar Communications, Inc. and Jeffrey A. Veres.
10.6* Form of Principal Stockholder's Escrow and Contingent Stock Agreement among
PentaStar Communications, Inc., OC Mergerco 1, Inc. and Jeffrey A. Veres.
10.7* Form of Principal Stockholder's Escrow and Contingent Stock Agreement among
PentaStar Communications, Inc., OC Mergerco 2, Inc. and Dennis W. Schillinger.
10.8* Lease Agreement between BACE Real Estate, LLC and PentaStar
Communications, Inc.
10.9* Stock Purchase Agreement dated March 31, 1999 between Optimal
Communications, Inc. (nka PentaStar Communications, Inc.) and Robert S.
Lazzeri and Addendum thereto.
10.10* Stock Purchase Agreement dated March 31, 1999 between Optimal
Communications, Inc. (nka PentaStar Communications, Inc.) and Black Diamond
Capital, LLC and Addendum thereto.
10.11* Stock Purchase Agreement dated March 31, 1999 between Optimal
Communications, Inc. (nka PentaStar Communications, Inc.) and Jeffrey A. Veres
and Addendum thereto.
10.12* Lock-Up Agreement dated March 17, 1999 between Optimal Communications,
Inc. (nka PentaStar Communications, Inc.) and BACE Investments, LLC.
10.13* Business Lease dated April 10, 1996 between Jeffrey and Linda Veres and DMA
Ventures, Inc. (dba Access Communications) and First Amendment to Lease
dated August 13, 1999.
</TABLE>
II-2
<PAGE> 139
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------- -----------------------
<S> <C>
10.14**** Form of Escrow Agreement among BACE Investments, LLC, Black Diamond
Capital, LLC, PentaStar Communications, Inc., Schneider Securities, Inc. and
American Securities Transfer & Trust, Inc.
21.1**** Statement re subsidiaries of PentaStar Communications, Inc.
23.1** Consent of Sherman & Howard L.L.C. (included in Exhibit 5.1).
23.2**** Consent of Arthur Andersen LLP, Independent Public Accountants.
24.1* Power of Attorney. Reference is made to II-5.
27.1* Financial Data Schedule.
99.1**** Consent of Robert S. Lazzeri to be named.
99.2**** Consent of R. Neal Tomblyn to be named.
99.3**** Consent of David L. Dunham to be named.
99.4**** Consent of Dennis W. Schillinger to be named.
99.5**** Consent of Jeffrey A. Veres to be named.
</TABLE>
- --------------
* Previously submitted.
** To be filed by amendment.
*** Previously submitted. The registrant has applied for confidential
treatment for portions of this exhibit.
**** Filed herewith.
All schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements of the
registrant or related notes thereto.
II-3
<PAGE> 140
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Amendment No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Denver, State of Colorado, on the 23 day of
September, 1999.
PENTASTAR COMMUNICATIONS, INC.
By: /s/ Richard M. Tyler
------------------------------------
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Craig J. Zoellner President, Treasurer and Director September 23, 1999
- ------------------------------------- (Principal Executive Officer and
Richard M. Tyler as Principal Financial Accounting
attorney-in-fact for Officer)
Craig J. Zoellner
/s/ Richard M. Tyler Vice President, Secretary and September 23, 1999
- ------------------------------------- Director
Richard M. Tyler
Director
- --------------------------------------
Carleton A. Brown
</TABLE>
II-4
<PAGE> 141
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------- -----------------------
<S> <C>
1.1* Form of Underwriting Agreement.
1.2* Form of Selected Dealers Agreement.
2.1* Agreement and Plan of Merger dated August 13, 1999 among PentaStar
Communications, Inc., OC Mergerco 1, Inc., DMA Ventures, Inc. and its
principal shareholder, Jeffrey A. Veres.
2.2**** Agreement and Plan of Merger dated August 13, 1999 among PentaStar
Communications, Inc., OC Mergerco 2, Inc., ICM Communications
Integration, Inc. and the shareholders of ICM Communications Integration,
Inc.
3.1**** Form of Restated Certificate of Incorporation.
3.2**** Form of Restated Bylaws.
4.1** Specimen stock certificate representing shares of common stock of
PentaStar Communications, Inc.
4.2* Form of Warrant for the purchase of common stock to be issued to the
representatives upon the closing of this offering.
5.1** Opinion of Sherman & Howard L.L.C. regarding the legality of the
securities being registered.
10.1* PentaStar Communications, Inc. Stock Option Plan.
10.2*** Strategic Agent Sales Agreement by and between U S WEST
Communications, Inc. and Access Communications dated February 15,
1998, as amended by memorandum dated March 24, 1999.
10.3*** Strategic Agent Sales Agreement by and between U S WEST
Communications, Inc. and ICM Communications Integration, Inc. dated
February 13, 1998, as amended by memorandum dated March 24, 1999.
</TABLE>
1
<PAGE> 142
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------- -----------------------
<S> <C>
10.4**** Consulting Agreement effective September 1, 1999 between Optimal
Communications, Inc. (nka PentaStar Communications, Inc.) and BIBD,
LLC.
10.5* Employment and Noncompetition Agreement entered into as of
August 13, 1999 between PentaStar Communications, Inc. and Jeffrey A.
Veres.
10.6* Form of Principal Stockholder's Escrow and Contingent Stock Agreement
among PentaStar Communications, Inc., OC Mergerco 1, Inc. and
Jeffrey A. Veres.
10.7* Form of Principal Stockholder's Escrow and Contingent Stock Agreement
among PentaStar Communications, Inc., OC Mergerco 2, Inc. and
Dennis W. Schillinger.
10.8* Lease Agreement between BACE Real Estate, LLC and PentaStar
Communications, Inc.
10.9* Stock Purchase Agreement dated March 31, 1999 between Optimal
Communications, Inc. (nka PentaStar Communications, Inc.) and
Robert S. Lazzeri and Addendum thereto.
10.10* Stock Purchase Agreement dated March 31, 1999 between Optimal
Communications, Inc. (nka PentaStar Communications, Inc.) and Black
Diamond Capital, LLC and Addendum thereto.
10.11* Stock Purchase Agreement dated March 31, 1999 between Optimal
Communications, Inc. (nka PentaStar Communications, Inc.) and
Jeffrey A. Veres and Addendum thereto.
10.12* Lock-Up Agreement dated March 17, 1999 between Optimal
Communications, Inc. (nka PentaStar Communications, Inc.) and BACE
Investments, LLC.
10.13* Business Lease dated April 10, 1996 between Jeffrey and Linda Veres and
DMA Ventures, Inc. (dba Access Communications) and First Amendment
to Lease dated August 13, 1999.
10.14**** Form of Escrow Agreement among BACE Investments, LLC, Black
Diamond Capital, LLC, PentaStar Communications, Inc., Schneider
Securities, Inc. and American Securities Transfer & Trust, Inc.
</TABLE>
2
<PAGE> 143
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
21.1**** Statement re subsidiaries of PentaStar Communications, Inc.
23.1** Consent of Sherman & Howard L.L.C. (included in Exhibit 5.1).
23.2**** Consent of Arthur Andersen LLP, Independent Public Accountants.
24.1* Power of Attorney. Reference is made to II-5.
27.1* Financial Data Schedule.
99.1**** Consent of Robert S. Lazzeri to be named.
99.2**** Consent of R. Neal Tomblyn to be named.
99.3**** Consent of David L. Dunham to be named.
99.4**** Consent of Dennis W. Schillinger to be named.
99.5**** Consent of Jeffrey A. Veres to be named.
</TABLE>
- ----------------
* Previously submitted.
** To be filed by amendment.
*** Previously submitted. The registrant has applied for confidential
treatment for portions of this exhibit.
**** Filed herewith.
3
<PAGE> 1
EXHIBIT 2.2
AGREEMENT AND PLAN OF MERGER
AMONG
PENTASTAR COMMUNICATIONS, INC.,
OC MERGERCO 2, INC.,
ICM COMMUNICATIONS INTEGRATION, INC.
AND
THE SHAREHOLDERS
OF
ICM COMMUNICATIONS INTEGRATION, INC.,
DATED AS OF AUGUST 13, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Definitions...........................................................................................................1
2. The Merger............................................................................................................1
3. Representations and Warranties........................................................................................7
3.1. Representations and Warranties of the Company and the Shareholders...........................................7
3.2. Additional Representations and Warranties of the Shareholders Relating to Underwriting......................18
3.3. Representations and Warranties of Each Shareholder..........................................................18
3.4. Representations and Warranties of PentaStar.................................................................20
3.5. Representations and Warranties of Acquiror..................................................................21
3.6. Survival of Representations.................................................................................22
3.7. Representations as to Knowledge.............................................................................22
4. Pre-Closing Covenants................................................................................................22
4.1. General.....................................................................................................22
4.2. Operation and Preservation of Business......................................................................22
4.3. Full Access.................................................................................................23
4.4. Notice of Developments......................................................................................23
4.5. Exclusivity.................................................................................................23
4.6. Announcements...............................................................................................23
4.7. Closing Date Liabilities. .................................................................................23
4.8. License Agreement...........................................................................................23
4.9. Agreement with NCI..........................................................................................23
5. Post-Closing Covenants...............................................................................................24
5.1. Further Assurances..........................................................................................24
5.2. Transition..................................................................................................24
5.3. Cooperation.................................................................................................24
5.4. Confidentiality.............................................................................................24
5.5. Post-Closing Announcements..................................................................................24
5.6. Financial Statements........................................................................................24
5.7. Satisfaction of Liabilities.................................................................................24
5.8. Repurchase of Unpaid Receivables............................................................................25
5.9. Termination of Obligations..................................................................................25
5.10. Transfer Restrictions.......................................................................................25
5.11. Underwriter and Securities Act Restrictions,................................................................26
6. Conditions to Closing................................................................................................26
6.1. Conditions to Obligation of PentaStar.......................................................................26
6.2. Conditions to Obligation of the Shareholders................................................................28
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C>
7. Remedies for Breaches of This Agreement..............................................................................29
7.1. Indemnification Provisions for Benefit of PentaStar and the Company.........................................29
7.2. Indemnification Provisions for Benefit of the Shareholders..................................................30
7.3. Matters Involving Third Parties.............................................................................31
7.4. Right of Offset.............................................................................................32
7.5. Other Remedies..............................................................................................32
7.6. Basket......................................................................................................32
8. Termination..........................................................................................................32
8.1. Termination of Agreement....................................................................................32
8.2. Effect of Termination.......................................................................................32
8.3. Confidentiality.............................................................................................33
9. Miscellaneous........................................................................................................33
9.1. No Third-Party Beneficiaries................................................................................33
9.2. Entire Agreement............................................................................................33
9.3. Succession and Assignment...................................................................................33
9.4. Counterparts................................................................................................33
9.5. Headings and Terms..........................................................................................33
9.6. Notices.....................................................................................................33
9.7. Governing Law...............................................................................................34
9.8. Amendments and Waivers......................................................................................34
9.9. Severability................................................................................................34
9.10. Expenses....................................................................................................34
9.11. Arbitration.................................................................................................35
9.12. Construction................................................................................................35
9.13. Incorporation of Exhibits...................................................................................35
9.14. Shareholders' Agent.........................................................................................36
</TABLE>
(ii)
<PAGE> 4
Exhibits to ICM Merger Agreement:
<TABLE>
<S> <C>
Exhibit 1.1(a) Defined Terms
Exhibit 1.1(b) Form of Employment and Noncompetition Agreement
between PentaStar and Schillinger
Exhibit 1.1(c) Form of Noncompetition Agreement
Exhibit 1.1(d) Contracts Which After Closing May Give Rise to
ICM Obligations (Part (a) of Retained
Liabilities)
Exhibit 2(k)(i) Form of Norwest Escrow Agreement
Exhibit 2(k)(ii) Form of Principal Stockholder's Escrow and
Contingent Stock Agreement
Exhibit 3.1(a)(i)(A) ICM's Amended Certified Articles of
Incorporation
Exhibit 3.1(a)(i)(B) ICM's Amended Bylaws
Exhibit 3.1(b)(i) ICM Stock and Stock Restrictions to be
Terminated by Shareholders Prior to Closing
Exhibit 3.1(b)(ii) Network Communication Integration Disclosure
and ICM Subsidiaries
Exhibit 3.1(c) Notices/Consents to be Obtained Prior to
Closing
Exhibit 3.1(d)(i)(A) ICM Financial Statements
Exhibit 3.1(d)(i)(B) ICM Expenses
Exhibit 3.1(e)(i) Material Contracts Obligating ICM
Exhibit 3.1(e)(iv) ICM Cancelled and Doubtful Accounts and Notes
Exhibit 3.1(e)(vi) Wage/Salary Increases
Exhibit 3.1(f)(iii) ICM Tax Returns
Exhibit 3.1(f)(v) ICM "S" Corporation Election
Exhibit 3.1(f)(vi) ICM Carryforwards
Exhibit 3.1(g)(i) Encumbrances
Exhibit 3.1(h) ICM Contracts and Other Matters
Exhibit 3.1(i)(i) ICM Litigation
Exhibit 3.1(i)(ii) ICM Violations of Legal Requirements or Rights
Exhibit 3.1(k) ICM Liability Claims, Other Than Those on
Listed Exhibit 3.1(i)(i) and Termination
Agreements
Exhibit 3.1(l) ICM Insurance Claims, Other Than Those Listed
on Exhibit 3.1(k)
Exhibit 3.1(m)(i) Company Welfare Plans and Simple IRA Plans
Sponsored by Company
Exhibit 3.1(m)(iii) ICM Benefit Arrangements
Exhibit 3.1(n) ICM Employees who may Terminate Employment
Exhibit 3.1(o)(i)(A) ICM Principal Customers
Exhibit 3.1(o)(i)(B) ICM Principal Providers
Exhibit 3.1(o)(i)(C) US West Contract
Exhibit 3.1(s) ICM Brokers' Fees
Exhibit 3.1(t) ICM Guarantors/Guaranties
Exhibit 3.2 Additional Shareholders Representations and
Warranties Relating to Underwriting
Exhibit 3.3(a)(ii) Other Information Relating to PentaStar
Exhibit 3.3(a)(x) Shareholders' Information and Exceptions to
Accredited Investor Status
Exhibit 3.4(b)(i) Capitalization of PentaStar
Exhibit 3.5(a) OC Mergerco 2, Inc.'s Certified Articles of
Incorporation, Bylaws and Minute Book
Exhibit 4.8 License Agreement
Exhibit 4.9 NCI Agreement and Note
Exhibit 6.1(i) Form of Opinion of Shareholders' Counsel
Exhibit 6.2(e) Form of Opinion of PentaStar's Counsel
</TABLE>
(iii)
<PAGE> 5
This Agreement and Plan of Merger is entered into as of August
13, 1999 among PentaStar Communications, Inc., a Delaware corporation
("PentaStar"), OC Mergerco 2, Inc., a Delaware corporation (the "Acquiror," and
after the Effective Time, the "Surviving Corporation"), ICM Communications
Integration, Inc. (the "Company"), and the Persons identified on the signature
page hereto as Shareholders (individually, a "Shareholder" and collectively, the
"Shareholders").
Recitals
A. Prior to July 30, 1999, the Shareholders owned all of the
issued and outstanding capital stock of the Company. On July 30, 1999, the
Shareholders transferred all of such capital stock to OpCom, LLC, a Colorado
limited liability company (the "LLC"), in exchange for all of the Class B
membership interests in the LLC (the "Stock/LLC Exchange").
B. The Acquiror is a newly-formed, wholly-owned subsidiary of
PentaStar. The Acquiror desires to acquire all of the business operations of the
Company through a statutory merger of the Company with and into the Acquiror,
with the Acquiror as the surviving entity (the "Transaction").
C. The Boards of Directors of each of PentaStar, the Acquiror
and the Company has determined that the Transaction is in the best interests of
their respective corporations and shareholders.
D. It is intended that the Transaction will qualify as a
reorganization under the provisions of Section 368(a)(1)(A) pursuant to Section
368(a)(2)(D) of the Code.
E. PentaStar, the Acquiror, the Company and the Shareholders
desire to make certain representations, warranties and agreements in connection
with the Transaction and also desire to set forth various conditions precedent
thereto.
Agreement
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties and covenants set forth herein and other good and
valuable consideration, the receipt and sufficiency of which are acknowledged,
the parties agree as follows:
1. Definitions. The terms defined in Exhibit 1.1(a) shall have the meanings
designated therein.
2. The Merger. Subject to the terms and conditions of this Agreement and the
corporation laws of the states of Delaware and Washington, at the Effective
Time, the Company will be merged with and into the Acquiror (the "Merger") and
the separate existence of the Company will cease and the Acquiror will continue
as the surviving corporation in the Merger. From and after the Effective Time,
and without any further action on the part of any Person, the Merger will have
all the effects provided by applicable law, including Sections 251 and 252 of
the Delaware General Corporation Law and Section 23B.11.070 of the Washington
Business Corporation Act and, subject to applicable law, the following
additional effects:
<PAGE> 6
(a) Basic Transaction. At the Effective Time, the Shareholders
will receive the consideration described in Section 2(k), and the Company Shares
owned by the Shareholders will be canceled and will cease to represent any
interest in the Company or the Surviving Corporation. As of the Effective Time,
the stock transfer books of the Company will be closed and no transfer or
issuance of shares of capital stock of the Company will be permitted.
(b) Certificate of Incorporation. At the Effective Time, the
Certificate of Incorporation of the Acquiror, as in effect immediately prior to
the Effective Time, will become the Certificate of Incorporation of the
Surviving Corporation, except that the name of the Surviving Corporation will
become "ICM Communications Integration, Inc.," and such Certificate of
Incorporation may thereafter be amended as provided therein and by the Delaware
General Corporation Law.
(c) Bylaws. At the Effective Time, the Bylaws of the Acquiror,
as in effect immediately prior to the Effective Time, will become the Bylaws of
the Surviving Corporation, and such Bylaws may thereafter be amended or repealed
in accordance with their terms and the Certificate of Incorporation of the
Surviving Corporation and as provided by the Delaware General Corporation Law.
(d) Directors. At the Effective Time, the directors of the
Acquiror immediately prior to the Effective Time will become the directors of
the Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation and the
Delaware General Corporation Law and until the earlier of his or her resignation
or removal or until his or her successor is duly elected and qualified, as the
case may be.
(e) Officers. At the Effective Time, the officers of the
Acquiror immediately prior to the Effective Time will become the officers of the
Surviving Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation and the Delaware General
Corporation Law and until the earlier of his or her resignation or removal or
until his or her successor is duly appointed and qualified, as the case may be.
(f) Properties and Liabilities. At the Effective Time, all the
properties, rights, privileges, powers, and franchises of the Company and the
Acquiror will vest in the Surviving Corporation, and all debts, liabilities, and
duties of the Company and the Acquiror will become the debts, liabilities, and
duties of the Surviving Corporation.
(g) Documents. Subject to the terms and conditions in this
Agreement, the parties shall prepare, sign, and acknowledge, in accordance with
the Delaware General Corporation Law and the Washington Business Corporation
Act, a certificate of merger (the "Certificate of Merger") and articles of
merger (the "Articles of Merger") and deliver the Certificate of Merger to the
Secretary of State of the State of Delaware for filing pursuant to the Delaware
General Corporation Law on the Closing Date and the Articles of Merger to the
Secretary of State of the State of Washington for filing pursuant to the
Washington Business Corporation Act on the Closing Date. The Merger shall become
effective on the date on which the Articles of Merger and the Certificate of
Merger have been duly filed with the Washington Secretary of State and the
Delaware Secretary of State, respectively (the "Effective Time").
(h) Share Conversion. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of capital
stock of any corporation, each share of capital
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<PAGE> 7
stock of the Company will be converted into the right to receive the
consideration payable pursuant to Section 2(k). Each share of the capital stock
of the Company issued and outstanding immediately prior to the Effective Time
and owned directly or indirectly by the Company as treasury stock, if any, will
be cancelled and retired, and no cash, PentaStar Shares or other consideration
shall be delivered or payable in exchange therefor. Each share of the capital
stock of the Acquiror issued and outstanding immediately prior to the Effective
Time will remain issued and outstanding.
(i) Fractional Shares. No certificates or scrip representing
fractional shares of any class of PentaStar Shares will be issued pursuant to
the Merger. Such fractional share interests shall not entitle the owner thereof
to any rights as a security holder of the Surviving Corporation. In lieu of any
such fractional shares of any class of PentaStar Shares, each Shareholder will
be entitled to receive an amount in cash (without interest), rounded to the
nearest cent, determined by multiplying the value of an PentaStar Share issuable
pursuant to this Agreement (as determined as of the Closing Date) by the
fractional interest in such PentaStar Shares to which such Person would
otherwise be entitled.
(j) Estimated Closing Date Balance Sheet. No earlier than ten
Business Days prior to the Closing or later than three Business Days prior to
the Closing, the Shareholders will deliver a balance sheet for the Company
prepared as of the Closing Date (the "Estimated Closing Date Balance Sheet").
The Estimated Closing Date Balance Sheet will be prepared in accordance with
GAAP on a basis consistent with the historical accounting practices of the
Company used in connection with the preparation of the Company's audited balance
sheet for the period ended December 31, 1998. The Estimated Closing Date Balance
Sheet will set forth, in addition to other items required by GAAP, the amount of
(i) Cash held by the Company, (ii) the Closing Date Liabilities and each item
thereof, and (iii) the Retained Liabilities described in clauses (b), (c) and
(d) of the definition of Retained Liabilities and each item thereof.
(k) Consideration. The consideration payable by the Acquiror
to the Shareholders pursuant to the Merger will be an amount equal to the sum of
(a) (1) cash in an amount of $1,923,000, plus (2) the amount of Cash set forth
on the Estimated Closing Date Balance Sheet, minus (3) the amount of the Closing
Date Liabilities as set forth on the Estimated Closing Date Balance Sheet; plus
(b) 165,000 (which number of shares shall be subject to adjustment as set forth
below) PentaStar Shares (collectively the "Purchase Price"). The Purchase Price
will be adjusted in accordance with Section 2(m), and will be payable and
issuable to the Shareholders in accordance with the following percentages and
proportions:
<TABLE>
<CAPTION>
NUMBER OF COMPANY CASH REGULAR GUARANTEED TOTAL NUMBER OF
SHAREHOLDER SHARES OWNED CONSIDERATION SHARES SHARES PENTASTAR SHARES
- ----------- ------------ ------------- ------ ------ ----------------
<S> <C> <C> <C> <C> <C>
Dennis Schillinger 123,381.75 $ 200,000.00 100,000.00 20,000.00 120,000.00
Nicolas van Gelder 117,381.75 $ 508,669.58 12,430.34 3,682.75 16,113.09
Norma Douthit 82,254.50 $ 356,446.91 7,523.20 2,105.75 9,628.97
John Hall 82,254.50 $ 356,446.91 7,523.20 2,105.75 9,628.97
Charles Gibson 82,254.50 $ 356,446.91 7,523.20 2,105.75 9,628.97
Jeanette Murphy 12,342.00 $ 67,595.77 0.00 0.00 0.00
Rick Johnson 10,000.00 $ 54,768.89 0.00 0.00 0.00
Ed Peterson 4,131.00 $ 22,625.03 0.00 0.00 0.00
---------- ------------- ---------- --------- ----------
514,000.00 $1,923,000.00 135,000.00 30,000.00 165,000.00
</TABLE>
-3-
<PAGE> 8
The cash consideration payable set forth in the above table will be adjusted in
accordance with the foregoing clauses (a)(2) and (a)(3) in the first sentence of
Section 2(k). The Shareholders acknowledge and agree that the proportions in
which they will share the cash and PentaStar Shares payable and issuable to them
as part of the Purchase Price (as set forth immediately above) are different
from their relative percentage interests in the Company. The Shareholders hereby
agree to the proportions above and waive any right they may have to receive all
elements of the Purchase Price in proportion to their relative stock ownership
of the Company. On the Closing Date, the Surviving Corporation will (i) pay to
the Shareholders by wire transfer in immediately available funds to an account
or accounts designated by the Shareholders' Agent (in accordance with the
amounts set forth above) in cash the amount of the sum of (A) the cash portion
of the Purchase Price as set forth in the preceding clause (a) minus (B)
$500,000; (ii) issue 165,000 shares of PentaStar Common Stock to the
Shareholders (in such amounts as set forth above); and (iii) deposit $500,000 in
cash (the "Escrow Deposit") into an Escrow Account (as defined in the Escrow
Agreement the form of which is attached as Exhibit 2(k)(i)) with the Escrow
Agent; and (iv) pay, or make provision for payment of, the Closing Date
Liabilities set forth on the Estimated Closing Date Balance Sheet. The Escrow
Deposit will be held, invested, administered and disbursed according to this
Agreement and the Escrow Agreement. If the per share initial public offering
price of the PentaStar Common Stock in the IPO (the "Per Share IPO Price") is
less than $9 per share, then the aggregate number of PentaStar Shares to be
issued as part of the Purchase Price will instead be determined as follows:
X = Number of PentaStar Shares to be issued if the Per Share IPO Price
is less than $9 per share
Y = Per Share IPO Price
X = (135,000) + ($270,000/Y) (referred to as the "Guaranteed Shares")
If there is an adjustment in the Guaranteed Shares as provided pursuant to the
formula above, the Guaranteed Shares shall be distributed to the Shareholders in
the same proportion as the Shareholders own the Guaranteed Shares as set forth
above in this Section 2(k).
For example, if the Per Share IPO Price is $8 per share, then the aggregate
number of PentaStar Shares would be 168,750 rather than 165,000. The aggregate
number of PentaStar Shares would be computed as follows: (135,000) +
($270,000/8) (e.g. Guaranteed Shares), which equals 135,000 + 33,750 for a total
of 168,750 PentaStar Shares, consisting of 135,000 PentaStar Shares and 33,750
Guaranteed Shares. The 33,750 Guaranteed Shares would be distributed as follows:
(i) two thirds to Dennis Schillinger and (ii) one third to the Shareholders
(other than Dennis Schillinger) to be distributed between such Shareholders
(other than Dennis Schillinger) according to the ratio of PentaStar Shares each
Shareholder receives in the Merger to the total PentaStar Shares all
Shareholders (other than Dennis Schillinger) receive in the Merger, in each case
as described above.
If the Per Share IPO Price is more than $11 per share, then the aggregate number
of PentaStar Shares to be issued as part of the Purchase Price will instead be
determined as follows:
X = Number of PentaStar Shares if the Per Share IPO Price is more than
$11 per share
Y = Per Share IPO Price
X = (135,000) + ($330,000/Y)
-4-
<PAGE> 9
On the Closing Date, Schillinger will deposit 40,000 shares of PentaStar Common
Stock (out of the 120,000 shares he receives pursuant to the Merger) with
PentaStar, pursuant to the Principal Stockholder's Escrow and Contingent Stock
Agreement in the form attached as Exhibit 2(k)(ii) (the "Schillinger Escrow
Agreement"). The Schillinger Escrow Agreement provides that upon the occurrence
of certain conditions, Schillinger may receive a greater or lesser number of
PentaStar Shares than the number initially deposited with PentaStar pursuant to
the Schillinger Escrow Agreement. The parties agree that any adjustment in the
number of such shares will be treated as an adjustment to the Purchase Price.
(l) Closing Date Balance Sheet. Within 60 days after the
Closing Date, an audited balance sheet for the Company will be prepared as of
the Closing Date (the "Closing Date Balance Sheet") and delivered to PentaStar
and the Shareholders. The Closing Date Balance Sheet will be prepared by Arthur
Andersen LLP in accordance with GAAP on a basis consistent with the historical
accounting practices of the Company used in connection with the preparation of
the Company's audited balance sheet for the period ended December 31, 1998.
PentaStar will pay the fees and expenses of Arthur Andersen LLP incurred in
connection with the preparation of the Closing Date Balance Sheet. The Closing
Date Balance Sheet will set forth, in addition to other items required by GAAP,
the amount of (i) Cash on hand of the Company, (ii) the Closing Date Liabilities
and each item thereof and (iii) the Retained Liabilities described in clauses
(b), (c) and (d) of the definition of Retained Liabilities and each item
thereof.
(m) Post-Closing Adjustment to the Purchase Price. Following
delivery of the Closing Date Balance Sheet in accordance with Section 2(l), the
cash portion of the Purchase Price will be adjusted as follows:
(i) Within 20 days after receipt of the Closing Date
Balance Sheet, PentaStar or the Shareholders, as the case may be, will, in a
written notice to the other either accept the Closing Date Balance Sheet or
object to it by describing in reasonably specific detail any proposed
adjustments to the Closing Date Balance Sheet and the estimated amounts of and
reasons for such proposed adjustments. The failure by PentaStar or the
Shareholders to object to the Closing Date Balance Sheet within such 20-day
period will be deemed to be an acceptance by such Person of the Closing Date
Balance Sheet.
(ii) If any adjustments to the Closing Date Balance
Sheet are proposed, PentaStar and the Shareholders will negotiate in good faith
to resolve any dispute, provided that if the dispute is not resolved within 10
days following the receipt of the proposed adjustments described in Section
2(m)(i), PentaStar and the Shareholders will retain the Denver, Colorado office
of BDO Seidman to resolve such dispute, which resolution will be final and
binding. The fees and expenses of BDO Seidman will be shared equally by
PentaStar, on the one hand, and Shareholders, on the other hand, and BDO Seidman
will be retained under a retention letter executed by the parties that specifies
that the determination by said firm of any such disputes concerning the Closing
Date Balance Sheet will be resolved in accordance with GAAP on a basis
consistent with the historical accounting practices of the Company used in
connection with the preparation of the Company's audited balance sheet for the
period ended December 31, 1998, by choosing the position of Arthur Andersen LLP
or the objecting party under Section 2(m)(i) without change, within 30 days of
the expiration of the 10-day period described in this Section 2(m)(ii).
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<PAGE> 10
(iii) Within 10 Business Days after the later of the
acceptance of the Closing Date Balance Sheet by PentaStar and the Shareholders
or the resolution of any disputes under Section 2(m)(ii), as the case may be,
the cash portion of the Purchase Price will be adjusted as follows: First, to
the extent that the amount of the Closing Date Liabilities as set forth on the
Closing Date Balance Sheet is more than the amount of the Closing Date
Liabilities as set forth on the Estimated Closing Date Balance Sheet, the cash
portion of the Purchase Price will be reduced and the difference will be
refunded in cash by the Shareholders to PentaStar. If the amount of the Closing
Date Liabilities as set forth on the Closing Date Balance Sheet is less than the
amount of the Closing Date Liabilities as set forth on the Estimated Closing
Date Balance Sheet, the cash portion of the Purchase Price will be increased and
the difference will be paid in cash by PentaStar to the Shareholders in the
proportions set forth above under Section 2(k). If the amount of the Closing
Date Liabilities as set forth on the Closing Date Balance Sheet is equal to the
amount of the Closing Date Liabilities as set forth on the Estimated Closing
Date Balance Sheet, no adjustment will be made in the Purchase Price on account
of any Closing Date Liabilities. Second, in addition to the Purchase Price
adjustment described above in this Section 2(m)(iii), if the amount reflected as
Cash on the Closing Date Balance Sheet is less than the amount reflected as Cash
on the Estimated Closing Date Balance Sheet, the cash portion of the Purchase
Price will be reduced and the difference will be refunded in cash by the
Shareholders to PentaStar. If the amount reflected as Cash on the Closing Date
Balance Sheet exceeds the amount reflected as Cash on the Estimated Closing Date
Balance Sheet, the cash portion of the Purchase Price will be increased and the
difference will be paid in cash by PentaStar to the Shareholders in the
proportions set forth above under Section 2(k). If the amount reflected as Cash
on the Closing Date Balance Sheet is equal to the amount reflected as Cash on
the Estimated Closing Date Balance Sheet, no adjustment will be made to the
Purchase Price on account of any Cash. PentaStar will pay in cash to the
Shareholders, in the proportions set forth in Section 2(k), the amount of the
Purchase Price increase required under this Section 2(m)(iii), if any, within
the time period described in the first sentence of this Section 2(m)(iii). In
the event that the amounts reflected on the final Closing Date Balance Sheet
result in both a Purchase Price reduction and a Purchase Price increase under
this Section 2(m)(iii), the amounts of such reduction and increase will be
offset against each other and PentaStar or the Shareholders, as the case may be,
will make a payment to the other of the net amount of the adjustment to the
Purchase Price.
(iv) All amounts payable by the Shareholders to
PentaStar or any accounting firm under Section 2(m) will be paid as follows:
Each Shareholder will pay its pro rata share of such amount determined by
multiplying the total amount payable by a fraction, the numerator of which is
the number of Shares owned by such Shareholder immediately prior to the Closing,
and the denominator of which is total number of Shares; provided that, not
withstanding the foregoing, the Shareholders will, severally but not jointly, be
liable for any amounts payable to PentaStar under this Section 2(m). Any
adjustment in the Purchase Price made under this Section 2(m) will be allocated
as an adjustment to the consideration paid for the Company Shares.
(n) The Closing. The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place at the offices of Sherman &
Howard L.L.C. concurrently with the closing of the IPO. All transactions
contemplated by this Agreement will be effective at 12:00 a.m. local time in
Denver,
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<PAGE> 11
Colorado, on the day of the Closing (such effective time being the "Closing
Date").
(o) Deliveries at the Closing. At the Closing, (i) the
Shareholders will deliver to PentaStar the various certificates, instruments and
documents referred to in Section 6.1 and (ii) PentaStar will deliver to the
Shareholders the various certificates, instruments and documents referred to in
Section 6.2.
3. Representations and Warranties.
3.1. Representations and Warranties of the Company and the
Shareholders. The Company and the Shareholders each represent and warrant to
PentaStar that the statements contained in this Section 3.1 are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were then
substituted for the date of this Agreement throughout this Section 3.1).
(a) Organization, Good Standing, Etc. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Washington, and is qualified and authorized to do business as a
foreign corporation and is in good standing in Oregon, which is the only
jurisdiction in which the nature of the business conducted by it or the
properties owned, leased or operated by it make such qualification necessary.
The Company has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted. The
copies of the articles of incorporation (certified by the Secretary of State of
the State of Washington) and the bylaws of the Company, both as amended to date,
which have been delivered to PentaStar by the Shareholders and are attached as
Exhibits 3.1(a)(i)(A) and 3.1(a)(i)(B), respectively, are complete and correct,
and the Company is not in default under or in violation of any provision of its
articles of incorporation or bylaws. The minute books (which contain the records
of all meetings of or actions by the shareholders, the board of directors, and
any committees of the board of directors) and the stock certificate books and
the stock record books of the Company, copies of which have been delivered to
PentaStar by the Shareholders, are correct and complete.
(b) Ownership and Capitalization.
(i) The authorized capital stock of the Company
consists of 1,000,000 shares of common stock, no par value. Prior to the
Stock/LLC Exchange, each Shareholder owned, and immediately prior to the Closing
each Shareholder will own, beneficially and of record, free and clear of any
Encumbrance or Tax, the number of shares of the common stock, no par value, of
the Company (the "Company Shares") set forth opposite such Shareholder's name in
Section 2(k) above, and the Company Shares reflected in Section 2(k) constitute
all of the issued and outstanding capital stock of the Company. All of the
issued and outstanding shares of the Company's capital stock have been duly
authorized and validly issued, and are fully paid and nonassessable, with no
personal Liability attaching to the ownership thereof. There is no authorized or
outstanding stock or security convertible into or exchangeable for, or any
authorized or outstanding option, warrant or other right to subscribe for or to
purchase, or convert any obligation into, any unissued shares of the Company's
capital stock or any
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<PAGE> 12
treasury stock, and the Company has not agreed to issue any security so
convertible or exchangeable or any such option, warrant or other right. There
are no authorized or outstanding stock appreciation, phantom stock, profit
participation or similar rights with respect to the Company. There are no voting
trusts, voting agreements, proxies or other agreements or understandings with
respect to any capital stock of the Company. Except as set forth on Exhibit
3.1(b) (i), all of which the Shareholders shall cause to be terminated prior to
the Closing, there are no existing rights of first refusal, buy-sell
arrangements, options, warrants, rights, calls, or other commitments or
restrictions of any character relating to any of the Shares, except those
restrictions on transfer imposed by the Securities Act of 1993, as amended, and
applicable state securities laws.
(ii) Except as set forth on Exhibit 3.1(b)(ii), the
Company has no Subsidiaries and no capital stock, securities convertible into
capital stock, or any other equity interest in any other corporation,
partnership, limited partnership, limited liability company, association, joint
venture or other Person. Each of the entities listed on Exhibit 3.1(b)(ii) is
wholly-owned, directly or indirectly, by the Company, is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation, as set forth on Exhibit 3.1(b)(ii), and is qualified to do
business as a foreign corporation and is in good standing in the states set
forth on Exhibit 3.1(b)(ii), which are the only jurisdictions in which the
nature of the business conducted by it or the properties owned, leased or
operated by it make such qualification necessary. No Person has any right to
acquire any interest in any Subsidiary and there are no authorized or
outstanding stock appreciation, phantom stock, profit participation or similar
rights with respect to any Subsidiary. Each such Subsidiary has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as now being conducted. Exhibit 3.1(b)(ii) describes
Network Communication Integration, Inc., its relationship to the Company, the
business it conducts and the Company employees.
(c) Authority; No Violation. (i) Each Shareholder and each
relative or affiliate of the Company or of a Shareholder who is party to any
Other Seller Agreement has full and absolute right, power, authority and legal
capacity to execute, deliver and perform this Agreement and all Other Seller
Agreements to which such Shareholder, relative or affiliate is a party, and this
Agreement constitutes, and the Other Seller Agreements will when executed and
delivered constitute, the legal, valid and binding obligations of, and shall be
enforceable in accordance with their respective terms against, each such
Shareholder, relative or affiliate who is a party thereto. The execution,
delivery and performance of this Agreement and the Other Seller Agreements and
the consummation of the transactions contemplated hereby and thereby will not
(A) violate any Legal Requirement to which the Company, any Shareholder, or any
relative or affiliate of the Company or of any Shareholder who is a party to any
Other Seller Agreement is subject or any provision of the articles of
incorporation or bylaws of the Company or of any such affiliate, or (B) violate,
with or without the giving of notice or the lapse of time or both, or conflict
with or result in the breach or termination of any provision of, or
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<PAGE> 13
constitute a default under, or give any Person the right to accelerate any
obligation under, or result in the creation of any Encumbrance upon any
properties, assets or business of the Company, of any Shareholder, or of any
such relative or affiliate pursuant to any indenture, mortgage, deed of trust,
lien, lease, license, Permit, agreement, instrument or other arrangement to
which the Company, any Shareholder or any such relative or affiliate is a party
or by which the Company, any Shareholder, or any such relative or affiliate or
any of their respective assets and properties is bound or subject. Except for
notices that will be given and consents that will be obtained by the
Shareholders prior to the Closing (each of which is set forth in Exhibit
3.1(c)), neither the Company, any Shareholder, nor any such relative or
affiliate need give any notice to, make any filing with or obtain any
authorization, consent or approval of any Governmental Authority or other Person
in order for the parties to consummate the transactions contemplated by this
Agreement and the Other Seller Agreements.
(d) Financial Statements; Absence of Liabilities. (i) The
audited balance sheets of the Company as of December 31, 1997 and December 31,
1998, the related statements of income, shareholders' equity and cash flows for
the fiscal years then ended, the unaudited balance sheet of the Company as of
June 30, 1999 (the latter being referred to as the "Latest Balance Sheet"), and
the related statements of income, shareholders' equity and cash flows for the
six-month period then ended have been prepared in accordance with GAAP on a
consistent basis (except that the Latest Balance Sheet and the related
statements of income, shareholders' equity and cash flows for the six-month
period ended June 30, 1999 may be subject to customary year-end adjustments,
none of which will be material in amount), are in accordance with the books and
records of the Company (which books and records are complete and correct in all
material respects), and, to the best knowledge of the Shareholders, fairly
present the financial position and results of operations of the Company in all
material respects as of such dates and for each of the periods indicated. As of
the date of each of such balance sheet, to the best knowledge of the
Shareholders, the Company had no Liability other than those set forth on each
such balance sheet. Copies of the financial statements described in the first
sentence in this Section 3.1(d) are attached as Exhibit 3.1(d)(i)(A). To the
best knowledge of the Shareholders, the expenses itemized on Exhibit
3.1(d)(i)(B) and reflected in the Company's financial performance for the
12-month period ended December 31, 1998 will not be realized on an on-going
basis after the Closing.
(ii) Since the date of the Latest Balance Sheet, the
Company has not incurred or become subject to any Liability other than
Liabilities incurred in the ordinary course of business. As of the Closing, the
Company will have no Liability (and there is no basis for the assertion of any
Liability), except for the Retained Liabilities. Notwithstanding anything to the
foregoing in this Section 3.1(d), the representations set forth in this Section
3.1(d) will not be qualified or deemed to be qualified as to the knowledge or
best knowledge with respect to Schillinger.
(e) Absence of Certain Agreements, Changes or Events. The
Company is not, except as set forth on Exhibit 3.1(e)(i), a party to or
otherwise bound by any material contract or agreement (i) pursuant to which the
Company is obligated to furnish any services, product or equipment and (ii) that
has been prepaid with respect to any period after the Closing Date. Since June
30, 1999, the Company has not (i) incurred any debt, indebtedness
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<PAGE> 14
or other Liability, except current Liabilities incurred in the ordinary course
of business; (ii) delayed or postponed the payment of accounts payable or other
Liabilities or accelerated the collection of any receivable beyond stated,
normal terms; (iii) sold or otherwise transferred any of its assets or
properties; (iv) except as disclosed in Exhibit 3.1(e)(iv), cancelled,
compromised, settled, released, waived, written-off or expensed any account or
note receivable, right, debt or claim involving more than $5,000 in the
aggregate; (v) changed in any significant manner the way in which it conducts
its business; (vi) except as provided in Exhibit 3.1(e)(vi) made or granted any
individual wage or salary increase in excess of 10% or $1.00 per hour, as
applicable, any general wage or salary increase, or any additional benefits of
any kind or nature; (vii) except as otherwise expressly permitted by this
Section 3.1(e), (A) entered into any contracts or agreements, or made any
commitments, involving more than $5,000 individually or in the aggregate or (B)
accelerated, terminated, delayed, modified or cancelled any agreement, contract,
lease or license (or series of related agreements, contracts, leases and
licenses) involving more than $5,000 individually or in the aggregate; (viii)
except for the cancellation or write down of accounts receivable in accordance
with its doubtful accounts as disclosed on Exhibit 3.1(e)(iv), suffered any
material adverse fact or change, including, without limitation, to or in its
business, assets or financial condition or customer or service provider
relationships; (ix) except for the payment to Nicolas van Gelder for the
purchase of 6,000 of his Company Shares pursuant to an agreement dated December
12, 1999 (a copy of which has been provided to PentaStar), made any payment or
transfer to or for the benefit of any shareholder, officer or director or any
relative or affiliate thereof or permitted any Person, including, without
limitation, any Shareholder, officer, director or employee or any relative or
affiliate thereof, to withdraw assets from the Company (other than payment to
the Shareholders of the proportionate monthly amount of their respective normal
annualized salaries due and payable during such period); (x) or agreed to incur,
take, enter into, make or permit any of the matters described in clauses (i)
through (ix).
(f) Tax Matters.
(i) The Company has filed all Tax Returns that it was
required to file. All such Tax Returns were correct and complete in all material
respects. All material Taxes owed by the Company (whether or not shown on any
Tax Return) have been paid. Except for the Company's 1998 federal income tax
return, the Company is not currently the beneficiary of any extension of time
within which to file any Tax Return. No claim has ever been made by an authority
in a jurisdiction where the Company does not file Tax Returns that it is or may
be subject to taxation by that jurisdiction. There are no Encumbrances on any of
the assets of the Company that arose in connection with any failure (or alleged
failure) to pay any Tax.
(ii) To the best knowledge of the Shareholders, the
Company has withheld and paid all Taxes required to have been withheld and paid
in connection with amounts paid or owing to any employee, independent
contractor, creditor, shareholder or other third party.
(iii) To the best knowledge of the Shareholders,
there is no basis for any authority to assess any additional Taxes for any
period for which Tax Returns have been filed. There is no pending or threatened
dispute or claim concerning any Tax Liability of the
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<PAGE> 15
Company. Exhibit 3.1(f)(iii) lists all federal, state, local and foreign income
Tax Returns (except federal payroll Tax Returns) filed with respect to the
Company for taxable periods ended on or after December 31, 1992, indicates those
Tax Returns that have been audited and indicates those Tax Returns that
currently are the subject of audit. The Shareholders have delivered to PentaStar
correct and complete copies of all federal income Tax Returns, examination
reports, and statements of deficiencies filed or assessed against or agreed to
by the Company since December 31, 1992.
(iv) The Company has not waived any statute of
limitations in respect of Taxes or agreed to any extension of time with respect
to a Tax assessment or deficiency.
(v) Neither the Company nor any of its shareholders
has ever filed (A) an election pursuant to Section 1362 of the Code that the
Company be taxed as an "S" corporation, except as set forth on Exhibit
3.1(f)(v), or (B) a consent pursuant to Section 341(f) of the Code relating to
collapsible corporations. The Company has not made any payments, is not
obligated to make any payments and is not a party to any agreement that under
certain circumstances could obligate it to make any payments that will not be
deductible under Code Section 280G. The Company has not been a United States
real property holding corporation within the meaning of Code Section 897(c)(2)
during the applicable period specified in Code Section 897(c)(1)(A)(ii). The
Company has disclosed on its federal income Tax Returns all positions taken
therein that could give rise to a substantial understatement of federal income
Tax within the meaning of Code Section 6662. The Company is not a party to any
Tax allocation or sharing agreement. The Company has not been a member of an
Affiliated Group filing a consolidated federal income Tax Return (other than a
group the common parent of which was the Company) since the distribution of the
Company's Shares to the Shareholders in 1997 pursuant to Section 355 of the Code
and, to the best knowledge of the Shareholders, the Company has no Liability for
the Taxes of any Person (other than the Company) under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local, or foreign law), as
a transferee or successor, by contract or otherwise.
(vi) Exhibit 3.1(f)(vi) sets forth the following
information with respect to the Company as of the most recent practicable date:
(A) the basis of the Company in its assets; and (B) the amount of any net
operating loss, net capital loss, unused investment or other credit, unused
foreign tax credit or excess charitable contribution allocable to the Company.
(g) Assets and Properties.
(i) The Company has good and marketable title to, or
a valid leasehold interest or interest as a licensee in, the properties and
assets used or held for use by it, located on its Premises, or shown on the
Latest Balance Sheet or acquired after the date thereof. Except as provided in
Exhibit 3.1(g)(i), as of the Closing, all of the Acquired Assets will be owned
by the Company, free and clear of all Encumbrances except for the Retained
Liabilities. Since June 30, 1999, the Company has not entered into any contract
or made any commitment to sell all or any part of its assets. The Acquired
Assets constitute all of the real, personal and mixed assets and property, both
tangible and intangible, including Intellectual Property, which are being used
or held for use by the Company in the conduct of the
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<PAGE> 16
business and operations of the Company, consistent with historical and current
practices. The Company owns or leases all equipment and other tangible assets
necessary for the conduct of its business as presently conducted and as
presently proposed to be conducted. Each such tangible asset material to the
Company's operations has been maintained in accordance with normal industry
practice and is in good operating condition and repair (subject to normal wear
and tear). All leases of real property between the Company and any Shareholder,
officer or director or any relative or affiliate thereof are on fair market
terms (including rent at fair market value). None of the Shareholders, nor any
relative or affiliate thereof, own any asset, tangible or intangible, which is
used in the business of the Company, other than real property leased to the
Company at fair market value which leases are disclosed in Schedule 3.1(h).
(ii) The Premises constitute all of the real
property, buildings and improvements used by the Company in its business. To the
best knowledge of the Shareholders, the Premises have been occupied, operated
and maintained by the Company in accordance with applicable Legal Requirements.
The Company has not received notice of violation of any Legal Requirement or
Permit relating to its operations or its owned or leased properties.
(iii) No party to any lease with respect to any
Premises has repudiated any provision thereof, and there are no disputes, oral
agreements or forbearance programs in effect as to any such lease.
(h) Lists of Contracts and Other Matters. Attached as Exhibit
3.1(h) is a correct and complete list setting forth the following items:
(i) the following contracts and other agreements in
effect as of the Closing Date to which the Company is a party:
(A) any agreement (or group of related
agreements) for the lease of personal property to or from any Person providing
for lease payments in excess of $5,000 per year;
(B) any agreement pursuant to which the
Company, or any of the Shareholders on behalf of the Company, has made a deposit
in an amount greater than $5,000;
(C) any agreement (or group of related
agreements) for the purchase or sale of supplies, products or other personal
property, or for the furnishing or receipt of services, the performance of which
will extend over a period of more than one year, result in a material loss to
the Company or involve consideration in excess of $10,000;
(D) any agreement in which the Company
participates in a partnership or joint venture;
(E) any agreement (or group of related
agreements) under which the
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<PAGE> 17
Company has created, incurred, assumed or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation in excess of $10,000 or
under which it has granted any Encumbrances on any of its assets, tangible or
intangible;
(F) any agreement concerning confidentiality
or noncompetition;
(G) any agreement with any of the
Shareholders or any relative or affiliate thereof (other than the Company);
(H) any profit sharing, stock option, stock
purchase, phantom stock, stock appreciation, profit participation, deferred
compensation, severance or other plan or arrangement;
(I) any collective bargaining agreement;
(J) any agreement for the employment of any
individual on a full-time, part-time, consulting or other basis or any agreement
providing severance benefits;
(K) any agreement under which the Company
has advanced or loaned any amount to any of its directors, officers and
employees outside the ordinary course of business;
(L) any agreement obligating the Company to
meet another party's unspecified requirements for goods or services or
obligating it to purchase an unspecified amount of goods or services based on
another party's ability to supply them;
(M) any agreement under which the
consequences of a default or termination could have a material adverse effect on
the business, financial condition, operations, results of operations or future
prospects of the Company;
(N) any other agreement (or group of related
agreements) the performance of which involves consideration in excess of $10,000
in any one year; or
(O) any agreement with Network
Communications Integration, Inc. ("NCI") or any affiliate thereof.
(ii) All material claims, deposits, causes of action,
choses in action, rights of recovery, rights of setoff and rights of recoupment
of the Company.
(iii) All material franchises, approvals, Permits,
licenses, Orders, registrations, certificates, variances and similar rights of
the Company (all of which are in full force and effect).
(iv) Each item of Intellectual Property owned by the
Company or which is used by the Company in its business and, in each case where
the Company is not the owner, the owner of the Intellectual Property.
(v) The name of each bank or other financial
institution or entity in which the Company has an account or safe deposit box
(with the identifying account number or symbol) and the
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<PAGE> 18
names of all persons authorized to draw thereon or to have access thereto.
The Shareholders have delivered to PentaStar a correct and complete
copy of each written agreement and a written summary setting forth the terms and
conditions of each oral agreement referred to in Section 3.1(h)(i). With respect
to each such agreement, and except to the extent that such enforcement may be
limited by applicable bankruptcy, reorganization, insolvency and other laws of
general application affecting enforcement of creditors' rights generally: (A)
the agreement is legal, valid, binding, enforceable and in full force and
effect; (B) the agreement will continue to be legal, valid, binding, enforceable
and in full force and effect on identical terms following the consummation of
the transactions contemplated hereby; (C) neither the Company nor, to the best
knowledge of the Shareholders, any other party is in breach or default, and, to
the best knowledge of the Shareholders, no event has occurred which, with notice
or lapse of time, would constitute a breach or default, or permit termination,
modification or acceleration under the agreement; and (D) no party has
repudiated any provision of the agreement.
(i) Litigation; Compliance with Applicable Laws and Rights.
(i) There is no outstanding Order against, nor,
except as set forth on Exhibit 3.1(i)(i), is there any litigation, proceeding,
arbitration or investigation by any Governmental Authority or other Person
pending or, to the best knowledge of the Shareholders, threatened against, the
Company, its assets or its business or relating to the transactions contemplated
by this Agreement, nor is there any basis for any such action.
(ii) To the best knowledge of the Shareholders,
except as set forth on Exhibit 3.1(i)(ii), neither the Company nor the Company's
assets are in violation of any applicable Legal Requirement or Right. The
Company has not received notice from any Governmental Authority or other Person
of any violation or alleged violation of any Legal Requirement or Right, and no
action, suit, proceeding, hearing, investigation, charge, complaint, claim,
demand or notice has been filed or commenced or is pending or, to the best
knowledge of the Shareholders, threatened against, the Company alleging any such
violation.
(j) Notes and Accounts Receivable. Except as disclosed in
Exhibit 3(e)(iv), the notes and accounts receivable of the Company reflected on
its Latest Balance Sheet, and all notes and accounts receivable arising on or
prior to the Closing Date, arose and will arise from bona fide transactions by
the Company in the ordinary course of business and are valid receivables with
trade customers subject to no setoffs or counterclaims.
(k) Product Quality, Warranty and Liability. To the best
knowledge of the Shareholders, all services and products sold, leased, provided
or delivered by the Company to customers on or prior to the Closing Date conform
to applicable contractual commitments, express and implied warranties, product
and service specifications and quality standards, and there is no basis for any
Liability for replacement or repair thereof or other damages in connection
therewith. Except as disclosed on Exhibit 3.1(k), no service or product sold,
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<PAGE> 19
leased, provided or delivered by the Company to customers on or prior to the
Closing is subject to any guaranty, warranty or other indemnity beyond the
applicable standard terms and conditions of sale or lease. The Company has no
Liability and, to the best knowledge of the Shareholders, there is no basis for
any Liability arising out of any injury to a Person or property as a result of
the ownership, possession, provision or use of any service or product sold,
leased, provided or delivered by the Company on or prior to the Closing Date.
All product or service liability claims that have been asserted against the
Company since January 1, 1996, whether covered by insurance or not and whether
litigation has resulted or not, other than those listed and summarized on
Exhibit 3.1(i)(i), are listed and summarized on Exhibit 3.1(k).
(l) Insurance. The Company has policies of insurance (i)
covering risk of loss on the Acquired Assets, (ii) covering products and
services liability and liability for fire, property damage, personal injury and
workers' compensation coverage, and (iii) for business interruption, all, to the
best knowledge of the Shareholders, with responsible and financially sound
insurance carriers in adequate amounts and in compliance with governmental
requirements and in accordance with good industry practice. All such insurance
policies are valid, in full force and effect and enforceable in accordance with
their respective terms and no party has repudiated any provision thereof. All
such policies will remain in full force and effect until the Closing Date.
Neither the Company nor, to the best knowledge of the Shareholders, any other
party to any such policy is in breach or default (including with respect to the
payment of premiums or the giving of notices) in the performance of any of their
respective obligations thereunder, and no event exists which, with the giving of
notice or the lapse of time or both, would constitute a breach, default or event
of default, or permit termination, modification or acceleration under any such
policy. There are no claims, actions, proceedings or suits arising out of or
based upon any of such policies nor, to the best knowledge of the Shareholders,
does any basis for any such claim, action, suit or proceeding exist. All
premiums have been paid on such policies as of the date of this Agreement and
will be paid on such policies through the Closing Date. The Company has been
covered since the inception of the Company by insurance in scope and amount
customary and reasonable for the businesses in which it has engaged during the
aforementioned period. All claims made during such period with respect to any
insurance coverage of the Company, other than those described on Exhibit 3.1(k),
are set forth on Exhibit 3.1(l).
(m) Pension and Employee Benefit Matters.
(i) Exhibit 3.1(m)(i) lists each Employee Benefit
Plan that is an Employee Welfare Benefit Plan (the "Company Welfare Plans"). As
of the Closing Date and for the preceding three years, neither the Company nor
any ERISA Affiliate has sponsored, maintained, contributed to, or has had any
obligation under any Employee Benefit Plan, other than the Company Welfare Plans
and the Company's Simple IRA Plan. Correct and complete copies of each Company
Welfare Plan have been delivered to PentaStar by the Shareholders.
(ii) Each Company Welfare Plan has been maintained
and administered in substantial compliance with its terms and with all
applicable Legal Requirements.
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<PAGE> 20
(iii) Exhibit 3.1(m)(iii) lists each employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits,
deferred compensation, profit sharing, bonuses, stock options, stock
appreciation rights or other forms of incentive compensation, reduced interest
or interest free loans (other than sales advances made in the ordinary course of
business), mortgages, relocation assistance or post-retirement insurance,
compensation or other benefits that: (A) is not an Employee Benefit Plan; (B) is
entered into, maintained or contributed to, by the Company; and (C) covers any
employee or former employee of the Company or any relative thereof. Such
contracts, plans and arrangements as are described in this Section 3.1(m)(iii),
are hereinafter referred to collectively as the "Benefit Arrangements." Copies
and descriptions (including descriptions of the number and employment
classifications of employees covered by each such Benefit Arrangement) have been
delivered by the Shareholders to PentaStar and attached hereto as part of
Exhibit 3.1(m)(iii). Each Benefit Arrangement has been maintained and
administered in substantial compliance with its terms and with the requirements
prescribed by any and all Legal Requirements that are applicable to each such
Benefit Arrangement.
(iv) No Company Welfare Plan is maintained in
connection with any trust described in Section 501(c)(9) of the Code.
(v) There have been no prohibited transactions with
respect to any Company Welfare Plan. No "Fiduciary" (as defined in Section 3(21)
of ERISA) has any Liability for breach of fiduciary duty or any other failure to
act or comply in connection with the administration or investment of the assets
of any such Company Welfare Plan. No action, suit, proceeding, hearing or
investigation with respect to the administration or the investment of the assets
of any Company Welfare Plan (other than routine claims for benefits) is pending
or, to the best knowledge of the Shareholders, is threatened. None of the
Shareholders has any knowledge of any basis for any such action, suit,
proceeding, hearing or investigation.
(vi) The Company does not maintain and has never
maintained nor contributes, or ever has contributed, or ever has been required
to contribute, to any Company Welfare Plan providing health or medical benefits
for current or future retired or terminated employees, their spouses or their
dependents (other than in accordance with Code Section 4980B). No condition
exists that would prevent the Company from amending or terminating any Company
Welfare Plan or Benefit Arrangement providing health or medical benefits in
respect of any active or retired employees of the Company.
(vii) Any Company Welfare Plan that is a "group
health plan" (as defined in Code Section 5000(b)(l)) has been administered in
accordance with the requirements of Part 6 of Subtitle B of Title I of ERISA and
Code Section 4980B and nothing done or omitted to be done in connection with the
maintenance or administration of any Company Welfare Plan that is a "group
health plan" has made or will make the Company subject to any liability under
Title I of ERISA, excise Tax Liability under Code Section 4980B or has resulted
or will result in any loss of income exclusion for a participant under Code
Sections 105(h) or 106.
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<PAGE> 21
(viii) There is no contract, agreement, plan or
arrangement covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to the terms of Section 280G or 162(a)(l) of
the Code.
(ix) The Company has made, before the date of this
Agreement, all required contributions and premium payments under each Company
Welfare Plan and Benefit Arrangement for all completed fiscal years including
contributions that may not by law have otherwise been required to be made until
the due date for filing the Tax Return for any completed fiscal year.
(n) Employees and Labor. Except as set forth on Exhibit
3.1(n), the Company has not received any notice, nor, to the best knowledge of
the Shareholders, is there any reason to believe that any executive or Key
Employee of the Company or any material group of employees of the Company has
any plans to terminate his, her or its employment with the Company. No executive
or Key Employee is subject to any agreement, obligation, Order or other legal
hindrance that impedes or might impede such executive or Key Employee from
devoting his or her full business time to the affairs of the Company prior to
the Closing Date and, if such person becomes an employee of PentaStar, to the
affairs of PentaStar after the Closing Date. The Company will not be required to
give any notice under the Worker Adjustment and Retraining Notification Act, as
amended (29 U.S.C.A. Section 2101, et. seq.), or any similar Legal Requirement
as a result of this Agreement, the Other Seller Agreements or the transactions
contemplated hereby or thereby. To the best knowledge of the Shareholders, the
Company does not have any labor relations problems or disputes, nor has the
Company experienced any strikes, grievances, claims of unfair labor practices or
other collective bargaining disputes. The Company is not a party to or bound by
any collective bargaining agreement, there is no union or collective bargaining
unit at the Company's facilities, and no union organization effort has been
threatened, initiated or is in progress with respect to any employees of the
Company.
(o) Customer and Service Provider Relationships. Exhibit
3.1(o)(i)(A) lists each customer that individually or with its affiliates was,
based on the Company's revenues during the fiscal year ended December 31, 1998,
one of the Company's ten largest customers during such fiscal year or accounted
for 2% or more of the Company's revenues during such fiscal year (the "Principal
Customers"). Exhibit 3.1(o)(i)(B) lists each Person who is a service provider to
the customers of the Company as of the date of this Agreement (the "Principal
Providers"). The Company has good commercial working relationships with its
Principal Customers and Principal Providers and since December 31, 1998, no
Principal Customer or Principal Provider has cancelled or otherwise terminated
its relationship with the Company, materially decreased its purchases from or
services supplied to the Company, or threatened to take any such action;
provided, however, that US West, which accounts for nearly all of the Company's
revenue, is subject to a contract that terminates on December 31, 2000, a copy
of which is included in Exhibit 3.1(o)(i)(C) and pursuant to which there is no
right to extend ("US West Contract"). To the best knowledge of the Shareholders,
the Shareholders have no reasonable basis to anticipate any problems with the
Company's Principal Customer or Principal Provider relationships, subject to the
foregoing. To the best knowledge of the
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<PAGE> 22
Shareholders, no Principal Customer or Principal Provider has any plans to
terminate their relationship with the Company and the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby will
not adversely affect the relationship of the Company with any Principal Customer
or Principal Provider prior to the Closing Date or of PentaStar with any
Principal Customer or Principal Provider after the Closing Date; provided that
the Company obtains the consent of US West to the Transaction.
(p) Environmental Matters. To the best knowledge of the
Shareholders, the Company is conducting and at all times has conducted its
business and operations, and has occupied, used and operated the Premises and
all other real property and facilities presently or previously owned, occupied,
used or operated by the Company, in compliance with all Environmental
Obligations and so as not to give rise to Liability under any Environmental
Obligations or to any impact on the Company's business or activities. The
Company has no Liability under any Environmental Obligation, nor is there any
basis for any such Liability.
(q) Intellectual Property. The Company owns or has the legal
right to use each item of Intellectual Property required to be identified on
Exhibit 3.1(h). Except as provided in Exhibit 3.1(h), to the best knowledge of
the Shareholders, the continued operation of the business of the Company as
currently conducted will not interfere with, infringe upon, misappropriate or
conflict with any Intellectual Property rights of another Person. To the best
knowledge of the Shareholders, no other Person has interfered with, infringed
upon, misappropriated or otherwise come into conflict with any Intellectual
Property rights of the Company. The Company has not granted any license,
sublicense or permission with respect to any Intellectual Property owned or used
in the Company's business. No claims are pending or, to the best knowledge of
the Shareholders, threatened, that the Company is infringing or otherwise
adversely affecting the rights of any Person with regard to any Intellectual
Property. To the best knowledge of the Shareholders, all of the Intellectual
Property that is owned by the Company is owned free and clear of all
Encumbrances and was not misappropriated from any Person, and all portions of
the Intellectual Property that are licensed by the Company are licensed pursuant
to valid and existing license agreements. The consummation of the transactions
contemplated by this Agreement will not result in the loss or material
diminution of any Intellectual Property or rights in Intellectual Property.
(r) Year 2000 Warranty. To the best knowledge of the
Shareholders, the computer software owned by the Company and all other
Intellectual Property used or held for use by the Company in its business
accurately processes date/time data (including calculating, comparing, and
sequencing) from, into, and between the twentieth and twenty-first centuries,
and the years 1999 and 2000 and leap year calculations and the date September 9,
1999 when either (i) used as a standalone application, or (ii) integrated into
or otherwise used in conjunction with third party hardware, software, firmware
and data over which the Shareholders and the Company have no control ("Third
Party Products") with which such Company software or other Intellectual Property
was designated or intended to operate at the
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<PAGE> 23
time such Company software was (i) developed or (ii) first provided to the
Company's customers, or tested by the Company for such customers, whichever is
later. Notwithstanding the foregoing, the Company shall not be considered to be
in breach of the representation and warranty in the immediately preceding
sentence if the failure of such Company software to comply with such
representation and warranty is attributable solely to (x) a failure by any Third
Party Product to accurately process date/time data (including but not limited
to, calculating, comparing, and sequencing) from, into, and between the
twentieth and twenty-first centuries, and the years 1999 and 2000 and leap year
calculations and the date September 9, 1999; or (y) any modification of the
Company software by any party other than the Company (unless such modification
was made at the direction of the Company).
(s) Brokers' Fees. Except as set forth on Exhibit 3.1(s), the
Company does not have, and will not have as a result of the consummation of this
Agreement, any Liability to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement.
(t) Guaranties. The Company is not a guarantor or otherwise
liable for any Liability (including indebtedness for borrowed money) of any
other Person. Except as set forth on Exhibit 3.1(t), no Person is a guarantor or
otherwise liable for any Liability (including indebtedness for borrowed money)
of the Company.
(u) Disclosure. None of the documents or information provided
to PentaStar by the Company, any Shareholder or any agent or employee thereof in
the course of PentaStar's due diligence investigation and the negotiation of
this Agreement and Sections 3.1, 3.2 and 3.3 of this Agreement and the
disclosure Exhibits referred to therein, including the financial statements
referred to above in Section 3.1, contains any untrue statement of any material
fact or omit to state a material fact necessary in order to make the statements
contained herein or therein not misleading. To the best knowledge of the
Shareholders, there is no fact which materially adversely affects the business,
condition, affairs or operations of the Company or any of its properties or
assets which has not been set forth in this Agreement or such Exhibits,
including such financial statements.
Nothing in the disclosure Exhibits referred to in Section 3.1
shall be deemed adequate to disclose an exception to a representation or
warranty made herein unless the applicable disclosure Exhibit identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate to
disclose an exception to a representation or warranty made herein (unless the
representation or warranty has to do with the existence of the document or other
item itself). Each of the Company and the Shareholders acknowledge and agree
that the fact that it or they have made disclosures pursuant to Section 3.1, 3.2
or 3.3 or otherwise of matters, or did not have knowledge of matters, which
result in Adverse Consequences to PentaStar or the Surviving Corporation shall
not relieve the Shareholders of their obligation pursuant to Article 7 to
indemnify and hold PentaStar harmless from all Adverse Consequences, to the
extent provided in this Agreement.
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<PAGE> 24
3.2. Additional Representations and Warranties of the Shareholders
Relating to Underwriting. Each Shareholder represents and warrants to PentaStar
that the statements contained in Exhibit 3.2 will be correct and complete as of
the Closing Date and may be relied upon by PentaStar in making related
representations and warranties to the underwriters of PentaStar's IPO.
3.3. Representations and Warranties of Each Shareholder. Each
Shareholder represents and warrants to PentaStar that the statements contained
in this Section 3.3 are correct and complete as of the date of this Agreement
and will be correct and complete as of the Closing Date (as though made then and
as though the Closing Date were substituted for the date of this Agreement
throughout this Section 3.3).
(a) Investment Representations. (i) Such Shareholder is
acquiring the shares of PentaStar Common Stock to be issued to such Shareholder
pursuant to the Transaction (the "PentaStar Shares") for such Shareholder's own
account and not on behalf of any other Person; such Shareholder is aware and
acknowledges that the PentaStar Shares have not been registered under the
Securities Act, or applicable state securities laws, and may not be offered,
sold, assigned, exchanged, transferred, pledged or otherwise disposed of unless
so registered under the Securities Act and applicable state securities laws or
an exemption from the registration requirements thereof is available; (ii) such
Shareholder (or, if such Shareholder is not an "accredited investor" as defined
in Rule 501(a) of Regulation D promulgated under the Securities Act, such
Shareholder through such Shareholder's purchaser representative ("Purchaser
Representative") as duly designated pursuant to documentation delivered and
reasonably satisfactory to PentaStar on or before the execution of this
Agreement (the "Purchaser Representative Documents")) has been furnished all
information that such Shareholder (and such Shareholder's Purchaser
Representative, if such Shareholder is not an "accredited investor") deems
necessary to enable such Shareholder (and such Shareholder's Purchaser
Representative, if such Shareholder is not an "accredited investor") to evaluate
the merits and risks of an investment in PentaStar (including without limitation
the draft dated August 13, 1999 of PentaStar's Registration Statement on SEC
Form SB-2 relating to the IPO (the "Registration Statement") and the other
information described on Exhibit 3.3(a)(ii); such Shareholder (and such
Shareholder's Purchaser Representative if such Shareholder is not an "accredited
investor") has had a reasonable opportunity to ask questions of and receive
answers from PentaStar concerning PentaStar, the PentaStar Shares and any and
all matters relating to the transactions described herein or in the Registration
Statement, including, without limitation, the background and experience of the
current and proposed officers and directors of PentaStar, the plans for the
operations of the business of PentaStar, the business, operations and financial
condition of DMA Ventures, Inc. d/b/a Access Communications and any plans for
additional acquisitions, and all such questions, if any, have been answered to
the full satisfaction of such Shareholder (and such Shareholder's Purchaser
Representative, if such Shareholder is not an "accredited investor"); (iii) no
Person other than such Shareholder has (x) any rights in and to the PentaStar
Shares, which rights were obtained through or from such Shareholder; or (y) any
rights to acquire the PentaStar Shares, which rights were obtained through or
from such Shareholder; (iv) such Shareholder (or such Shareholder's Purchaser
Representative, if such Shareholder is not an "accredited investor") has such
knowledge and expertise in financial and business matters (including knowledge
and expertise
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<PAGE> 25
in the business and proposed business of PentaStar) that such Shareholder (or
such Shareholder's Purchaser Representative, if such Shareholder is not an
"accredited investor") is capable of evaluating the merits and risks involved in
an investment in the PentaStar Shares; and such Shareholder is financially able
to bear the economic risk of the investment in the PentaStar Shares, including a
total loss of such investment; (v) such Shareholder represents that it has
adequate means of providing for its current needs and has no need for liquidity
in its investment in the PentaStar Shares; such Shareholder has no reason to
anticipate any material change in its financial condition for the foreseeable
future; (vi) such Shareholder is aware that the acquisition of the PentaStar
Shares is an investment involving a risk of loss and that there is no guarantee
that such Shareholder will realize any gain from this investment, and that such
Shareholder could lose the total amount of its investment; (vii) such
Shareholder understands that no United States federal or state agency has made
any finding or determination regarding the fairness of the offering of the
PentaStar Shares for investment, or any recommendation or endorsement of the
offering of the PentaStar Shares; (viii) such Shareholder is acquiring the
PentaStar Shares for investment, with no present intention of dividing or
allowing others to participate in such investment or of reselling, or otherwise
participating, directly or indirectly, in a distribution of PentaStar Shares,
and shall not make any sale, transfer or pledge thereof without registration
under the Securities Act and any applicable securities laws of any state, unless
an exemption from registration is available, as established to the reasonable
satisfaction of PentaStar, by opinion of counsel or otherwise; (ix) except as
set forth herein, no representations or warranties have been made to such
Shareholder (or such Shareholder's Purchaser Representative, if such Shareholder
is not an "accredited investor") by PentaStar or any agent, employee or
affiliate of PentaStar, and in entering into this transaction such Shareholder
is not relying upon any information, other than from the results of independent
investigation by such Shareholder (or such Shareholder's Purchaser
Representative, if such Shareholder is not an "accredited investor"); and (x)
such Shareholder understands that the PentaStar Shares are being offered to such
Shareholder in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that
PentaStar is relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgments and understandings of such Shareholder
set forth herein (and in the Purchaser Representative Documents, if applicable)
in order to determine the applicability of such exemptions and the suitability
of such Shareholder to acquire the PentaStar Shares. Except as set forth on
Exhibit 3.3(a)(x) the Shareholder is an "accredited investor" as defined in Rule
501(a) of Regulation D promulgated under the Securities Act. Exhibit 3.3(a)(x)
also sets forth each Shareholder's state of residency.
All the certificates representing PentaStar Shares shall bear the
following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") NOR UNDER ANY STATE SECURITIES LAWS AND CAN
NOT BE TRANSFERRED, SOLD, ASSIGNED OR HYPOTHECATED UNTIL EITHER (I) A
REGISTRATION STATEMENT WITH RESPECT
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<PAGE> 26
THERETO IS DECLARED EFFECTIVE UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS
OR (II) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR OTHER
COUNSEL TO THE HOLDER OF SUCH SHARES, WHICH OPINION IS SATISFACTORY TO THE
COMPANY AND ITS COUNSEL, THAT SUCH SECURITIES MAY BE TRANSFERRED, SOLD, ASSIGNED
OR HYPOTHECATED WITHOUT REGISTRATION UNDER THE ACT OR APPLICABLE STATE
SECURITIES LAWS.
3.4. Representations and Warranties of PentaStar. PentaStar represents
and warrants to the Shareholders that the statements contained in this Section
3.4 are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout this
Section 3.4).
(a) Organization, Good Standing, Power, Etc. PentaStar is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. This Agreement and the Other PentaStar Agreements and
the transactions contemplated hereby and thereby have been duly approved by all
requisite corporate action. PentaStar has full corporate power and authority to
execute, deliver and perform this Agreement and the Other PentaStar Agreements,
and this Agreement constitutes, and the Other PentaStar Agreements will when
executed and delivered constitute, the legal, valid and binding obligations of
PentaStar, and shall be enforceable in accordance with their respective terms
against PentaStar.
(b) Ownership and Capitalization.
(i) As of the date hereof, the authorized, issued and
outstanding shares of the capital stock of PentaStar are as set forth on Exhibit
3.4(b)(i). Upon the Closing, the authorized, issued and outstanding shares of
capital stock of PentaStar will be as set forth in the Prospectus included in
the Registration Statement at the time the Registration Statement is declared
effective by the SEC.
(ii) At the time of issuance thereof and delivery to
the Shareholders, the PentaStar Shares to be delivered to the Shareholders
pursuant to this Agreement will constitute valid, duly authorized and legally
issued shares of PentaStar's Common Stock, and will be fully paid and
nonassessable. Such PentaStar Shares shall at the time of such issuance and
delivery be free and clear of any Encumbrances of any kind or character, other
than those arising under applicable federal and state securities laws, under
this Agreement or under any Other Seller Agreement to which such Shareholder is
a party.
(c) No Violation of Agreements, Etc. The execution, delivery
and performance of this Agreement and the Other PentaStar Agreements, and the
consummation of the transactions contemplated hereby and thereby will not (i)
violate any Legal Requirement to which PentaStar is subject or any provision of
the Certificate of Incorporation or Bylaws of PentaStar, or (ii) violate, with
or without the giving of notice or the lapse of time or both, or conflict with
or result in the breach or termination of any provision of, or constitute a
default under, or give any Person the right to accelerate any obligation under,
or result in the creation
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<PAGE> 27
of any Encumbrance upon any properties, assets or business of PentaStar pursuant
to any indenture, mortgage, deed of trust, lien, lease, license, agreement,
instrument or other arrangement to which PentaStar is a party or which PentaStar
or any of its assets and properties is bound or subject. Except for notices and
consents that will be given or obtained by PentaStar prior to the Closing,
PentaStar does not need to give any notice to, make any filing with or obtain
any authorization, consent or approval of any Governmental Authority or other
Person in order for the parties to consummate the transactions contemplated by
this Agreement.
(d) At the time that the Registration Statement is declared
effective by the SEC, the Registration Statement and the Prospectus will not
contain any untrue statement of material fact or omit to state a material fact
necessary in order to make the statements contained therein not misleading.
3.5. Representations and Warranties of Acquiror. Acquiror represents
and warrants to the Company and the Shareholders that the statements contained
in this Section 3.5 are correct and complete as of the date of this Agreement
and will be correct and complete as of the Closing Date (as though made then and
as though the Closing Date were substituted for the date of this Agreement
throughout this Section 3.5).
(a) Organization, Good Standing, Power, Etc. Acquiror is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. This Agreement and the transactions contemplated
hereby and thereby have been duly approved by all requisite corporate action of
Acquiror. Acquiror has full corporate power and authority to execute, deliver
and perform this Agreement, and this Agreement constitutes the legal, valid and
binding obligations of Acquiror, and shall be enforceable in accordance with its
terms against Acquiror. The copies of the articles of incorporation (certified
by the Secretary of State of Delaware), bylaws and minute book of Acquiror are
attached as Exhibit 3.5(a) are complete and correct and the Surviving
Corporation is not in default under or in violation of any provision of its
articles of incorporation or bylaws.
(b) Ownership and Capitalization.
(i) As of the date hereof, all of the authorized,
issued and outstanding shares of the capital stock of Acquiror are owned by
PentaStar.
(c) No Violation of Agreements, Etc. The execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby and thereby will not (i) violate any Legal Requirement to
which Acquiror is subject or any provision of the certificate of incorporation
or bylaws of Acquiror or (ii) violate, with or without the giving of notice or
the lapse of time or both, or conflict with or result in the breach or
termination of any provision of, or constitute a default under, or give any
Person the right to accelerate any obligation under, or result in the creation
of any Encumbrance upon any properties, assets or business of Acquiror pursuant
to any indenture, mortgage, deed of trust,
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<PAGE> 28
lien, lease, license, agreement, instrument or other arrangement to which
Acquiror is a party or which Acquiror or any of its assets and properties is
bound or subject. Except for notices and consents that will be given or obtained
by Acquiror prior to the Closing, Acquiror does not need to give any notice to,
make any filing with or obtain any authorization, consent or approval of any
Governmental Authority or other Person in order for the parties to consummate
the transactions contemplated by this Agreement.
3.6. Survival of Representations. The representations and warranties
contained in Sections 3.1, 3.2, 3.3 and 3.4 and the Liabilities of the parties
with respect thereto shall survive any investigation thereof by the parties and
shall survive the Closing for 30 months, except that the Liabilities of the
Shareholders with respect to the representations and warranties set forth in
Sections 3.1(a), 3.1(b), 3.1(c), 3.1(f), 3.1(m), 3.1(p), 3.2 and 3.3 and the
Liabilities of PentaStar with respect to the representations and warranties set
forth in Sections 3.4(a) and 3.4(b), shall survive without termination.
3.7. Representations as to Knowledge. The representations and
warranties contained in Article 3 hereof will in each and every case where an
exercise of discretion or a statement to the "best knowledge," "best of
knowledge" or "knowledge" is required on behalf of any party to this Agreement
be deemed to require that such exercise of discretion or statement be in good
faith after reasonable investigation (including, in the case of the
Shareholders, inquiry of the applicable employees of the Company), with due
diligence, to the best efforts of such party and be exercised always in a
reasonable manner and within reasonable times.
4. Pre-Closing Covenants. The parties agree as follows with respect to the
period between the execution of this Agreement and the Closing.
4.1. General. Each of the parties will use its reasonable best efforts
to take all actions necessary, proper or advisable in order to consummate and
make effective the transactions contemplated by this Agreement (including the
satisfaction, but not the waiver, of the closing conditions set forth in Section
6) and the other agreements contemplated hereby. Without limiting the foregoing,
the Shareholders will, and will cause the Company to, give any notices, make any
filings and obtain any consents, authorizations or approvals needed to
consummate the transactions contemplated by this Agreement.
4.2. Operation and Preservation of Business. The Shareholders will not
cause or permit the Company to engage in any practice, take any action or enter
into any transaction outside its ordinary course of business; provided, however,
that in no event will any action be taken or fail to be taken or any transaction
be entered into which would result in a breach of any representation, warranty
or covenant of the Company or any Shareholder. The Shareholders will cause the
Company to keep its business and properties, including its current operations,
physical facilities, working conditions and relationships with customers,
service providers, lessors, licensors and employees intact.
4.3. Full Access. The Shareholders will cause the Company to permit
PentaStar and its agents to have full access at all reasonable times, and in a
manner so as not to interfere with the normal business operations of the
Company, to all premises, properties, personnel, books, records (including Tax
records), contracts and documents of or pertaining to the Company.
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<PAGE> 29
4.4. Notice of Developments. The Shareholders will give prompt written
notice to PentaStar of any material development which occurs after the date of
this Agreement and before the Closing and affects the business, assets,
Liabilities, financial condition, operations, results of operations, future
prospects, representations, warranties, covenants or disclosure Exhibits of the
Company. No such written notice, however, will be deemed to amend or supplement
any disclosure Exhibit or to prevent or cure any misrepresentation, breach of
warranty or breach of covenant.
4.5. Exclusivity. No Shareholder will, and the Shareholders will not
cause or permit the Company to, (a) solicit, initiate or encourage the
submission of any proposal or offer from any Person relating to the acquisition
of any capital stock or other voting securities, or any portion of the assets
of, the Company (including any acquisition structured as a merger, consolidation
or share exchange) or (b) participate in any discussions or negotiations
regarding, furnish any information with respect to, assist or participate in or
facilitate in any other manner any effort or attempt by any Person to do or seek
any of the foregoing. No Shareholder will vote shares of the Company's stock in
favor of any such transaction. The Shareholders will notify PentaStar
immediately if any Person makes any proposal, offer, inquiry or contact with
respect to any of the foregoing.
4.6. Announcements. Prior to the Closing, no party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement without the prior written approval of the other parties.
4.7. Closing Date Liabilities. Effective as of immediately prior to the
Closing Date, the Shareholders, subject to the limitations on the maximum amount
payable by any Shareholder set forth in Section 7.1(a), hereby assume and agree
to pay, all Closing Date Liabilities in excess of the amounts set forth on the
Estimated Closing Date Balance Sheet without further action by the Shareholders,
the Company or any other Person.
4.8. License Agreement. On or before the Closing, the Company will
enter into the license agreement, in the form attached as Exhibit 4.8, with
International Communications Mgmt., Inc. providing for the use by the Company of
the name "ICM Communications Integration, Inc." and the logos currently used by
the Company as of the date of this Agreement (the form of which is reproduced in
Exhibit 4.8) (the "License Agreement").
4.9. Agreement with NCI. Prior to the Closing, the Company will enter
into the agreement with NCI for the provision of services by the Company to NCI
and NCI will deliver a promissory note evidencing its existing obligation to the
Company, such agreement and note to be in the form attached as Exhibit 4.9.
5. Post-Closing Covenants. The parties agree as follows with respect to the
period following the Closing.
5.1. Further Assurances. In case at any time after the Closing any
further action is
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<PAGE> 30
necessary or desirable to carry out the purposes of this Agreement, each of the
parties will take such further action (including the execution and delivery of
such further instruments and documents) as any other party reasonably may
request, all at the sole cost and expense of the requesting party (unless the
requesting party is entitled to indemnification therefor under Section 7).
5.2. Transition. No Shareholder will take any action at any time that
is designed or intended to have the effect of discouraging any customer,
supplier, lessor, licensor or other business associate of the Company from
establishing or continuing a business relationship with PentaStar after the
Closing except where such action is approved in writing by PentaStar.
5.3. Cooperation. In the event and for so long as any party actively is
contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand in connection with (a) any
transaction contemplated by this Agreement or (b) any fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act or transaction on or prior to the Closing Date
involving any of the Acquired Assets or the Company's business, each of the
other parties will cooperate with such party and its counsel in the contest or
defense, make available their personnel, and provide such testimony as shall be
reasonably necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending party (unless the contesting or
defending party is entitled to indemnification therefor under Section 7).
5.4. Confidentiality. The Shareholders will treat and hold as
confidential all Confidential Information concerning PentaStar, the Company's
business or the Acquired Assets, refrain from using any such Confidential
Information and deliver promptly to PentaStar or destroy, at the request and
option of PentaStar, all of such Confidential Information in its or their
possession.
5.5. Post-Closing Announcements. Following the Closing, no Shareholder
will issue any press release or make any public announcement relating to the
subject matter of this Agreement without the prior written approval of
PentaStar.
5.6. Financial Statements. The Shareholders will, upon request of
PentaStar, cooperate with PentaStar and render such assistance to PentaStar and
its accountants as may be required to produce such historical and on-going
financial statements and audits as PentaStar may request, all at the sole cost
and expense of PentaStar, but without additional consideration to the
Shareholders. The Shareholders acknowledge that PentaStar may be required by
applicable law to include audited financial statements with respect to the
business of the Company in reports filed with governmental agencies and that the
inability to audit the financial statements as of the Closing Date promptly
after the Closing could have a material adverse effect on PentaStar.
5.7. Satisfaction of Liabilities.
(a) Promptly following the Closing, the Shareholders, subject
to the limitations on the maximum amount payable by any Shareholder set forth in
Section 7.1(a), will assume
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Liability for, and pay, all Closing Date Liabilities in excess of the amounts
set forth on the Estimated Closing Date Balance Sheet or the Closing Date
Balance Sheet, as applicable, and any Taxes attributable to the transactions
contemplated by this Agreement.
(b) The Shareholders, at their expense, promptly will take or
cause to be taken any action necessary to remedy any failure of the Premises or
the acquired business to comply at the Closing Date with any Legal Requirement,
upon receipt of notice from PentaStar at any time.
(c) PentaStar will pay and perform, as and when due (except to
the extent the validity thereof or the Liability therefor is being contested by
PentaStar), the Retained Liabilities.
5.8. Repurchase of Unpaid Receivables. The Shareholders guarantee that
the Closing Accounts Receivables, net of any reserve established in accordance
with GAAP applied on a consistent basis on the Latest Balance Sheet, will be
fully paid to PentaStar in accordance with their terms at their recorded amounts
not later than 180 days from the Closing Date. Upon demand by PentaStar at any
time after 180 days from the Closing Date, each Shareholder shall pay to
PentaStar the full amount of any unpaid Closing Accounts Receivable which are
the subject of such demand, provided, however, that no Shareholder shall be
required to pay more than 150% of the Total Consideration Paid or Payable to
such Shareholder pursuant to 2(k). Upon such payment to PentaStar, the Closing
Accounts Receivable which are so paid for by the Shareholders shall, without
further action of any party, become the property of the Shareholders. From the
Closing until 180 days after the Closing Date, PentaStar will apply its standard
accounts receivable collection procedures to the Closing Accounts Receivables;
provided, however, that PentaStar will not be required to institute suit,
utilize third-party collection agencies or other agents or take other
extraordinary collection actions with respect to the Closing Accounts
Receivables; and, provided further, that any failure of any collection
activities of PentaStar or any such collection agency or other agent will not
relieve the Shareholders from their guarantee of the Closing Accounts
Receivables as described in this Section 5.8. With respect to the foregoing, all
collections for Accounts Receivables shall be applied to the invoice to which
such collection relates; provided that if such invoice cannot be reasonably
identified by the Surviving Corporation, such collections will be applied on a
"first in, first out" or FIFO basis, with the specific exception that a payment
made by a customer will not be applied against the oldest outstanding invoice
for such customer if such invoice has been disputed by the customer.
5.9. Termination of Obligations. Effective as of the Closing Date,
neither the Company nor PentaStar shall have any Liability to any Shareholder or
any relative or affiliate thereof or of the Company, except as otherwise
provided in this Agreement or in an Other Seller Agreement. Effective as of the
Closing Date, the Shareholders shall not have any Liability to the Company or
PentaStar, except as otherwise provided in this Agreement or in an Other Seller
Agreement.
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<PAGE> 32
5.10. Transfer Restrictions. Unless otherwise agreed by PentaStar,
except for transfers to (a) immediate family members who agree to be bound by
the restrictions set forth in this Section 5.10 (and a copy of such agreement is
furnished to PentaStar prior to the transfer), (b) trusts, limited partnerships
or other estate planning entities for the benefit of a Shareholder or family
members of a Shareholder the trustees, partners or other persons having
authority to bind the trust, limited partnership or other estate planning entity
of which agree to be bound by such restrictions (and a copy of such agreement is
furnished to PentaStar prior to the transfer), or (c) any charitable
organization that qualifies for receipt of charitable contributions under
Section 170(c) of the Code and such organization agrees to be bound by such
restrictions, no Shareholder shall sell, assign, exchange, transfer, pledge, or
otherwise dispose at any time prior to the date which is 18 months after the
Closing of any shares of PentaStar Shares received by such Shareholder as part
of the Purchase Price. Thereafter, up to one-third of the PentaStar Shares
received at the Closing as part of the Purchase Price by such Shareholder (other
than Dennis Schillinger) may be resold at any time, an additional one-third of
the PentaStar Shares received at the Closing as part of the Purchase Price by
such Shareholder (other than Dennis Schillinger) may be resold by such
Shareholder beginning 24 months after the Closing and the remaining one-third
may be resold by such Shareholder (other than Dennis Schillinger) beginning 30
months after the Closing. Beginning 18 months after the Closing, Dennis
Schillinger may sell 33.33% of the PentaStar Shares received at the Closing as
part of the Purchase Price and beginning 24 months after the Closing, Dennis
Schillinger may sell an additional 16.67% of the PentaStar Shares received at
the Closing as part of the Purchase Price. The remaining PentaStar Shares
received by Dennis Schillinger, other than those subject to the Schillinger
Escrow Agreement, shall not be sold by Schillinger until the earlier of the
fifth anniversary of the Closing Date or the sale of all or substantially all of
the outstanding capital stock or assets of PentaStar. Certificates for the
PentaStar Shares delivered to the Shareholders pursuant to this Agreement will
bear a legend substantially in the form set forth below as long as applicable:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THAT CERTAIN AGREEMENT
AND PLAN OF MERGER DATED AS OF AUGUST 13, 1999 (THE "AGREEMENT"), BY AND AMONG
THE ISSUER AND OC MERGERCO 2, INC., ICM COMMUNICATIONS INTEGRATION, INC. AND THE
SHAREHOLDERS OF ICM COMMUNICATIONS INTEGRATION, INC. PRIOR TO THE EXPIRATION OF
THE HOLDING PERIOD SET FORTH IN THE AGREEMENT, SUCH SHARES MAY NOT BE SOLD,
ASSIGNED, EXCHANGED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF WITHOUT THE
WRITTEN CONSENT OF THE ISSUER, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE
EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, PLEDGE OR OTHER
DISPOSITION WHICH VIOLATES THE AGREEMENT. UPON THE WRITTEN REQUEST OF THE HOLDER
OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND
ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) WHEN THE HOLDING PERIOD HAS
EXPIRED.
PentaStar shall issue separate certificates to each Shareholder representing the
shares of PentaStar Shares subject to each of the three periods of restriction
contemplated by this Section 5.10.
5.11. Underwriter and Securities Act Restrictions. The restrictions set
forth in Section 5.10 shall be in addition to any restrictions on transfer
imposed by the underwriters in connection with the IPO (not
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to exceed eighteen months after the Closing) and the Securities Act. The
Shareholders agree to comply with such additional restrictions.
6. Conditions to Closing.
6.1. Conditions to Obligation of PentaStar. The obligation of PentaStar
to consummate the transactions contemplated by this Agreement is subject to
satisfaction of the following conditions:
(a) each Shareholder's and the Company's representations and
warranties shall be correct and complete at and as of the Closing Date and the
Closing and any written notices delivered to PentaStar pursuant to Section 4.5
and the subject matter thereof shall be satisfactory to PentaStar;
(b) the Shareholders and the Company shall have performed and
complied with all of their covenants hereunder through the Closing;
(c) the Shareholders and the Company shall have given, or
shall have caused the Company to give, all notices and procured, or shall have
caused the Company to procure, all of the third-party consents (including the
consent of US West), authorizations and approvals required to consummate the
transactions contemplated by this Agreement, including the Transaction, all in
form and substance reasonably satisfactory to PentaStar;
(d) no action, suit or proceeding shall be pending or
threatened before any Governmental Authority or any other Person wherein an
unfavorable Order would (i) prevent consummation of any of the transactions
contemplated by this Agreement, (ii) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (iii) affect
adversely the right of the Acquiror to own the Company or the Acquired Assets
and conduct the Company's business, and no such Order shall be in effect;
(e) there shall have been no material adverse change in the
Company, the Acquired Assets or the Company's business between the date of
execution of this Agreement and the Closing;
(f) the LLC shall have been liquidated and dissolved;
(g) the Shareholders shall have delivered to PentaStar (i) a
certificate to the effect that each of the conditions specified above in
Sections 6.1(a) through (f) is satisfied in all respects, (ii) a certificate of
existence, dated within 10 days of the Closing, from the Secretary of State of
the State of the Company's jurisdiction of incorporation and each other state in
which the Company is qualified or authorized to do business as a foreign
corporation, (iii) a certificate setting forth the amount of the Retained
Liabilities (other than the Retained Liabilities described in clause (a)
thereof) and (iv) a tax status letter, dated within 10 days of the Closing;
(h) the Other Seller Agreements shall have been executed and
delivered by the Shareholders, as applicable;
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(i) PentaStar shall have received from counsel to the
Shareholders an opinion in form and substance as set forth in Exhibit 6.1(i)
addressed to PentaStar dated as of the Closing;
(j) the Registration Statement shall have been declared
effective by the SEC and not be subject to any stop order proceeding and the
underwriters named therein shall have agreed to acquire and shall have acquired
PentaStar's common stock on a firm commitment basis on terms satisfactory to
PentaStar;
(k) PentaStar shall have received from the Shareholders or the
Company evidence of the termination of all Encumbrances filed against the
Acquired Assets;
(l) PentaStar shall have received the resignations, effective
as of the Closing, of each director and officer of the Company;
(m) stock certificates representing the Shares duly endorsed
in blank or accompanied by stock powers duly executed in blank, shall have been
delivered by the Shareholders to PentaStar;
(n) the Company shall have delivered to PentaStar possession
and control of the Company and the Acquired Assets, including, without
limitation, all stock certificate books, minute books, corporate seals, and all
other corporate and financial records of the Company;
(o) the Shareholders and the Company shall have delivered, or
caused the Company to deliver, to PentaStar such other instruments, certificates
and documents as are reasonably requested by PentaStar in order to consummate
the transactions contemplated by this Agreement, all in form and substance
reasonably satisfactory to PentaStar; and
(p) Schillinger shall have entered into the Schillinger Escrow
Agreement; and
(q) the License Agreement shall be in full force and effect.
PentaStar may waive any condition specified in this Section 6.1 at or prior to
the Closing.
6.2. Conditions to Obligation of the Shareholders. The obligation of
the Shareholders to consummate the transactions contemplated by this Agreement
is subject to satisfaction of the following conditions:
(a) PentaStar's representations and warranties shall be
correct and complete at and as of the Closing Date and the Closing;
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(b) PentaStar shall have performed and complied with all of
its covenants hereunder through the Closing Date;
(c) PentaStar shall have delivered to the Shareholders a
certificate to the effect that each of the conditions specified above in
Sections 6.2(a) and (b) is satisfied in all respects;
(d) the Other PentaStar Agreements shall have been executed
and delivered by PentaStar;
(e) the Shareholders shall have received from counsel to
PentaStar an opinion in form and substance as set forth in Exhibit 6.2(e),
addressed to the Shareholders and dated as of the Closing;
(f) the Registration Statement shall have been declared
effective by the SEC and not be subject to any stop order proceeding and the
underwriters named therein shall have agreed to acquire and shall have acquired
PentaStar's common stock on a firm commitment basis on terms satisfactory to
PentaStar; and
(g) PentaStar shall have paid and deposited the Purchase Price
pursuant to Section 2.
The Shareholders' Agent may waive any condition specified in this Section 6.2 at
or prior to the Closing.
7. Remedies for Breaches of This Agreement.
7.1. Indemnification Provisions for Benefit of PentaStar and the
Company.
(a) If any Shareholder breaches (or if any Person other than
PentaStar alleges facts that, if true, would mean any Shareholder has breached)
any of the representations or warranties of any Shareholder or the Company
contained herein and PentaStar gives notice thereof to the Shareholders' Agent
within the Survival Period, or if any Shareholder breaches any covenants of any
Shareholder or the Company contained herein or any representations, warranties
or covenants of any Shareholder contained in any Other Seller Agreement and
PentaStar gives notice thereof to the Shareholders' Agent, then, subject to
Section 7.6, each Shareholder agrees to indemnify and hold harmless PentaStar
and the Surviving Corporation from and against any Adverse Consequences
PentaStar or the Surviving Corporation may suffer resulting from, arising out
of, relating to or caused by any of the foregoing regardless of whether the
Adverse Consequences are suffered during or after the Survival Period, up to,
but in no event to exceed 150% of the Total Consideration Paid or Payable to
such Shareholder pursuant to Section 2(k). In determining for all purposes under
this Agreement (including this Section 7 and Section 8) whether there has been a
breach of any representation or warranty contained in Sections 3.1, 3.2 and 3.3
and in determining for purposes of the preceding sentence the amount of Adverse
Consequences suffered by
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PentaStar or the Surviving Corporation, such representations and warranties
shall not be qualified (other than by (A) the reference to "knowledge" set forth
in the last sentence of Section 3.1(o) and (B) the references to "material" set
forth in Section 3.1(u)) by "material," "materiality," "in all material
respects," "best knowledge," "best of knowledge" or "knowledge" or words of
similar import, or by any phrase using any such terms or words. Each Majority
Shareholder also agrees to indemnify and hold harmless PentaStar and the
Surviving Corporation from and against any Adverse Consequences PentaStar or the
Surviving Corporation may suffer up to, but in no event to exceed 150% of the
Total Consideration Paid or Payable to such Majority Shareholder pursuant to
Section 2(k), and each Minority Shareholder agrees to indemnify and hold
harmless PentaStar and the Surviving Corporation from and against any Adverse
Consequences PentaStar or the Surviving Corporation may suffer, but in no event
to exceed 100% of the Total Consideration Paid or Payable to such Minority
Shareholder pursuant to Section 2(k) which result from, arise out of, relate to
or are caused by (i) any Liability of the Company or any Shareholder not
included in the Retained Liabilities (other than Closing Date Liabilities in an
amount not exceeding the amount of the Closing Date Liabilities set forth on the
Estimated Closing Date Balance Sheet or the Closing Date Balance Sheet, as
applicable) or (ii) any condition, circumstance or activity existing prior to
the Closing Date which relates to any Legal Requirement or any act or omission
of the Company or any Shareholder or any predecessor with respect to, or any
event or circumstance related to, the Company's, any Shareholder's or any
predecessor's ownership, use or operation of any of the Acquired Assets, the
Premises or any other assets or properties or the conduct of its or their
business, regardless, in the case of (i) or (ii), of (A) whether or not such
Liability, act, omission, event, circumstance or matter was known or disclosed
to PentaStar, was disclosed on any Exhibit hereto or is a matter with respect to
which any Shareholder did or did not have knowledge, (B) when such Liability,
act, omission, event, circumstance or matter occurred, existed, occurs or exists
and (C) whether a claim with respect thereto was asserted before or is asserted
after the Closing Date. If any dispute arises concerning whether any
indemnification is owing which cannot be resolved by negotiation among the
parties within 30 days of notice of claim for indemnification from the party
claiming indemnification to the party against whom such claim is asserted, the
dispute will be resolved by arbitration pursuant to this Agreement.
Notwithstanding the foregoing, the Liability of the Shareholders to indemnify
PentaStar and the Surviving Corporation in the aggregate under this Section
7.1(a) shall not exceed the Total Consideration Paid or Payable to all of the
Shareholders pursuant to Section 2(k). The date of any notice of any claim for
indemnification given by PentaStar to the Shareholders' Agent shall be referred
to as a "Notice Date."
(b) Amounts needed to cover any indemnification claims
resolved in favor of PentaStar against any Shareholder during the Escrow Period
will be paid to PentaStar first out of the funds escrowed pursuant to the Escrow
Agreement, along with interest from the date of the Closing at the rate
applicable to the escrowed funds. Subject to Section 7.6 and the last sentence
of Section 7.1(a), each Shareholder shall have personal Liability for any
additional amounts needed to cover such claims, which amounts will be paid
directly to PentaStar,
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provided, however, that notwithstanding anything in this Agreement to the
contrary, the Liability of each Majority Shareholder under this Agreement shall
in no event exceed 150% of the Total Consideration Paid or Payable to such
Majority Shareholder pursuant to Section 2(k) and the Liability of each Minority
Shareholder shall in no event exceed 100% of the Total Consideration Paid or
Payable to such Minority Shareholder pursuant to Section 2(k). At the end of the
Escrow Period, amounts that may be needed to cover pending indemnification
claims made by PentaStar (such amounts to be determined by PentaStar based upon
the reasonable exercise of its business judgment) will be retained in the Escrow
Account until such claims are resolved, and any excess on deposit therein,
including any accrued interest, will be paid to the Shareholders. Nothing in
this Section 7.1(b) will be construed to limit PentaStar's or the Surviving
Corporation's right to indemnification to amounts on deposit in the Escrow
Account. PentaStar and the Shareholders' Agent shall jointly give instructions
to the Escrow Agent to carry out the intent of this Section 7.1(b). Any disputes
concerning the escrowed funds will be settled by arbitration as provided in this
Agreement. PentaStar, on the one hand, and the Shareholders jointly and
severally, on the other hand, shall each be responsible for one-half of the
fees, charges and expenses payable to the Escrow Agent pursuant to paragraph a.
of Article 2 of the Escrow Agreement and, except as otherwise determined
pursuant to Section 9.11 of this Agreement, one-half of any amounts payable
pursuant to paragraph b. of such Article 2.
7.2. Indemnification Provisions for Benefit of the Shareholders. If
PentaStar breaches (or if any Person other than a Shareholder alleges facts
that, if true, would mean PentaStar has breached) any of its representations or
warranties contained herein and the Shareholders' Agent gives notice of a claim
for indemnification against PentaStar within the Survival Period, or if
PentaStar breaches any of its covenants contained herein or any of its
representations, warranties or covenants contained in any Other PentaStar
Agreement and the Shareholders' Agent gives notice thereof to PentaStar, then
PentaStar agrees to indemnify and hold harmless the Shareholders from and
against any Adverse Consequences the Shareholders may suffer which result from,
arise out of, relate to, or are caused by the breach or alleged breach,
regardless of whether the Adverse Consequences are suffered during or after the
Survival Period. In determining whether there has been a breach of any
representation or warranty contained in Section 3.4 and in determining the
amount of Adverse Consequences suffered by the Shareholders for purposes of this
Section 7.2, such representations and warranties shall not be qualified by
"material," "materiality," "in all material respects," "best knowledge," "best
of knowledge" or "knowledge" or words of similar import, or by any phrase using
any such terms or words. If any dispute arises concerning whether any
indemnification is owing which cannot be resolved by negotiation among the
parties within 30 days of notice of claim for indemnification from the party
claiming indemnification to the party against whom such claim is asserted, the
dispute will be resolved by arbitration pursuant to this Agreement.
7.3. Matters Involving Third Parties.
(a) If any Person not a party to this Agreement (including,
without limitation, any Governmental Authority) notifies any party (the
"Indemnified Party") with respect to any matter (a "Third Party Claim") which
may give rise to a claim for indemnification against any other party (the
"Indemnifying Party"), then the Indemnified Party will notify each Indemnifying
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Party thereof in writing within 15 days after receiving such notice. No delay on
the part of the Indemnified Party in notifying any Indemnifying Party will
relieve the Indemnifying Party from any obligation hereunder unless (and then
solely to the extent) the Indemnifying Party thereby is prejudiced.
(b) Any Indemnifying Party will have the right, at its sole
cost and expense, to defend the Indemnified Party against the Third Party Claim
with counsel of its choice satisfactory to the Indemnified Party so long as (i)
the Indemnifying Party notifies the Indemnified Party in writing within 10 days
after the Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party will indemnify the Indemnified Party from and against the
entirety of any Adverse Consequences the Indemnified Party may suffer resulting
from, arising out of, relating to or caused by the Third Party Claim, (ii) the
Indemnifying Party provides the Indemnified Party with evidence reasonably
acceptable to the Indemnified Party that the Indemnifying Party will have the
financial resources to defend against the Third Party Claim and fulfill its
indemnification obligations hereunder, (iii) the Third Party Claim involves only
money damages and does not seek an injunction or other equitable relief, (iv)
settlement of, or an adverse judgment with respect to, the Third Party Claim is
not, in the good faith judgment of the Indemnified Party, likely to establish a
precedential custom or practice materially adverse to the continuing business
interests of the Indemnified Party, and (v) the Indemnifying Party conducts the
defense of the Third Party Claim actively and diligently. If the Indemnifying
Party does not assume control of the defense or settlement of any Third Party
Claim in the manner described above, it will be bound by the results obtained by
the Indemnified Party with respect to the Third Party Claim.
(c) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 7.3(b) above, (i)
the Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim, (ii) the
Indemnified Party will not consent to the entry of any judgment or enter into
any settlement with respect to the Third Party Claim without the prior written
consent of the Indemnifying Party (not to be withheld unreasonably), and (iii)
the Indemnifying Party will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of the Indemnified Party (not to be withheld unreasonably).
(d) In the event any of the conditions in Section 7.3(b) above
is or becomes unsatisfied, however, (i) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into any settlement
with respect to, the Third Party Claim in any manner it reasonably may deem
appropriate (and the Indemnified Party need not consult with, or obtain any
consent from, any Indemnifying Party in connection therewith), (ii) the
Indemnifying Parties will reimburse the Indemnified Party promptly and
periodically for the costs of defending against the Third Party Claim (including
reasonable attorneys' fees and expenses), and (iii) the Indemnifying Parties
will remain responsible for any Adverse Consequences the
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Indemnified Party may suffer resulting from, arising out of, relating to or
caused by the Third Party Claim to the fullest extent provided in this Section
7.
7.4. Right of Offset. PentaStar will have the right to offset any
Adverse Consequences it may suffer against any amounts payable pursuant to this
Agreement or any Other Seller Agreement to any Shareholder or any relative or
affiliate of any Shareholder at or after the Closing.
7.5. Other Remedies. The foregoing indemnification provisions are in
addition to, and not in derogation of, any statutory, equitable or common law
remedy any party may have.
7.6. Basket. Notwithstanding anything to the contrary in this Section
7, the Shareholders will not have any obligation to indemnify PentaStar or the
Surviving Corporation from and against any Adverse Consequences resulting from,
arising out of, relating to, in the nature of, or caused by the breach of any
representation or warranty of the Shareholders or the Company set forth in
Section 3.1, 3.2 or 3.3 until PentaStar and the Surviving Corporation have
suffered Adverse Consequences by reason of any or of all such breaches in excess
of Ten Thousand Dollars ($10,000) in the aggregate, after which point the
Shareholders will be obligated to indemnify PentaStar and the Surviving
Corporation from and against the entirety of any such Adverse Consequences
exceeding Ten Thousand Dollars ($10,000).
8. Termination.
8.1. Termination of Agreement. The parties may terminate this Agreement
as provided below:
(a) PentaStar and the Shareholders' Agent may terminate this
Agreement by mutual written consent at any time prior to the Closing;
(b) PentaStar may terminate this Agreement by giving written
notice to the Shareholders' Agent at any time prior to the Closing (i) in the
event any Shareholder has breached any representation, warranty or covenant
contained in this Agreement in any material way, PentaStar has notified the
Shareholders' Agent of the breach, and the breach has not been cured within 10
days after the notice of breach or (ii) if the Closing has not occurred on or
before January 31, 2000.
(c) the Shareholders' Agent may terminate this Agreement by
giving written notice to PentaStar at any time prior to the Closing (i) if
PentaStar has breached any representation, warranty or covenant contained in
this Agreement in any material way, the Shareholders' Agent has notified
PentaStar of the breach, and the breach has not been cured within 10 days after
the notice of breach or (ii) if the Closing has not occurred on or before
January 31, 2000).
8.2. Effect of Termination. Neither the Company, on the one hand, nor
PentaStar and the Acquiror, on the other hand, will have any liability or
obligation to the other upon termination of this Agreement for any reason
whatsoever, unless the termination is directly based on or arising from a
material breach of any representations, warranties or covenants
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contained in this Agreement of the Company and the Shareholders, on the one
hand, or PentaStar and the Acquiror, on the other hand, and such breach results
in, relates to or concerns an item, fact or circumstance that is materially
adverse to the Company, on the one hand, or PentaStar or the Acquiror, on the
other hand, as applicable. In the case of such a breach, the Company and the
Shareholders, on the one hand, or PentaStar and the Acquiror, on the other hand,
shall be entitled to seek all relief to which it or they are entitled under
applicable law from PentaStar and the Acquiror and the Company, as applicable,
but not from any Shareholder. Notwithstanding anything herein in this Agreement
to the contrary, no Shareholders shall have any liability to PentaStar or the
Acquiror upon the termination of this Agreement for any reason whatsoever.
8.3. Confidentiality. If this Agreement is terminated, each party will
treat and hold as confidential all Confidential Information concerning the other
parties which it acquired from such other parties in connection with this
Agreement and the transactions contemplated hereby.
9. Miscellaneous.
9.1. No Third-Party Beneficiaries. This Agreement will not confer any
rights or remedies upon any Person other than the parties and their respective
successors and permitted assigns.
9.2. Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the parties and supersedes any
prior understandings, agreements or representations by or among the parties,
written or oral, to the extent they relate in any way to the subject matter
hereof.
9.3. Succession and Assignment. This Agreement will be binding upon and
inure to the benefit of the parties and their respective successors and
permitted assigns. No Shareholder may assign this Agreement or any of his or her
rights, interests or obligations hereunder without the prior written approval of
PentaStar. PentaStar may assign its rights and obligations hereunder as
permitted by law, including, without limitation, to any debt or equity financing
source.
9.4. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall be deemed to be one and the same instrument. The execution of a
counterpart of the signature page to this Agreement will be deemed the execution
of a counterpart of this Agreement. This Agreement may be delivered by facsimile
and facsimile signatures will be treated as original signatures for all
applicable purposes.
9.5. Headings and Terms. The section headings contained in this
Agreement are inserted for convenience only and will not affect in any way the
meaning or interpretation of this Agreement. Terms used with initial capital
letters will have the meanings specified, applicable to both singular and plural
forms, for all purposes of this Agreement. The singular or plural includes the
other, as the context requires or permits. The word "include" (and any
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variation) is used in an illustrative sense rather than a limiting sense.
9.6. Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if it is sent by
registered or certified mail, return receipt requested, postage prepaid, or by
courier, telecopy or facsimile, and addressed to the intended recipient as set
forth below:
If to the
Shareholders: Copy to:
Addressed to the Peterson Russell Cofano, PLLC
Shareholders' Agent at: 870 Skyline Tower
ICM Communications Integration, Inc. 10900 NE 4th Street
4122 128th Avenue, S.E., Suite 300 Bellevue, Washington 98004-5873
Bellevue, Washington 98006 Attn: Pete Peterson
Attn: Dennis Schillinger Telecopy: (425) 451-0714
Telecopy: (425) 456-1301
If to PentaStar: Copy to:
PentaStar Communications, Inc. Sherman & Howard L.L.C.
1522 Blake Street 633 Seventeenth Street, Suite 3000
Denver, Colorado 80202 Denver, Colorado 80202
Attn: President Attn: B. Scott Pullara
Telecopy: (303) 620-9016 Telecopy: (303) 298-0940
Notices will be deemed given three days after mailing if sent by certified mail,
when delivered if sent by courier, and upon receipt of confirmation by person or
machine if sent by telecopy or facsimile transmission. Any party may change the
address to which notices, requests, demands, claims and other communications
hereunder are to be delivered by giving the other parties notice in the manner
herein set forth.
9.7. Governing Law. This Agreement will be governed by and construed in
accordance with the domestic laws of the State of Colorado without giving effect
to any choice or conflict of law provision or rule (whether of the State of
Colorado or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of Colorado.
9.8. Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same is in writing and signed by PentaStar
and the Shareholders' Agent. No waiver by any party of any default,
misrepresentation or breach of warranty or covenant hereunder, whether
intentional or not, will be deemed to extend to any prior or subsequent default,
misrepresentation or breach of warranty or covenant hereunder or affect in any
way any rights arising by virtue of any prior or subsequent such occurrence, and
no waiver will be effective unless set forth in writing and signed by the party
against whom such waiver is asserted.
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9.9. Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
9.10. Expenses. Except as otherwise provided in Section 8.2, (a)
PentaStar shall bear its own costs and expenses (including, without limitation,
legal fees and expenses) incurred either before or after the date of this
Agreement in connection with this Agreement or the transactions contemplated
hereby and (b) the Shareholders will bear all costs and expenses (including,
without limitation, all legal, accounting and tax related fees and expenses, all
fees, commissions, expenses and other amounts payable to any broker, finder or
agent) incurred by the Company prior to the Closing or by any Shareholder either
before or after the date of this Agreement in connection with this Agreement or
the transactions contemplated hereby (collectively, "Seller Transaction
Expenses"); provided, however, that prior to the Closing Date the Company may
use any cash to pay Seller Transaction Expenses; and provided, further, that
PentaStar will pay the accounting fees and expenses necessary to prepare audited
financial statements of the Company with respect to any period prior to August
1, 1997 if PentaStar determines to have such an audit.
9.11. Arbitration. Any disputes arising under or in connection with
this Agreement, including, without limitation, those involving claims for
specific performance or other equitable relief, will be submitted to binding
arbitration in Denver, Colorado before the Judicial Arbiter Group, but under the
Commercial Arbitration Rules of the American Arbitration Association under the
authority of federal and state arbitration statutes, and shall not be the
subject of litigation in any forum. If the Judicial Arbiter Group is unavailable
to conduct the arbitration, then it shall be before another arbitral body in
Denver, Colorado selected by PentaStar and the Shareholder's Agent or, if they
cannot agree on another arbitral body, the American Arbitration Association.
EACH PARTY, BY SIGNING THIS AGREEMENT, VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY
WAIVES ANY RIGHTS SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR
OTHER FORUMS, INCLUDING THE RIGHT TO JURY TRIAL. The arbitrator shall have full
authority to order specific performance and other equitable relief and award
damages and other relief available under this Agreement or applicable law, but
shall have no authority to add to, detract from, change or amend the terms of
this Agreement or existing law. All arbitration proceedings, including
settlements and awards, shall be confidential. The decision of the arbitrators
will be final and binding, and judgment on the award by the arbitrators may be
entered in any court of competent jurisdiction. THIS SUBMISSION AND AGREEMENT TO
ARBITRATE WILL BE SPECIFICALLY ENFORCEABLE. The prevailing party or parties in
any such arbitration or in any action to enforce this Agreement will be entitled
to recover, in addition to any other relief awarded by the arbitrator, all
reasonable costs and expenses, including fees and expenses of the arbitrators
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and attorneys, incurred in connection therewith. If each party prevails on
specific issues in the arbitration, the arbitrator may allocate the costs
incurred by all parties on a basis the arbitrator deems appropriate.
9.12. Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement will be construed as
if drafted jointly by the parties and no presumption or burden of proof will
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. The word "including" will mean including
without limitation. The parties intend that each representation, warranty and
covenant contained herein will have independent significance. If any party
breaches any representation, warranty or covenant contained herein in any
respect, the fact that there exists another representation, warranty or covenant
relating to the same subject matter (regardless of the relative levels of
specificity) which the party has not breached will not detract from or mitigate
the fact that the party is in breach of the first representation, warranty or
covenant.
9.13. Incorporation of Exhibits. The Exhibits identified in this
Agreement are incorporated herein by reference and made a part hereof.
9.14. Shareholders' Agent. Each Shareholder hereby authorizes and
appoints the Shareholders' Agent as its, his or her exclusive agent and
attorney-in-fact to act on behalf of each of them with respect to all matters
which are the subject of this Agreement, including, without limitation, (a)
receiving or giving all notices, instructions, other communications, consents or
agreements that may be necessary, required or given hereunder and (b) asserting,
settling, compromising, or defending, or determining not to assert, settle,
compromise or defend, (i) any claims which any Shareholder may assert, or have
the right to assert, against PentaStar, or (ii) any claims which PentaStar may
assert, or have the right to assert, against any Shareholder. The Shareholders'
Agent hereby accepts such authorization and appointment. Upon the receipt of
written evidence satisfactory to PentaStar to the effect that the Shareholders'
Agent has been substituted as agent of the Shareholders by reason of his death,
disability or resignation, PentaStar shall be entitled to rely on such
substituted agent to the same extent as they were theretofore entitled to rely
upon the Shareholders' Agent with respect to the matters covered by this Section
9.14. No Shareholder shall act with respect to any of the matters which are the
subject of this Agreement except through the Shareholders' Agent. The
Shareholders acknowledge and agree that PentaStar may deal exclusively with the
Shareholders' Agent in respect of such matters, that the enforceability of this
Section 9.14 is material to PentaStar, and that PentaStar has relied upon the
enforceability of this Section 9.14 in entering into this Agreement.
[THE REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY,
SIGNATURE PAGES FOLLOW]
-39-
<PAGE> 44
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
PENTASTAR:
PENTASTAR COMMUNICATIONS, INC.
By: /s/ Craig J. Zoellner
----------------------------
Name: Craig J. Zoellner
----------------------------
Title: President
----------------------------
ACQUIROR:
OC MERGERCO 2, INC.
By: /s/ Craig J. Zoellner
----------------------------
Name: Craig J. Zoellner
----------------------------
Title: President
----------------------------
COMPANY:
ICM COMMUNICATIONS INTEGRATION, INC.
By: /s/ Dennis Schillinger
----------------------------
Name: Dennis Schillinger
----------------------------
Title: President
----------------------------
SHAREHOLDERS:
/s/ Dennis Schillinger
----------------------------
Dennis Schillinger
/s/ Nicolas van Gelder
----------------------------
Nicolas van Gelder
/s/ Norma Douthit
----------------------------
Norma Douthit
/s/ John Hall
----------------------------
John Hall
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]
<PAGE> 45
/s/ Charles Gibson
----------------------------
Charles Gibson
/s/ Jeanette Murphy,
by Nicholas van Gelder
----------------------------
Jeanette Murphy, by Nicholas
van Gelder, her
attorney-in-fact
/s/ Rick Johnson
----------------------------
Rick Johnson
/s/ Ed Peterson
----------------------------
Ed Peterson
SPOUSES OF SHAREHOLDERS (NOT SHAREHOLDERS)
Monica Schillinger
- ----------------------------
Monica Schillinger
/s/ Kirstin van Gelder
- ----------------------------
Kirstin van Gelder
/s/ David T. Douthit
- ----------------------------
David T. Douthit
/s/ Judy Gibson
- ----------------------------
Judy Gibson
/s/ Dennis M. Baluseio, by Nicholas van Gelder
- ----------------------------------------------
Dennis M. Baluseio, by Nicholas van Gelder,
his power of attorney
/s/ Margaret Johnson
- ----------------------------
Margaret Johnson
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]
<PAGE> 46
Exhibit 1.1(a)
DEFINED TERMS
Acquiror has the meaning given it in the preamble to this
Agreement.
Acquired Assets means all right, title and interest of the Company
in and to all of the tangible and intangible assets of the Company.
Adverse Consequences means all actions, suits, proceedings,
investigations, complaints, claims, demands, Orders, Liabilities, liens, losses,
damages, penalties, fines, settlements, costs, remediation costs, expenses and
fees (including court costs and reasonable fees and expenses of counsel and
other experts), plus interest at a rate equal to two percentage points above the
prime rate quoted by PentaStar's principal lender from time to time accrued from
the date of such Adverse Consequence.
Affiliated Group means any affiliated group within the meaning of
Code Section 1504 or any similar group defined under a similar provision of
state, local or foreign law.
Articles of Merger has the meaning given it in Section 2(g).
Benefit Arrangement has the meaning set forth in Section
3.1(m)(iii).
Business Day means any day on which commercial banks are open for
business in Denver, Colorado and Seattle, Washington.
Cash means cash, cash equivalents, and commissions for the most
recent Payment Period, which are undisputed and which were either customers'
orders submitted or customer installations completed during the Payment Period
and were payable pursuant to the US West Contract, but unpaid.
Cash Covered Accrued Commission Liability means accrued sales
commissions payable by the Company resulting from any sale by the Company prior
to the Closing Date, if and only to the extent that the Company has not received
payment prior to the Closing Date of the amount in respect of which such accrued
sales commission was earned.
Certificate of Merger has the meaning given it in Section 2(g).
Closing and Closing Date have the meanings given in Section 2(n).
Closing Accounts Receivable means all accounts (including late
fees and interest charges thereon) and notes receivable of the Company which are
in existence as of the Closing Date.
Closing Date Balance Sheet has the meaning given it in Section
2(l).
<PAGE> 47
Closing Date Liabilities means all Liabilities of the Company, but
excluding Retained Liabilities.
Code means the Internal Revenue Code of 1986, as amended.
Company has the meaning given it in the preamble to this
Agreement, except that for purposes of Sections 3.1, 3.2 and 3.3, the term the
"Company" shall mean the Company and all of its Subsidiaries.
Company Shares has the meaning given it in Section 3.1(b)(i).
Company Welfare Plan has the meaning given it in Section
3.1(m)(i).
Confidential Information means any information concerning the
subject Person or the subject Person's business, products, financial condition,
prospects and affairs that is not already generally available to the public.
Effective Time has the meaning given it in Section 2(g).
Employee Benefit Plan means any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan
(including any Multiemployer Plan, as defined in ERISA Section 3(37)) or (d)
Employee Welfare Benefit Plan.
Employee Pension Benefit Plan has the meaning set forth in ERISA
Section 3(2).
Employee Welfare Benefit Plan has the meaning set forth in ERISA
Section 3(1).
Employment Agreement means the Employment and Noncompetition
Agreement between PentaStar and Dennis Schillinger in the form of Exhibit
1.1(b).
Encumbrance means any mortgage, pledge, conditional sale
agreement, charge, claim, interest of another Person, lien, security interest,
title defect or other encumbrance.
Environmental Obligations means all present and future Legal
Requirements and Permits concerning land use, public health, safety, welfare or
the environment, including, without limitation, the Resource Conservation and
Recovery Act (42 U.S.C. ss.6901 et seq.), as amended, and the Comprehensive
Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9601 et
seq.), as amended.
ERISA means the Employee Retirement Income Security Act of 1974,
as amended, and any regulations, rules or orders promulgated thereunder.
Exhibit 1.1(a) - 2
<PAGE> 48
ERISA Affiliate means any entity which is controlled by, or is
under common control with, the Company, as determined under ERISA Section
4001(a)(14).
Escrow Account means the account established pursuant to the
Escrow Agreement.
Escrow Agent means Norwest Bank Colorado, NA.
Escrow Agreement means the Escrow Agreement among PentaStar, the
Shareholders, the Shareholders' Agent and Norwest Bank Colorado, N.A. (the
"Escrow Agent") in the form of Exhibit 2(k)(i) with respect to the period
commencing on the Closing Date and ending on the first anniversary of the
Closing Date (the "Escrow Period").
Escrow Deposit has the meaning given it in Section 2(k).
Escrow Period has the meaning given it in the definition of Escrow
Agreement.
Estimated Closing Date Balance Sheet has the meaning given it in
Section 2(j).
GAAP means generally accepted accounting principles as in effect
from time to time in the United States.
Governmental Authority means the United States of America, any
state, commonwealth, territory or possession of the United States of America,
any political subdivision thereof (including counties, municipalities, home-rule
cities and the like), and any agency, authority or instrumentality of any of the
foregoing, including, without limitation, any court, tribunal, department,
bureau, commission or board.
Guaranteed Shares is defined in Section 2(k) and refers to the
PentaStar Shares received in the Merger subject to adjustment under Section
2(k).
Hazardous Materials means any material, chemical, compound,
mixture, hazardous substance, hazardous waste, pollutant or contaminant defined,
listed, classified or regulated under any Environmental Obligation.
IPO means the initial public offering of PentaStar's Common Stock
pursuant to the Registration Statement.
Indemnified Party has the meaning given it in Section 7.3(a).
Indemnifying Party has the meaning given it in Section 7.3(a).
Intellectual Property means all trade, corporate, business and
product names, trademarks, trademark rights, service marks, copyrights, patents,
patent rights, trade secrets, business, customer and technical information, and
computer software, all registrations, licenses and applications pertaining
thereto, and all related documentation and goodwill.
Key Employee means an employee, other than an executive, whose
responsibilities are integral or material to the sustained operations of the
business or the implementation of the business plan.
Exhibit 1.1(a) - 3
<PAGE> 49
Latest Balance Sheet has the meaning given it in Section 3.1(d).
Legal Requirement means any constitution, statute, ordinance,
code, or other law (including common law), rule, regulation, Order, notice,
standard, procedure or other requirement enacted, adopted, applied or issued by
any Governmental Authority, including, without limitation, judicial decisions
applying or interpreting any such Legal Requirement.
License Agreement has the meaning given it in Section 4.8.
Liability means any liability or obligation (whether known or
unknown, whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and whether due or to
become due).
LLC has the meaning given it in Recital A.
Majority Shareholder means a Shareholder owning more than three
percent (3%) of the issued and outstanding shares of the Company prior to the
Merger.
Merger has the meaning given it in Section 2.
Minority Shareholder means a Shareholder other than a Majority
Shareholder.
NASDAQ means the national automated quotation system maintained by
the National Association of Securities Dealers, Inc.
NCI has the meaning given it in Section 3.1(h)(i)(O).
Noncompetition Agreement means the Noncompetition Agreement among
PentaStar and the Shareholders (other than Schillinger) in the form of Exhibit
1.1(c).
Notice Date has the meaning given it in Section 7.1(a).
Orders means all judgments, injunctions, orders, rulings, decrees,
directives, notices of violation or other requirements of any Governmental
Authority or arbitrator having jurisdiction in the matter, including a
bankruptcy court or trustee.
Other PentaStar Agreements means the Employment Agreement, the
Escrow Agreement, the Noncompetition Agreement, the Schillinger Escrow Agreement
and the other documents and instruments to be executed and delivered by
PentaStar pursuant to this Agreement.
Other Seller Agreements means the Employment Agreement, the Escrow
Agreement, the Noncompetition Agreement, the Schillinger Escrow Agreement and
other documents and instruments to be executed and delivered by any Shareholder
or any relative or affiliate of the Company or of any Shareholder pursuant to
this Agreement.
Payment Period means the calendar month prior to the month before
Closing.
Exhibit 1.1(a) - 4
<PAGE> 50
PentaStar has the meaning given it in the preamble to this
Agreement.
PentaStar Common Stock means the common stock of PentaStar.
PentaStar Shares has the meaning set forth in Section 3.3(a).
Permits means all permits, licenses, consents, franchises,
authorizations, approvals, privileges, waivers, exemptions, variances,
exclusionary or inclusionary Orders and other concessions, whether governmental
or private, including, without limitation, those relating to environmental,
public health, welfare or safety matters.
Per Share IPO Price has the meaning given it in Section 2(k).
Person means an individual, partnership, corporation, association,
joint stock company, trust, joint venture, limited liability company,
unincorporated organization or Governmental Authority.
Premises means the real property, buildings and improvements
thereon constituting the business premises of the Company located at 4122
Factoria Boulevard, SE, Suite 300, 310, and Suite 400 (which is subleased to
NCI), Bellevue, Washington 98006 and 12300 SE Mallard Way, Suite 250, Milwaukie,
Oregon.
Principal Customer has the meaning given it in Section 3.1(o).
Principal Provider has the meaning given it in Section 3.1(o).
Prospectus means the final prospectus included as a part of the
Registration Statement at the time such Registration Statement is declared
effective by the SEC.
Purchase Price has the meaning given it in Section 2(k).
Purchaser Representative has the meaning given it in Section
3.3(a).
Purchaser Representative Documents has the meaning given it in
Section 3.3(a).
Registration Statement has the meaning given it in Section 3.3(a).
Retained Liabilities means (a) the obligations of the Company
arising after the Closing Date under those contracts which are identified by the
Company on Exhibit 1.1(d) with respect to the period after the Closing Date, (b)
trade payables incurred in the ordinary course of business which are not past
due based upon their normal, stated terms, (c) accrued liabilities incurred in
the ordinary course of business which are not past due based upon their normal,
stated terms (e.g., payroll and Simple IRA Plan), but excluding accrued bonus
(other than quarterly bonuses, payable in the ordinary course of business,
consistent with past practice), accrued profit sharing, accrued rent and accrued
Liabilities for Taxes (to the extent accrued Taxes payable exceed tax deposits,
other than personal property taxes assessed, but not payable, and with respect
to payroll taxes, only to the extent of payroll taxes due but not paid as of the
Closing Date) and (d) Cash Covered Accrued Commission Liabilities. Retained
Liabilities will not include any other Liability.
Exhibit 1.1(a) - 5
<PAGE> 51
Right means any right, property interest, concession, patent,
trademark, trade name, copyright, know-how or other proprietary right of another
Person.
SEC means the United States Securities and Exchange Commission.
Schillinger means Dennis Schillinger.
Schillinger Escrow Agreement means the Principal Stockholder's
Escrow and Contingent Stock Agreement between PentaStar and Dennis Schillinger
in the form of Exhibit 2(k)(ii).
Securities Act means the Securities Act of 1933, as amended.
Seller Transaction Expenses has the meaning given it in Section
9.10.
Shareholders has the meaning given it in the preamble to this
Agreement.
Shareholders' Agent means Dennis Schillinger (or the substituted
agent described in Section 9.14) acting as agent for the Shareholders pursuant
to Section 9.14.
Shares means all of the issued and outstanding capital stock of
the Company.
Simple IRA Plan means the Company's simple IRA plan.
Stock/LLC Exchange has the meaning given it in Recital A.
Subsidiary means, with respect to the Company, any corporation,
partnership, limited liability company or entity in which the Company has an
equity interest.
Survival Period means, with respect to a representation or
warranty, the applicable period after the Closing Date during which such
representation or warranty survives pursuant to Section 3.5.
Surviving Corporation has the meaning given it in the preamble to
this Agreement.
Tax means any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section
59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, documentary,
personal property, sales, use, transfer, registration, value added, alternative
or add-on minimum, estimated or other tax of any kind whatsoever, including any
interest, penalty or addition thereto, whether disputed or not.
Tax Return means any return, declaration, report, claim for refund
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
Third Party Claim has the meaning given it in Section 7.3(a).
Exhibit 1.1(a) - 6
<PAGE> 52
Third Party Product has the meaning given it in Section 3.1(r).
Total Consideration Paid or Payable means, with respect to any
Shareholder, the sum of (a) the amount of cash paid or payable to such
Shareholder under Section 2(k) and (b) the value of the PentaStar Shares paid or
payable to such Shareholder under Section 2(k). The value of such PentaStar
Shares will be determined as of the date that is 180 days after the Closing
Date, with respect to the Shareholders' obligation to pay the full amount of any
unpaid Closing Accounts Receivable under Section 5.8, or on the Notice Date with
respect to any claim for indemnification under Section 7.1(a) or 7.3 for which
notice is given by PentaStar, as applicable, with respect to the Shareholders'
Liability to pay such claim, as the case may be. The value of any PentaStar
Share under this Agreement will be the fair market value of a share of PentaStar
Common Stock as of any date of determination, as follows. If shares of PentaStar
Common Stock are not traded on any stock exchange within the United States or
listed or quoted on NASDAQ or any successor quotation system, the fair market
value of such share shall be the most recent value as reasonably determined by
the Board of Directors of PentaStar in good faith. If shares of PentaStar Common
Stock are so traded, listed or quoted, the fair market value of a share of such
shares will be (i) the closing price of a share of PentaStar Common Stock on the
principal exchange on which shares of PentaStar Common Stock are then trading,
if any (or as reported on any composite index which includes such principal
exchange), on the trading day previous to such date, or if shares were not
traded on the trading day previous to such date, then on the next preceding date
on which a trade occurred; or (ii) if PentaStar Common Stock is not traded on an
exchange but is quoted on NASDAQ or a successor quotation system, the mean
between the closing representative bid and asked prices for the PentaStar Common
Stock on the trading day previous to such date as reported by NASDAQ or such
successor quotation system.
Transaction has the meaning given it in Recital B.
US West means U.S. West Communications, Inc.
US West Contract has the meaning given it in 3.1(o).
Exhibit 1.1(a) - 7
<PAGE> 53
EXHIBIT 3.2
(a) The Company is a corporation duly organized and validly existing in
good standing under the laws of the jurisdiction of its organization, with full
corporate power and authority to own, lease, and operate its properties and to
conduct its business as described in the Prospectus. The Company is duly
qualified to do business and is in good standing in every jurisdiction in which
its ownership, leasing, licensing, or use of property and assets or the conduct
of its business makes such qualifications necessary.
(b) The financial statements of the Company included in the Registration
Statement and the Prospectus fairly present in all material respects with
respect to the Company the financial position, the results of operations, and
the other information purported to be shown therein at the respective dates and
for the respective periods to which they apply. Such financial statements have
been prepared in accordance with generally accepted accounting principles,
except to the extent that certain footnote disclosures regarding any stub period
may have been omitted in accordance with the applicable rules of the Commission
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
consistently applied throughout the periods involved, are correct and complete
in all material respects, and are in accordance with the books and records of
the Company. There has at no time been a material adverse change in the
financial condition, results of operations, business, properties, assets,
liabilities, or future prospects of the Company from the latest information set
forth in the Registration Statement or the Prospectus, except as may be properly
described in the Prospectus.
(c) There is no litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation pending, or, to the knowledge
of the Company, threatened, or proposed with respect to the Company or any of
its operations, businesses, properties, or assets, except as may be properly
described in the Prospectus or such as individually or in the aggregate do not
now have and will not in the future have a material adverse effect upon the
operations, business, properties, or assets of the Company. The Company is not
in violation of, or in default with respect to, any law, rule, regulation,
order, judgment, or decree except as may be properly described in the Prospectus
or such as in the aggregate do not now have and will not in the future have a
material adverse effect upon the operations, business, properties, or assets of
the Company, nor is the Company required to take any action in order to avoid
any such violation or default.
(d) The Company has good and marketable title in fee simple absolute to all
real properties and good title to all other properties and assets which the
Prospectus indicates are owned by it, free and clear of all liens, security
interests, pledges, charges, encumbrances, and mortgages except as may be
properly described in the Prospectus or such as in the aggregate do not now have
and will not in the future have a material adverse effect upon the operations,
business, properties, or assets of the Company. No real property owned, leased,
licensed, or used by the Company lies in an area which is, or to the knowledge
of the Company will be, subject to zoning, use, or building code restrictions
which would prohibit, and no state of facts relating to the actions or inaction
of another person or entity or his or its ownership, leasing, licensing, or use
of any real or personal property exists which would prevent, the continued
effective ownership, leasing, licensing, or use of such real property in the
business of the Company as presently conducted or as the Prospectus indicates it
contemplates conducting, except as may be properly described in the Prospectus
or such as in
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<PAGE> 54
the aggregate do not now have and will not in the future have a material adverse
effect upon the operations, business, properties, or assets of the Company.
(e) Neither the Company nor any other party is now or is expected by the
Company to be in violation or breach of, or in default with respect to complying
with, any material provision of any contract, agreement, instrument, lease,
license, arrangement, or understanding which is material to the Company, and
each such contract, agreement, instrument, lease, license, arrangement, and
understanding is in full force and is the legal, valid, and binding obligation
of the parties thereto and is enforceable as to them in accordance with its
terms. The Company enjoys peaceful and undisturbed possession under all material
leases and licenses under which it is operating. The Company is not a party to
or bound by any contract, agreement, instrument, lease, license, arrangement, or
understanding, or subject to any charter or other restriction, which has had or
could reasonably be expected to have in the future a material adverse effect on
the financial condition, results of operations, business, properties, assets,
liabilities, or future prospects of the Company. The Company is not in violation
or breach of, or in default with respect to, any term of its Articles of
Incorporation (or other charter document) or by-laws.
(f) All patents, patent applications, trademarks, trademark applications,
trade names, service marks, copyrights, franchises, technology, know-how and
other intangible properties and assets that are material to the Company (all of
the foregoing being herein called "Intangibles") that the Company owns or has
pending, or under which it is licensed, are uncontested to the knowledge of the
Company. Except as otherwise disclosed in the Registration Statement, the
Intangibles are owned by the Company, free and clear of all liens, security
interests, pledges, and encumbrances. There is no right under any Intangible
necessary to the business of the Company as presently conducted or as the
Prospectus indicates it contemplates conducting (except as may be so designated
in the Prospectus). The Company has not infringed, is not infringing, and has
not received notice of infringement with respect to asserted Intangibles of
others, except for such infringements which in the aggregate would not result in
a material adverse effect on the Company. To the knowledge of the Company, there
is no infringement by others of Intangibles of the Company. To the knowledge of
the Company, there is no Intangible of others which has had or could reasonably
be expected in the future to have a materially adverse effect on the financial
condition, results of operations, business, properties, assets, liabilities, or
future prospects of the Company.
(g) Neither the Company nor any director, officer, agent, employee, or
other person associated with or acting on behalf of the Company has, directly or
indirectly: used any corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political activity; made
any unlawful payment to foreign or domestic government officials or employees or
to foreign or domestic political parties or campaigns from corporate funds;
violated any provision of the Foreign Corrupt Practices Act of 1977, as amended
by the International Anti-Bribery Act of 1998; or made any bribe, rebate,
payoff, influence payment, kickback, or other unlawful payment. The Company has
not accepted any material advertising allowances or marketing allowances from
suppliers to the Company or, to the extent any advertising allowance has been
accepted, the Company has provided proper documentation to the supplier with
respect to advertising as to which the advertising allowance has been granted.
(h) The Company has not, directly or indirectly, (i) taken any action
designed to cause
-2-
<PAGE> 55
or to result in, or that has constituted or which might reasonably be expected
to constitute, the stabilization or manipulation of the price of any security of
PentaStar to facilitate the sale or resale of shares ("Shares") of PentaStar's
common stock to be purchased by the underwriter as described in the Prospectus,
or (ii) since the filing of the Registration Statement, (A) sold, bid for,
purchased, or paid anyone any compensation for soliciting purchases of the
Shares, or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of PentaStar.
(i) The Company has not distributed written offering material in connection
with the offering and sale of the Shares to be purchased by the underwriter as
described in the Prospectus.
(j) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which it is engaged. The Company has no
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a material adverse effect, except as described in or contemplated
by the Prospectus.
(k) The Company is not presently doing business with the government of Cuba
or with any person or affiliate located in Cuba.
(l) Except as disclosed in the Prospectus, and to the Company's best
knowledge after reasonable investigation, all hardware, firmware, software and
computer systems of the Company and, to the Company's knowledge, of respective
material vendors and suppliers of the Company, will be by the Closing Date, year
2000 Compliant (as defined below) and will continue to function in accordance
with their independent purpose without material error or material interruption
as a result of the transition to the year 2000, to the extent that data
submitted or processed is unambiguous and date specific, except for such errors
and interruptions which in the aggregate could not reasonably be expected to
have a material adverse effect on the Company. The Company will not incur any
additional material costs for the Company to become year 2000 Compliant. For
purposes of this paragraph, "year 2000 Compliant" means, with respect to the
Company or its respective material vendors and suppliers, that the hardware,
firmware, software and computer systems of each of the foregoing (i) will
completely and accurately address, produce, store and calculate data involving
dates before, on or after January 1, 2000 and will not produce abnormally ending
or incorrect results involving such dates as used in any forward or regression
dated based functions, and (ii) will provide that date related functionalities
and data fields include the indication of century and millennium and will
perform calculations that involve a four-digit year.
(m) Except as set forth in the Prospectus, there is no action, suit or
proceeding before any court, arbitration tribunal or governmental agency,
authority or body pending or, to the knowledge of the Company, threatened which
could reasonably be expected to result in judgments against the Company not
adequately covered by insurance or which collectively could reasonably be
expected to result in any material adverse change in the condition (financial or
otherwise), the business or the prospects of the Company or would materially
affect the properties or assets of the Company.
(n) Except as set forth in the Prospectus:
-3-
<PAGE> 56
i. The Company has obtained all permits, licenses and
other authorizations which are required under the Environmental
Laws for the ownership, use and operation of each location
operated or leased by the Company (the "Property"), all such
permits, licenses and authorizations, if any, obtained are in
effect, no appeal nor any other action is pending to revoke any
such permit, license or authorization, and the Company is in full
compliance with all terms and conditions of all such permits,
licenses and authorizations, if any, obtained by the Company.
ii. To the best knowledge of the Company's executive
officers, the Company and the Property are in compliance with all
Environmental Laws including, without limitation, all
restrictions, conditions, standards, limitations, prohibitions,
requirements, obligations, schedules and timetables contained in
the Environmental Laws or contained in any regulation, code, plan,
order, decree, judgment, injunction, notice or demand letter
issued, entered, promulgated or approved thereunder.
iii. The Company has not, and to the best knowledge of the
Company's executive officers, no other person has, released,
placed, stored, buried or dumped any Hazardous Substances, Oils,
Pollutants or Contaminants or any other wastes produced by, or
resulting from, any business, commercial, or industrial
activities, operations, or processes, on, beneath, or adjacent to
the Property or any property formerly owned, operated or leased by
the Company except for inventories of such substances to be used,
and wastes generated therefrom, in the ordinary course of business
of the Company (which inventories and wastes, if any, were and are
stored or disposed of in accordance with applicable laws and
regulations and in a manner such that there has been no release of
any such substances into the environment).
iv. Except as provided to PentaStar in writing, there
exists no written or tangible report, synopsis or summary of any
asbestos, toxic waste or Hazardous Substances, Oils, Pollutants or
Contaminants investigation made with respect to all or any portion
of the assets of the Company (whether or not prepared by experts
and whether or not in the possession of the executive officers of
the Company).
v. Definitions: As used herein:
(1) Environmental Laws means all federal, state
and local laws, regulations, rules and ordinances relating
to pollution or protection of the environment, including,
without limitation, laws relating to Releases or
threatened Releases of Hazardous Substances, Oils,
Pollutants or Contaminants into the indoor or outdoor
environment (including, without limitation, ambient air,
surface water, groundwater, land, surface and subsurface
strata) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage,
Release, transport or handling of Hazardous Substances,
Oils, Pollutants or Contaminants.
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<PAGE> 57
(2) Hazardous Substances, Oils, Pollutants or
Contaminants means all substances defined as such in the
National Oil and Hazardous Substances Pollutant
Contingency Plan, 40 C.F.R. ss.300.6, or defined as such
under any Environmental Law.
(3) Release means any release, spill, emission,
discharge, leaking, pumping, injection, deposit, disposal,
discharge, dispersal, leaching or migration into the
indoor or outdoor environmental (including, without
limitation, ambient air, surface water, groundwater, and
surface or subsurface strata) or into or out of any
property, including the movement of Hazardous Substances,
Oils, Pollutants or Contaminants through or in the air,
soil, surface water, groundwater or any property.
(o) The Company is not a party to any agreement giving rise to any
obligation by the Company or any subsidiary to pay any third party royalties or
fees of any kind whatsoever with respect to any technology developed, employed,
used or licensed by the Company or any subsidiary, other than as is disclosed in
the Prospectus.
(p) The issued and outstanding shares of common stock of the Company and
all other securities issued and sold or exchanged by the Company were not
required to be registered under any applicable state or federal securities laws
and regulations when issued and sold or exchanged and were issued and sold or
exchanged in compliance with applicable exemptions from registration under
federal and state securities laws.
-5-
<PAGE> 1
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
PENTASTAR COMMUNICATIONS, INC.
The undersigned, _____________________, hereby certifies that:
ONE: He is the duly elected and acting President of PentaStar
Communications, Inc.
TWO: The corporation's original Certificate of Incorporation was filed
with the Secretary of State of the State of Delaware on March 15, 1999. The name
of the corporation at that time was Optimal Communications, Inc.
THREE: This Restated Certificate of Incorporation amends, integrates
and restates the corporation's Certificate of Incorporation filed on March 15,
1999 and amended on August 13, 1999, and has been duly adopted in accordance
with Sections 242 and 245 of the General Corporation Law of the State of
Delaware (the "DGCL").
FOUR: The text of the Certificate of Incorporation of this corporation
is hereby amended and restated to read in its entirety as follows:
ARTICLE I.
NAME
The name of this corporation is PentaStar Communications, Inc.
ARTICLE II.
REGISTERED OFFICER AND AGENT
The address of the registered office of the corporation in the State of
Delaware is 1013 Centre Road, Wilmington, New Castle County, Delaware 19805. The
name of its registered agent at such address is Corporation Service Company.
ARTICLE III.
PURPOSES AND POWERS
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the DGCL.
<PAGE> 2
ARTICLE IV.
CAPITALIZATION
A. This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is Twenty One Million
(21,000,000) shares. Twenty Million (20,000,000) shares shall be Common Stock,
par value $.0001 per share. One Million (1,000,000) shares shall be Preferred
Stock, par value $.0001 per share.
B. Each of the 915.7509 shares of the corporation's common stock, par
value $.01 per share, issued and outstanding as of the effective time of this
Restated Certificate of Incorporation shall, without further action, be
subdivided, reclassified and changed into 3,417.96 fully paid and nonassessable
shares of Common Stock. Each holder of record of certificates for any of such
915.7509 shares of common stock of the corporation as of the effective time of
this Restated Certificate of Incorporation shall be entitled to receive, as soon
as practicable upon surrender of the stock certificate(s) representing such
shares, stock certificates representing 3,417.96 shares of Common Stock for each
one share of such common stock represented by the surrendered certificate of
such holder; provided, however, that no fractional shares resulting from such
subdivision shall be issued but the corporation shall instead pay to any holder
otherwise entitled to receive a fractional share an amount determined by
multiplying such fractional share by $_____ [IPO PER SHARE PRICE], which is
determined to be the fair value of such fractional share.
C. The following is a statement of the designations and powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, in respect of the Common Stock:
1. Subject to the preferential rights, if any, of the
Preferred Stock, the holders of shares of Common Stock shall be
entitled to receive, when and if declared by the Board of Directors,
out of the assets of the corporation which are by law available
therefor, dividends payable either in cash, in property or in shares of
Common Stock.
2. Except as otherwise required by law, at every annual or
special meeting of stockholders of the corporation, every holder of
Common Stock shall be entitled to one vote, in person or by proxy, for
each share of Common Stock standing in such holder's name on the books
of the corporation.
3. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the corporation, after
payment or provision for payment of the debts and other liabilities of
the corporation and of the preferential amounts, if any, to which the
holders of Preferred Stock shall be entitled, the holders of all
outstanding shares of Common Stock shall be entitled to share ratably
in the remaining net assets of the corporation.
D. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate
pursuant to the DGCL, to fix or alter from time to time the designation, powers,
preferences and rights of the shares of each series and the qualifications,
limitations or restrictions of any wholly unissued series or any of them; and to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of any
series then outstanding. In case the number of shares of any series shall be
decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
ARTICLE V.
DIRECTORS
For the management of the business and for the conduct of the affairs
of the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed exclusively
by, or in the manner provided in, the Bylaws of the corporation.
B. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, following the
closing of the initial public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "1933 Act"),
covering the offer and sale of Common Stock to the public (the "Initial Public
Offering"), the directors shall be divided into three classes designated as
Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the closing of the
Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
2
<PAGE> 3
Notwithstanding the foregoing provisions of this Article, each director
shall serve until such director's successor is duly elected and qualified or
until his death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
C. Removal of Directors
1. Subject to the rights of the holders of any series of
Preferred Stock, neither the Board of Directors nor any individual director may
be removed without cause.
2. Subject to any limitation imposed by law, any individual
director or directors may be removed with cause by the holders of a majority of
the voting power of the corporation entitled to vote at an election of
directors.
D. Vacancies
1. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
2. If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
DGCL.
3
<PAGE> 4
ARTICLE VI.
BYLAWS
In furtherance and not in limitation of the powers conferred by statue,
the Board of Directors of the corporation is expressly authorized to make, alter
or repeal the bylaws of the corporation, but such authorization shall not divest
the stockholders of the power, nor limit their power, to make, alter or repeal
bylaws.
A. The directors of the corporation need not be elected by written
ballot unless the Bylaws so provide.
B. No action shall be taken by the stockholders of the corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws and following the closing of the Initial Public Offering no action
shall be taken by the stockholders by written consent.
C. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
ARTICLE VII.
LIMITATION OF DIRECTORS' LIABILITY
A. The liability of the directors for monetary damages shall be
eliminated to the fullest extent under applicable law.
B. Any repeal or modification of this VII shall be prospective and
shall not adversely affect any right or protection of a director under this
Article VII as in effect immediately prior to such repeal or modification with
respect to any liability that would have accrued, but for this Article VII,
prior to such repeal or modification.
ARTICLE VIII.
INDEMNIFICATION
The corporation shall, to the fullest extent permitted by Section 145
of the DGCL (or any successor section), as the same may be amended and
supplemented, indemnify any director or officer of the corporation, including
any director or officer of the corporation who was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any and all of
the expenses, liabilities or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any Bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his
4
<PAGE> 5
official capacity and as to action in another capacity while holding such
office, shall continue as to a person who has ceased to be a director or officer
and shall inure to the benefit of the heirs, executors, and administrators of
such person. No amendment or repeal of this Article VIII shall apply to or have
any affect on any right to indemnification provided hereunder with respect to
any acts or omissions occurring prior to such amendment or repeal.
ARTICLE IX.
RESERVATION OF POWER TO AMEND
The corporation reserves the right at any time and from time to time to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, as from time to time amended, in the manner now or hereafter
prescribed by law; and all rights, preferences and privileges of whatsoever
nature conferred upon stockholders, directors or any other persons whomsoever by
and pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the right reserved in this Article IX.
ARTICLE X.
TRANSACTIONS WITH DIRECTORS AND OFFICERS
The corporation shall have authority, to the fullest extent now or
hereafter permitted by the DGCL, or by any other applicable law, to enter into
any contract or transaction with one or more of its directors or officers, or
with any corporation, partnership, joint venture, trust, association or other
entity in which one or more of its directors or officers are directors or
officers or have a financial interest, notwithstanding such relationships and
notwithstanding the fact that the director or officer is present at or
participates in the meeting of the board of directors or committee thereof which
authorizes the contract or transaction.
IN WITNESS WHEREOF, this Certificate has been subscribed this ____ day
of __________, 1999 by the undersigned who affirms that the statements made
herein are true and correct.
------------------------------
------------------------------
5
<PAGE> 1
EXHIBIT 3.2
RESTATED
BYLAWS
OF
PENTASTAR COMMUNICATIONS, INC.
(A DELAWARE CORPORATION)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I - Offices...............................................................................................1
Section 1. Registered Office.............................................................................1
Section 2. Other Offices.................................................................................1
ARTICLE II - Corporate Seal.......................................................................................1
Section 3. Corporate Seal................................................................................1
ARTICLE III - Stockholders' Meetings..............................................................................1
Section 4. Place Of Meetings.............................................................................1
Section 5. Annual Meetings...............................................................................2
Section 6. Special Meetings..............................................................................4
Section 7. Notice Of Meetings............................................................................5
Section 8. Quorum........................................................................................5
Section 9. Adjournment And Notice Of Adjourned Meetings..................................................6
Section 10. Voting Rights................................................................................6
Section 11. Joint Owners Of Stock .......................................................................6
Section 12. List Of Stockholders.........................................................................6
Section 13. Action Without Meeting.......................................................................7
Section 14. Organization.................................................................................7
ARTICLE IV - Directors............................................................................................8
Section 15. Number And Term Of Office....................................................................8
Section 16. Powers.......................................................................................8
Section 17. Classes of Directors.........................................................................8
Section 18. Vacancies....................................................................................9
Section 19. Resignation..................................................................................9
Section 20. Removal.....................................................................................10
Section 21. Meetings....................................................................................10
Section 22. Quorum And Voting...........................................................................11
Section 23. Action Without Meeting......................................................................11
Section 24. Fees And Compensation.......................................................................11
Section 25. Committees..................................................................................11
Section 26. Organization................................................................................13
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE V - Officers.............................................................................................13
Section 27. Officers Designated.........................................................................13
Section 28. Tenure And Duties Of Officers...............................................................13
Section 29. Delegation Of Authority.....................................................................15
Section 30. Resignations................................................................................15
Section 31. Removal.....................................................................................15
ARTICLE VI - Execution Of Corporate Instruments And Voting Of Securities Owned By The Corporation................15
Section 32. Execution Of Corporate Instruments..........................................................15
Section 33. Voting Of Securities Owned By The Corporation...............................................16
ARTICLE VII - Shares Of Stock....................................................................................16
Section 34. Form And Execution Of Certificates..........................................................16
Section 35. Lost Certificates...........................................................................17
Section 36. Transfers...................................................................................17
Section 37. Fixing Record Dates.........................................................................17
Section 38. Registered Stockholders.....................................................................18
ARTICLE VIII - Other Securities Of The Corporation...............................................................18
Section 39. Execution Of Other Securities...............................................................18
ARTICLE IX - Dividends...........................................................................................19
Section 40. Declaration Of Dividends....................................................................19
Section 41. Dividend Reserve............................................................................19
ARTICLE X - Fiscal Year..........................................................................................19
Section 42. Fiscal Year.................................................................................19
ARTICLE XI - Indemnification.....................................................................................20
Section 43. Indemnification Of Directors, Executive Officers, Other Officers,
Employees And Other Agents..............................................................................20
ARTICLE XII - Notices............................................................................................23
Section 44. Notices.....................................................................................23
ARTICLE XIII - Amendments........................................................................................25
Section 45. Amendments..................................................................................25
ARTICLE XIV - Loans To Officers..................................................................................25
Section 46. Loans To Officers...........................................................................25
</TABLE>
ii
<PAGE> 4
RESTATED
BYLAWS
OF
PENTASTAR COMMUNICATIONS, INC.
(A DELAWARE CORPORATION)
ARTICLE I
Offices
Section 1. Registered Office. The registered office of the corporation
in the State of Delaware shall be in the City of Wilmington, County of New
Castle.
Section 2. Other Offices. The corporation shall also have and maintain
an office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the corporation may require.
ARTICLE II
Corporate Seal
Section 3. Corporate Seal. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate Seal-
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
Stockholders' Meetings
Section 4. Place Of Meetings. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
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<PAGE> 5
Section 5. Annual Meetings.
(a) The annual meeting of the stockholders of the corporation, for the
purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors. Nominations of persons for election
to the Board of Directors of the corporation and the proposal of business to be
considered by the stockholders may be made at an annual meeting of stockholders:
(i) pursuant to the corporation's notice of meeting of stockholders; (ii) by or
at the direction of the Board of Directors; or (iii) by any stockholder of the
corporation who was a stockholder of record at the time of giving of notice
provided for in the following paragraph, who is entitled to vote at the meeting
and who complied with the notice procedures set forth in Section 5.
(b) At an annual meeting of the stockholders, only such business shall
be conducted as shall have been properly brought before the meeting. For
nominations or other business to be properly brought before an annual meeting by
a stockholder pursuant to clause (iii) of Section 5(a) of these Bylaws, (i) the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation, (ii) such other business must be a proper matter for
stockholder action under the General Corporation Law of Delaware, (iii) if the
stockholder, or the beneficial owner on whose behalf any such proposal or
nomination is made, has provided the corporation with a Solicitation Notice (as
defined in this Section 5(b)), such stockholder or beneficial owner must, in the
case of a proposal, have delivered a proxy statement and form of proxy to
holders of at least the percentage of the corporation's voting shares required
under applicable law to carry any such proposal, or, in the case of a nomination
or nominations, have delivered a proxy statement and form of proxy to holders of
a percentage of the corporation's voting shares reasonably believed by such
stockholder or beneficial owner to be sufficient to elect the nominee or
nominees proposed to be nominated by such stockholder, and must, in either case,
have included in such materials the Solicitation Notice, and (iv) if no
Solicitation Notice relating thereto has been timely provided pursuant to this
section, the stockholder or beneficial owner proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice under this Section 5. To be
timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the corporation not later than the close of
business on the ninetieth (90th) day nor earlier than the close of business on
the one hundred twentieth (120th) day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced more than thirty (30) days prior to or
delayed by more than thirty (30) days after the anniversary of the preceding
year's annual meeting, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the one hundred twentieth
(120th) day prior to such annual meeting and not later than the close of
business on the later of the ninetieth (90th) day prior to such annual meeting
or the tenth (10th) day following the day on which public announcement of the
date of such meeting is first made. In no event shall the public announcement of
an adjournment of an annual meeting commence a new time period for the giving of
a stockholder's notice as described above. Such stockholder's notice shall set
forth: (A) as to each
2
<PAGE> 6
person whom the stockholder proposed to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "1934 Act") and Rule 14a-11
thereunder (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (B) as to any
other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (C) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
corporation's books, and of such beneficial owner, (ii) the class and number of
shares of the corporation which are owned beneficially and of record by such
stockholder and such beneficial owner, and (iii) whether either such stockholder
or beneficial owner intends to deliver a proxy statement and form of proxy to
holders of, in the case of the proposal, at least the percentage of the
corporation's voting shares required under applicable law to carry the proposal
or, in the case of a nomination or nominations, a sufficient number of holders
of the corporation's voting shares to elect such nominee or nominees (an
affirmative statement of such intent, a "Solicitation Notice").
(c) Notwithstanding anything in the second sentence of Section 5(b) of
these Bylaws to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the corporation at least one
hundred (100) days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this Section 5 shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the corporation.
(d) Only such persons who are nominated in accordance with the
procedures set forth in this Section 5 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 5. Except as otherwise provided by law, the Chairman of the
meeting shall have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made, or proposed, as the
case may be, in accordance with the procedures set forth in these Bylaws and, if
any proposed nomination or business is not in compliance with these Bylaws, to
declare that such defective proposal or nomination shall not be presented for
stockholder action at the meeting and shall be disregarded.
3
<PAGE> 7
(e) Notwithstanding the foregoing provisions of this Section 5, in
order to include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Nothing in these Bylaws shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the corporation proxy statement pursuant to
Rule 14a-8 under the 1934 Act.
(f) For purposes of this Section 5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the 1934 Act.
Section 6. Special Meetings.
(a) Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption), and shall be held at such place, on such date, and at
such time as the Board of Directors, shall fix.
(b) If a special meeting is properly called by any person or persons
other than the Board of Directors, the request shall be in writing, specifying
the general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the Chairman of the Board of Directors, the Chief
Executive Officer, or the Secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
Board of Directors shall determine the time and place of such special meeting,
which shall be held not less than thirty-five (35) nor more than one hundred
twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within one hundred (100) days after the receipt of the request, the
person or persons properly requesting the meeting may set the time and place of
the meeting and give the notice. Nothing contained in this paragraph (b) shall
be construed as limiting, fixing, or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.
(c) Nominations of persons for election to the Board of Directors may
be made at a special meeting of stockholders at which directors are to be
elected pursuant to the corporation's notice of meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
corporation who is a stockholder of record at the time of giving notice provided
for in these Bylaws who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 6(c). In the event
the corporation calls a special meeting of stockholders for the
4
<PAGE> 8
purpose of electing one or more directors to the Board of Directors, any such
stockholder may nominate a person or persons (as the case may be), for election
to such position(s) as specified in the corporation's notice of meeting, if the
stockholder's notice required by Section 5(b) of these Bylaws shall be delivered
to the Secretary at the principal executive offices of the corporation not
earlier than the close of business on the one hundred twentieth (120th) day
prior to such special meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to such meeting or the tenth (10th) day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
Section 7. Notice Of Meetings. Except as otherwise provided by law or
the Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
Section 8. Quorum. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a quorum,
any meeting of stockholders may be adjourned, from time to time, either by the
chairman of the meeting or by vote of the holders of a majority of the shares
represented thereat, but no other business shall be transacted at such meeting.
The stockholders present at a duly called or convened meeting, at which a quorum
is present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by statute, the Certificate of Incorporation or these Bylaws,
in all matters other than the election of directors, the affirmative vote of the
majority of shares present in person or represented by proxy at the meeting and
entitled to vote on the subject matter shall be the act of the stockholders.
Except as otherwise provided by statute, the Certificate of Incorporation or
these Bylaws, directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Where a separate vote by a class or classes
or series is required, except where otherwise provided by the statute or by the
Certificate of Incorporation or these Bylaws, a majority of the outstanding
shares of such class or classes or series, present in person or represented by
proxy, shall constitute a quorum entitled to take action with respect to that
vote on that matter and, except where otherwise provided by the statute or by
the Certificate of Incorporation or these Bylaws, the affirmative vote of the
majority (plurality, in the case of the
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election of directors) of the votes cast by the holders of shares of such class
or classes or series shall be the act of such class or classes or series.
Section 9. Adjournment And Notice Of Adjourned Meetings. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
(30) days or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 10. Voting Rights. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote shall have the right to do so either in person or by an
agent or agents authorized by a proxy granted in accordance with Delaware law.
An agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a longer
period.
Section 11. Joint Owners Of Stock. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the Delaware General Corporation Law, Section 217(b). If
the instrument filed with the Secretary shows that any such tenancy is held in
unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
Section 12. List Of Stockholders. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place
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where the meeting is to be held. The list shall be produced and kept at the time
and place of meeting during the whole time thereof and may be inspected by any
stockholder who is present.
Section 13. Action Without Meeting.
(a) Unless otherwise provided in the Certificate of Incorporation, any
action required by statute to be taken at any annual or special meeting of the
stockholders, or any action which may be taken at any annual or special meeting
of the stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered to the corporation in the manner herein
required, written consents signed by a sufficient number of stockholders to take
action are delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
(c) Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is consented
to is such as would have required the filing of a certificate under any section
of the Delaware General Corporation Law if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written consent has been given in accordance with
Section 228 of the Delaware General Corporation Law.
(d) Notwithstanding the foregoing, no such action by written consent
may be taken following the closing of the initial public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "1933 Act"), covering the offer and sale of Common Stock of the corporation
(the "Initial Public Offering").
Section 14. Organization.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the Chief
Executive Officer, or, if the Chief Executive Officer is absent, a chairman of
the meeting chosen by a majority in interest of the stockholders entitled to
vote, present in person or by proxy, shall act as chairman. The Secretary, or,
in his absence, an Assistant Secretary directed to do so by the Chief Executive
Officer, shall act as secretary of the meeting.
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(b) The Board of Directors of the corporation shall be entitled to make
such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
ARTICLE IV
Directors
Section 15. Number And Term Of Office. The authorized number of
directors of the corporation shall be fixed by one or more resolutions of the
Board of Directors. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any reason, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
Section 16. Powers. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
Section 17. Classes of Directors. Subject to the rights of the holders
of any series of Preferred Stock to elect additional directors under specified
circumstances, following the closing of the Initial Public Offering, the
directors shall be divided into three classes designated as Class I, Class II
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class I directors shall expire and
Class I directors shall be elected for a full term of three years. At the second
annual meeting of stockholders following the closing of the Initial Public
Offering, the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three years. At the third annual
meeting of stockholders following the closing of the Initial Public Offering,
the term of office of the Class III directors shall expire and Class III
directors shall be elected for a full term of three years. At each succeeding
annual meeting of stockholders, directors shall be elected for a full term of
three years to succeed the directors of the class whose terms expire at such
annual meeting.
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Notwithstanding the foregoing provisions of this section, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
Section 18. Vacancies.
(a) Unless otherwise provided in the Certificate of Incorporation, any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other causes and any newly created directorships
resulting from any increase in the number of directors shall, unless the Board
of Directors determines by resolution that any such vacancies or newly created
directorships shall be filled by stockholders, except as otherwise provided by
law, be filled only by the affirmative vote of a majority of the directors then
in office, even though less than a quorum of the Board of Directors. Any
director elected in accordance with the preceding sentence shall hold office for
the remainder of the full term of the director for which the vacancy was created
or occurred and until such director's successor shall have been elected and
qualified. A vacancy in the Board of Directors shall be deemed to exist under
this Bylaw in the case of the death, removal or resignation of any director.
(b) If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
Delaware General Corporation Law.
Section 19. Resignation. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When one
or more directors shall resign from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
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Section 20. Removal.
(a) Neither the Board of Directors nor any individual director may be
removed without cause.
(b) Subject to any limitation imposed by law, any individual director
or directors may be removed with cause by the affirmative vote of a majority of
the voting power of the corporation entitled to vote at an election of
directors.
Section 21. Meetings.
(a) Annual Meetings. The annual meeting of the Board of Directors shall
be held immediately before or after the annual meeting of stockholders and at
the place where such meeting is held. No notice of an annual meeting of the
Board of Directors shall be necessary and such meeting shall be held for the
purpose of electing officers and transacting such other business as may lawfully
come before it.
(b) Regular Meetings. Unless otherwise restricted by the Certificate of
Incorporation, regular meetings of the Board of Directors may be held at any
time or date and at any place within or without the State of Delaware which has
been designated by the Board of Directors and publicized among all directors. No
formal notice shall be required for regular meetings of the Board of Directors.
(c) Special Meetings. Unless otherwise restricted by the Certificate of
Incorporation, special meetings of the Board of Directors may be held at any
time and place within or without the State of Delaware whenever called by the
Chairman of the Board, the Chief Executive Officer or any two of the directors.
(d) Telephone Meetings. Any member of the Board of Directors, or of any
committee thereof, may participate in a meeting by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting by such means
shall constitute presence in person at such meeting.
(e) Notice of Meetings. Notice of the time and place of all special
meetings of the Board of Directors shall be orally or in writing, by telephone,
including a voice messaging system or other system or technology designed to
record and communicate messages, facsimile, telegraph or telex, or by electronic
mail or other electronic means, during normal business hours, at least
twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, charges prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
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(f) Waiver of Notice. The transaction of all business at any meeting of
the Board of Directors, or any committee thereof, however called or noticed, or
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
the meeting, each of the directors not present shall sign a written waiver of
notice. All such waivers shall be filed with the corporate records or made a
part of the minutes of the meeting.
Section 22. Quorum And Voting.
(a) Unless the Certificate of Incorporation requires a greater number
and except with respect to indemnification questions arising under Section 43
hereof, for which a quorum shall be one-third of the exact number of directors
fixed from time to time in accordance with the Certificate of Incorporation, a
quorum of the Board of Directors shall consist of a majority of the exact number
of directors fixed from time to time by the Board of Directors in accordance
with the Certificate of Incorporation; provided, however, at any meeting whether
a quorum be present or otherwise, a majority of the directors present may
adjourn from time to time until the time fixed for the next regular meeting of
the Board of Directors, without notice other than by announcement at the
meeting.
(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by the affirmative vote
of a majority of the directors present, unless a different vote be required by
law, the Certificate of Incorporation or these Bylaws.
Section 23. Action Without Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 24. Fees And Compensation. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
Section 25. Committees.
(a) Executive Committee. The Board of Directors may appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and provided
in the resolution of the Board of Directors shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers
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which may require it; but no such committee shall have the power or authority in
reference to (i) approving or adopting, or recommending to the stockholders, any
action or matter expressly required by the Delaware General Corporation Law to
be submitted to stockholders for approval, or (ii) adopting, amending or
repealing any bylaw of the corporation.
(b) Other Committees. The Board of Directors may, from time to time,
appoint such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall any such committee have the powers denied to the Executive
Committee in these Bylaws.
(c) Term. Each member of a committee of the Board of Directors shall
serve a term on the committee coexistent with such member's term on the Board of
Directors. The Board of Directors, subject to any requirements of any
outstanding series of preferred Stock and the provisions of subsections (a) or
(b) of this Bylaw, may at any time increase or decrease the number of members of
a committee or terminate the existence of a committee. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation from the committee or from the Board of Directors. The Board of
Directors may at any time for any reason remove any individual committee member
and the Board of Directors may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
(d) Meetings. Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 25 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings of any such
committee may be held at any place which has been determined from time to time
by such committee, and may be called by any director who is a member of such
committee, upon written notice to the members of such committee of the time and
place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized number of
members of any such committee shall
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constitute a quorum for the transaction of business, and the act of a majority
of those present at any meeting at which a quorum is present shall be the act of
such committee.
Section 26. Organization. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the Chief Executive Officer (if a director), or if the Chief
Executive Officer is absent, the President, or if the President is absent, the
most senior Vice President (if a director), or, in the absence of any such
person, a chairman of the meeting chosen by a majority of the directors present,
shall preside over the meeting. The Secretary, or in his absence, any Assistant
Secretary directed to do so by the Chief Executive Officer, shall act as
secretary of the meeting.
ARTICLE V
Officers
Section 27. Officers Designated. The officers of the corporation shall
be appointed or elected by vote of the Board of Directors. The officers shall
include a Chairman of the Board of Directors, a Chief Executive Officer, a
President and Chief Operating Officer, a Chief Financial Officer, one or more
Vice Presidents, a Secretary, and a Treasurer, all of whom shall be elected at
the annual organizational meeting of the Board of Directors. The Board of
Directors may also appoint one or more Assistant Secretaries, Assistant
Treasurers and such other officers and agents with such powers and duties as it
shall deem necessary. The Board of Directors may assign such additional titles
to one or more of the officers as it shall deem appropriate. Any one person may
hold any number of offices of the corporation at any one time unless
specifically prohibited therefrom by law. The salaries and other compensation of
the officers of the corporation shall be fixed by or in the manner designated by
the Board of Directors.
Section 28. Tenure And Duties Of Officers.
(a) General. All officers shall hold office at the pleasure of the
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the vacancy may be filled by the
Board of Directors.
(b) Chairman of the Board of Directors. The Chairman of the Board of
Directors, when present, shall preside at all meetings of the stockholders and
the Board of Directors. The Chairman of the Board of Directors shall perform
other duties commonly incident to his office and shall also perform such other
duties and have such other powers, as the Board of Directors shall designate
from time to time. If there is no Chief Executive Officer, then the Chairman of
the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.
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(c) Chief Executive Officer. The Chief Executive Officer shall be the
chief executive officer of the Corporation and, subject to the direction and
control of the Board of Directors, shall manage the business of the Corporation.
The Chief Executive Officer may execute contracts, deeds and other instruments
on behalf of the Corporation. In the absence of the chairman of the board or in
the event of his disability, inability or refusal to act, the Chief Executive
Officer shall perform the duties and exercise the power of the chairman of the
board. The Chief Executive Officer shall have full authority on behalf of the
Corporation to attend any meeting, give any waiver, cast any vote, grant any
discretionary or directed proxy to any person, and exercise any other rights of
ownership with respect to any shares of capital stock or other securities held
by the Corporation and issued by any other corporation or with respect to any
partnership, trust or similar interest held by the Corporation.
(d) President and Chief Operating Officer. The President and Chief
Operating Officer shall be the chief operating officer of the Corporation and,
subject to the direction and control of the Board of Directors and the Chief
Executive Officer, shall manage the day-to-day operations of the Corporation.
The President and Chief Operating Officer may execute contracts, deeds and other
instruments on behalf of the Corporation. The President and Chief Operating
Officer shall have full authority on behalf of the Corporation to attend any
meeting, give any waiver, cast any vote, grant any discretionary or directed
proxy to any person, and exercise any other rights of ownership with respect to
any shares of capital stock or other securities held by the Corporation and
issued by any other corporation or with respect to any partnership, trust or
similar interest held by the Corporation. The President and Chief Operating
Officer shall perform such other duties as the board, the Chairman of the Board,
or the Chief Executive Officer may from time to time prescribe or delegate to
him.
(e) Chief Financial Officer. The Chief Financial Officer shall be the
chief financial and accounting officer of the Corporation, subject to the
direction and control of the Board of Directors and the Chief Executive Officer.
The Chief Financial Officer may execute contracts, deeds and other instruments
on behalf of the Corporation. The Chief Financial Officer shall perform such
other duties as the board, the Chairman of the Board, or the Chief Executive
Officer may from time to time prescribe or delegate to him.
(f) Vice President. Each Vice President, if any, shall perform such
functions as may be prescribed by the Board of Directors or the Chief Executive
Officer. Each Vice President may execute contracts, deeds and other instruments
on behalf of the Corporation. Each Vice President shall have full authority on
behalf of the Corporation to attend any meeting, give any waiver, cast any vote,
grant any discretionary or directed proxy to any person, and exercise any other
rights of ownership with respect to any shares of capital stock or other
securities held by the Corporation and issued by any other corporation or with
respect to any partnership, trust or similar interest held by the Corporation.
Each Vice President shall perform such other duties as the Board of Directors,
the Chairman of the Board, or the Chief Executive Officer may from time to time
prescribe or delegate to him.
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(g) Secretary. The Secretary shall give, or cause to be given, notice
of all meetings of the stockholders and, upon the request of a person entitled
to call a special meeting of the board of directors, he shall give notice of any
such special meeting. He shall keep the minutes of all meetings of the
stockholders, the board of directors, or any committee established by the Board
of Directors. The Secretary shall be responsible for the maintenance of all
records of the Corporation and may attest documents on behalf of the
Corporation. The Secretary shall perform such other duties as the Board of
Directors, the Chairman of the Board, or the Chief Executive Officer may from
time to time prescribe or delegate to him. Each Assistant Secretary shall have
all power and authority of the secretary unless otherwise determined by the
Board of Directors.
(h) Treasurer. The Treasurer shall be responsible for the control of
the funds of the Corporation and the custody of all securities owned by the
Corporation. The Treasurer shall perform such other duties as the Board of
Directors, the Chairman of the Board, or the Chief Executive Officer may from
time to time prescribe or delegate to him. Each assistant treasurer shall have
all power and authority of the treasurer unless otherwise determined by the
Board of Directors.
Section 29. Delegation Of Authority. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
Section 30. Resignations. Any officer may resign at any time by giving
written notice to the Board of Directors or to the Chief Executive Officer or to
the Secretary. Any such resignation shall be effective when received by the
person or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
Section 31. Removal. Any officer may be removed from office at any
time, either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
Execution Of Corporate Instruments And
Voting Of Securities Owned By The Corporation
Section 32. Execution Of Corporate Instruments. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on
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behalf of the corporation, except where otherwise provided by law or these
Bylaws, and such execution or signature shall be binding upon the corporation.
All checks and drafts drawn on banks or other depositaries on funds to
the credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
Section 33. Voting Of Securities Owned By The Corporation. All stock
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
Shares Of Stock
Section 34. Form And Execution Of Certificates. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, the President or
any Vice President and by the Treasurer or Assistant Treasurer or the Secretary
or Assistant Secretary, certifying the number of shares owned by him in the
corporation. Any or all of the signatures on the certificate may be facsimiles.
In case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent, or registrar before such certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent,
or registrar at the date of issue. Each certificate shall state upon the face or
back thereof, in full or in summary, all of the powers, designations,
preferences, and rights, and the limitations or restrictions of the shares
authorized to be issued or shall, except as otherwise required by law, set forth
on the face or back a statement that the corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences and
relative, participating, optional, or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights. Within a reasonable time after the issuance or
transfer of uncertificated stock, the corporation shall send to the registered
owner thereof a written notice containing the information required to be set
forth or stated on certificates pursuant to this section or otherwise required
by law or with respect to this section a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative participating, optional or other special
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<PAGE> 20
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
Section 35. Lost Certificates. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to agree to indemnify the corporation in such manner as it shall
require or to give the corporation a surety bond in such form and amount as it
may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
Section 36. Transfers.
(a) Transfers of record of shares of stock of the corporation shall be
made only upon its books by the holders thereof, in person or by attorney duly
authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the Delaware General Corporation Law.
Section 37. Fixing Record Dates.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall, subject to applicable law, not be more than sixty (60) nor less than ten
(10) days before the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
(b) Prior to the Initial Public Offering, in order that the corporation
may determine the stockholders entitled to consent to corporate action in
writing without a meeting, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the
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<PAGE> 21
resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. Any
stockholder of record seeking to have the stockholders authorize or take
corporate action by written consent shall, by written notice to the Secretary,
request the Board of Directors to fix a record date. The Board of Directors
shall promptly, but in all events within ten (10) days after the date on which
such a request is received, adopt a resolution fixing the record date. If no
record date has been fixed by the Board of Directors within ten (10) days of the
date on which such a request is received, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by
applicable law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
corporation by delivery to its registered office in the State of Delaware, its
principal place of business or an officer or agent of the corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by law, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
Section 38. Registered Stockholders. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
Other Securities Of The Corporation
Section 39. Execution Of Other Securities. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chairman of the Board of
Directors, the Chief Executive Officer, the President or any Vice President, or
such other person as may be authorized by the Board of Directors, and the
corporate seal impressed thereon or a facsimile of such seal imprinted thereon
and attested by the signature of
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<PAGE> 22
the Secretary or an Assistant Secretary, or the Chief Financial Officer or
Treasurer or an Assistant Treasurer; provided, however, that where any such
bond, debenture or other corporate security shall be authenticated by the manual
signature, or where permissible facsimile signature, of a trustee under an
indenture pursuant to which such bond, debenture or other corporate security
shall be issued, the signatures of the persons signing and attesting the
corporate seal on such bond, debenture or other corporate security may be the
imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested
shall have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
Dividends
Section 40. Declaration Of Dividends. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation and applicable law, if any, may be declared by the Board of
Directors pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation and applicable law.
Section 41. Dividend Reserve. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
Fiscal Year
Section 42. Fiscal Year. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
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ARTICLE XI
Indemnification
Section 43. Indemnification Of Directors, Executive Officers, Other
Officers, Employees And Other Agents.
(a) Directors and Executive Officers. The corporation shall indemnify
its directors and executive officers (for the purposes of this Article XI,
"executive officers" shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law or any other applicable law; provided, however, that the
corporation may modify the extent of such indemnification by individual
contracts with its directors and executive officers; and, provided, further,
that the corporation shall not be required to indemnify any director or
executive officer in connection with any proceeding (or part thereof) initiated
by such person unless (i) such indemnification is expressly required to be made
by law, (ii) the proceeding was authorized by the Board of Directors of the
corporation, (iii) such indemnification is provided by the corporation, in its
sole discretion, pursuant to the powers vested in the corporation under the
Delaware General Corporation Law or any other applicable law or (iv) such
indemnification is required to be made under subsection (d).
(b) Other Officers, Employees and Other Agents. The corporation shall
have power to indemnify its other officers, employees and other agents as set
forth in the Delaware General Corporation Law or any other applicable law. The
Board of Directors shall have the power to delegate the determination of whether
indemnification shall be given to any such person except executive officers to
such officers or other persons as the Board of Directors shall determine.
(c) Expenses. The corporation shall advance to any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer, of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the
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proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, that the facts known to the decision-making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the corporation.
(d) Enforcement. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law or any other applicable law for the corporation
to indemnify the claimant for the amount claimed. In connection with any claim
by an executive officer of the corporation (except in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such executive officer is or was a director of the corporation)
for advances, the corporation shall be entitled to raise a defense as to any
such action clear and convincing evidence that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation, or with respect to any criminal action or
proceeding that such person acted without reasonable cause to believe that his
conduct was lawful. Neither the failure of the corporation (including its Board
of Directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he has met the applicable
standard of conduct set forth in the Delaware General Corporation Law or any
other applicable law, nor an actual determination by the corporation (including
its Board of Directors, independent legal counsel or its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that claimant has not met the applicable
standard of conduct. In any suit brought by a director or executive officer to
enforce a right to indemnification or to an advancement of expenses hereunder,
the burden of proving that the director or executive officer is not entitled to
be indemnified, or to such advancement of expenses, under this Article XI or
otherwise shall be on the corporation.
(e) Non-Exclusivity of Rights. The rights conferred on any person by
this Bylaw shall not be exclusive of any other right which such person may have
or hereafter acquire under any applicable statute, provision of the Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its directors,
officers, employees or agents respecting
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indemnification and advances, to the fullest extent not prohibited by the
Delaware General Corporation Law, or by any other applicable law.
(f) Survival of Rights. The rights conferred on any person by this
Bylaw shall continue as to a person who has ceased to be a director, officer,
employee or other agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
(g) Insurance. To the fullest extent permitted by the Delaware General
Corporation Law or any other applicable law, the corporation, upon approval by
the Board of Directors, may purchase insurance on behalf of any person required
or permitted to be indemnified pursuant to this Bylaw.
(h) Amendments. Any repeal or modification of this Bylaw shall only be
prospective and shall not affect the rights under this Bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(i) Saving Clause. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law. If this Section
43 shall be invalid due to the application of the indemnification provisions of
another jurisdiction, then the corporation shall indemnify each director and
executive officer to the full to the full extent under any other applicable law.
(j) Certain Definitions. For the purposes of this Bylaw, the following
definitions shall apply:
(1) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(2) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding.
(3) The term the "corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position
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under the provisions of this Bylaw with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(4) References to a "director," "executive officer," "officer,"
"employee," or "agent" of the corporation shall include, without limitation,
situations where such person is serving at the request of the corporation as,
respectively, a director, executive officer, officer, employee, trustee or agent
of another corporation, partnership, joint venture, trust or other enterprise.
(5) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
Notices
Section 44. Notices.
(a) Notice To Stockholders. Whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to his last known post office address as shown by the stock record
of the corporation or its transfer agent.
(b) Notice To Directors. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by overnight
delivery service, facsimile, telex or telegram, except that such notice other
than one which is delivered personally shall be sent to such address as such
director shall have filed in writing with the Secretary, or, in the absence of
such filing, to the last known post office address of such director.
(c) Affidavit Of Mailing. An affidavit of mailing, executed by a duly
authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
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(d) Time Notices Deemed Given. All notices given by mail or by
overnight delivery service, as above provided, shall be deemed to have been
given as at the time of mailing, and all notices given by facsimile, telex or
telegram shall be deemed to have been given as of the sending time recorded at
time of transmission.
(e) Methods of Notice. It shall not be necessary that the same method
of giving notice be employed in respect of all directors, but one permissible
method may be employed in respect of any one or more, and any other permissible
method or methods may be employed in respect of any other or others.
(f) Failure To Receive Notice. The period or limitation of time within
which any stockholder may exercise any option or right, or enjoy any privilege
or benefit, or be required to act, or within which any director may exercise any
power or right, or enjoy any privilege, pursuant to any notice sent him in the
manner above provided, shall not be affected or extended in any manner by the
failure of such stockholder or such director to receive such notice.
(g) Notice To Person With Whom Communication Is Unlawful. Whenever
notice is required to be given, under any provision of law or of the Certificate
of Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action or
meeting which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice
had been duly given. In the event that the action taken by the corporation is
such as to require the filing of a certificate under any provision of the
Delaware General Corporation Law, the certificate shall state, if such is the
fact and if notice is required, that notice was given to all persons entitled to
receive notice except such persons with whom communication is unlawful.
(h) Notice To Person With Undeliverable Address. Whenever notice is
required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.
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ARTICLE XIII
Amendments
Section 45. Amendments. Subject to the provisions of the Certificate of
Incorporation, these bylaws may be altered, amended or repealed at any regular
meeting of the stockholders (or at any special meeting thereof duly called for
that purpose), provided that in the notice of the special meeting, notice of
such purpose given. Subject to the laws of the State of Delaware, the
Certificate of Incorporation and the other provisions of these bylaws, the Board
of Directors may, by majority vote of the entire Board of Directors alter, amend
or repeal these bylaws, or enact such other bylaws as in their judgment may be
advisable for the regulation of the conduct of the affairs of the Corporation.
ARTICLE XIV
Loans To Officers
Section 46. Loans To Officers. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance may
be with or without interest and may be unsecured, or secured in such manner as
the Board of Directors shall approve, including, without limitation, a pledge of
shares of stock of the corporation. Nothing in these Bylaws shall be deemed to
deny, limit or restrict the powers of guaranty or warranty.
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<PAGE> 1
EXHIBIT 10.4
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is made effective as of
September 1, 1999, regardless of its date of execution, between BIBD, LLC, a
Colorado limited liability company ("BIBD") and Optimal Communications, Inc., a
Delaware corporation (the "Company").
RECITALS
The Company was formed to acquire, own and operate various
communications and Internet services businesses. BIBD and the Company have
agreed that BIBD's business expertise will be valuable to the Company and that
such expertise is important to the Company's success. BIBD and the Company
desire to set forth their understanding pursuant to which BIBD has agreed to
provide certain consulting services to the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto agree as follows:
I. DEFINITIONS
For purposes of this Agreement, the following terms shall be defined as
follows:
1.1 Affiliate means a person or entity, which controls, is controlled
by, or is under common control with another person or entity.
1.2 Consulting Fee means an annual amount based on the Company's sales
run rate determined per the following table (subject to annual adjustment as
provided below):
<TABLE>
<CAPTION>
Sales Run Rate Monthly Consulting Fee
-------------- ----------------------
<S> <C>
Less than $10 million $12,000
$10 million $15,000
$15 million $18,000
$20 million $21,000
</TABLE>
The Company's sales run rate means the Company's sales for the 12-month period
ending with the month preceding the month for which a payment of Consulting Fee
is being calculated. For that purpose, the Company's sales shall be deemed to
include the prior 12 month's sales of all entities acquired, or whose assets are
acquired, by the Company prior to the date of acquisition (excluding any sales
relating to portions of such entities or their assets which are not acquired),
even though the Company was not in existence or did not own the acquired entity
when those sales occurred.
<PAGE> 2
Consulting Agreement
Page 2 of 6
In January 2000, the annual amounts of the Consulting Fee reflected in the
foregoing table should be increased by a proportion equal to the proportionate
increase in the Index released in January 2000 over the Index released in
January 1999. In January of each succeeding year during the term of this
Agreement, the annual amounts of the Consulting Fee established in January of
the preceding year shall be increased by a proportion equal to the proportionate
increase in the Index released in January of that year over the Index released
in January of the preceding year. If the Index shall have decreased, the
Consulting Fee shall not decrease.
1.3 Index means the Consumer Price Index - All Urban Consumers, All
Items for the Denver-Boulder metropolitan area, as released from time to time.
II. CONSULTING SERVICES
BIBD shall provide management level consulting services concerning
acquisitions consistent with policies established by the Company's Board of
Directors (the "Board"), and shall report to the Board. BIBD and its partners,
employees and agents who provide services to the Company pursuant to this
Agreement shall be independent contractors as to the Company, and not its
employees. As independent contractors, neither BIBD nor its partners, agents or
employees shall, unless otherwise expressly granted by the Company's Board of
Directors, have the right or authority to execute documents in the name of the
company or to otherwise bind the Company; provided, however, that nothing
contained in this Article II shall limit or diminish any rights or powers which
any such partners, employees or agents may have as directors or officers of the
Company.
III. COMPENSATION
3.1 Compensation. BIBD shall be entitled to receive from the Company on
the first day of each calendar month a payment of the Consulting Fee then in
effect based on the Company's sales run rate for the 12-month period ending with
the preceding month.
3.2 Benefits and Expense Reimbursement. The Company shall reimburse
BIBD and its members and employees who perform services for or on behalf of the
Company hereunder for all reasonable out-of-pocket costs incurred by them,
including out-of-pocket costs incurred prior to the date hereof. The Company
shall provide or reimburse the members of BIBD for medical, dental, disability
and other similar insurance benefits for up to six members or employees of the
members of BIBD who are providing services for the Company hereunder on the same
basis as provided to Company officers.
<PAGE> 3
Consulting Agreement
Page 3 of 6
IV. TERM
4.1 Term. Unless previously terminated by mutual agreement of the
parties or unless terminated by the Company for cause pursuant to Section 4.2,
this Agreement shall continue until the earliest to occur of the following
events: (i) the Company sells all or substantially all of its assets on a
consolidated basis in any single transaction or series of related transactions
for cash to a person or entity that is not an Affiliate; (ii) the Company is
acquired for cash by a person or entity that is not an Affiliate of BIBD,
including without limitation, through the purchase for cash of all or
substantially all of the Company's outstanding stock or through a cash merger or
consolidation; or (iii) the Company files, or there is filed against the
Company, a proceeding under Chapter 11 of the Federal Bankruptcy Code.
4.2 Terminate for Cause. The Company may terminate this Agreement for
cause if (i) BIBD or any member, employee or authorized agent of BIBD commits
gross negligence in the performance of BIBD's duties hereunder, (ii) BIBD or any
member, employee or authorized agent of BIBD willfully engages in any improper
activity which is contrary to the best interests of the Company, (iii) BIBD or
any member, employee or authorized agent of BIBD willfully violates or
disregards written instructions from the Board with respect to BIBD's duties
hereunder, (iv) BIBD or any member, employee or authorized agent of BIBD engages
in any activity which has a direct material adverse effect upon the Company or
its business, or (v) if BIBD commits a material breach of a material provision
of this Agreement. BIBD shall be given 10 days' notice of any action which the
Company deems to be cause for termination hereunder and BIBD shall be terminated
only if BIBD fails to cure such action or offense within such 10-day period or
repeats or continues the action or offense after such notice. If the action of
offense was taken or committed by an employee or authorized agent of BIBD
without BIBD's express authorization or actual prior knowledge, solely for the
purpose of determining the Company's right to terminate this Agreement under
this Section 4.2, BIBD shall be deemed to have cured the action or offense if it
replaces the employee or agent within the 10-day period.
4.3 Termination. BIBD may terminate this agreement with 30 days written
notice to the Company.
V. NONCOMPETITION
BIBD expressly covenants and agrees that, during the term of this
Agreement and for one year thereafter, neither BIBD nor any member of BIBD will,
directly or indirectly, as an officer, agent, principal, employee, consultant,
or otherwise, engage in any activity which, at that time, competes to a material
extent with the Company. Nothing herein will preclude BIBD or any member from
acquiring or holding securities representing less than five-percent (5%) of
<PAGE> 4
Consulting Agreement
Page 4 of 6
the outstanding securities of any class of equity security registered under the
Securities Exchange Act of 1934, as amended.
VI. CONFIDENTIALITY AND NON-DISCLOSURE
BIBD acknowledges that information, observations and data obtained by
BIBD and its partners and other personnel during the term of this Agreement
concerning the business or affairs of the Company (the "Confidential
Information") are the property of the Company. BIBD will not disclose to any
person or use for its own account any Confidential Information without the
written consent of the Board. Nothing herein shall prevent the disclosure of
Confidential Information (i) which becomes generally known to and available for
use by the public other than as a result of a disclosure by BIBD, (ii) with
respect to which BIBD's duty of confidentiality is waived by the Company, (iii)
if required by applicable law, regulation or order of any governmental agency or
court of competent jurisdiction, (iv) which was known to the public when
received by BIBD or (v) which is lawfully obtained by BIBD from other sources.
BIBD agrees that upon termination of this Agreement, it will deliver to the
Company all memoranda, notes, plans, records, reports and other documents
containing Confidential Information, and all copies thereof, that BIBD may then
possess or have under its control.
VII. GENERAL PROVISIONS
7.1 Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by the parties hereto and their
respective permitted successors and assigns. BIBD may not assign any of its
rights or obligations hereunder, except to an Affiliate.
7.2 Notices. All notices hereunder shall be in writing and shall be
deemed to have been duly given when delivered in person, upon confirmation of
receipt if given by facsimile, or three days after being deposited in the United
States mail, certified mail, return receipt requested, postage prepaid, as
follows:
To the Company:
Optimal Communications, Inc.
1522 Blake Street, 2nd Floor
Denver, Colorado 80202
Attention: CEO
Fax: 303-620-9016
To BIBD:
1522 Blake Street, 3rd Floor
Denver, Colorado 80202
Attention: Richard M. Tyler
Fax: 303-620-9016
<PAGE> 5
Consulting Agreement
Page 5 of 6
or to such other address as either party shall have specified by notice in
writing to the other party.
7.3 Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or other jurisdiction, but
this Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been contained
herein.
7.4 Complete Agreement. This Agreement embodies the complete Agreement
and understanding between the parties and supersedes and preempts any prior
understandings, agreements or representations by or between the parties, written
or oral, which relate to the subject matter hereof.
7.5 CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY
AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY THE INTERNAL LAW, AND
NOT THE LAW OF CONFLICTS, OF THE STATE OF COLORADO.
7.6 Remedies. Each of the parties to this Agreement will be entitled to
enforce its rights under this Agreement specifically, to recover damages by
reason of any breach of the provisions of this Agreement and to exercise all
other rights in its favor at law or in equity. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of Articles V and VI of this Agreement and that any party may in
its sole discretion apply for specific performance and injunctive relief in
order to enforce or prevent any violations of the provisions of Article V or VI.
7.7 Amendments and Waivers. This Agreement may be amended only pursuant
to a duly authorized written agreement signed by all of the parties hereto. No
waiver of rights hereunder shall be effective unless such waiver is set forth in
writing signed by the party whose rights are being waived.
7.8 Arbitration. Any disputes arising under this Agreement, including,
without limitation, those involving claims for specific performance or
injunctive relief, shall be submitted to binding arbitration under the
Commercial Arbitration Rules of the American Arbitration Association. The
arbitration shall be conducted in Denver, Colorado, before a single arbitrator
selected by BIBD and the Company, or, if they are unable to agree on an
arbitrator, before a panel of three arbitrators, one selected by BIBD, one
selected by the Company and the third selected by the two arbitrators. Failing
the selection of any required arbitrator, the selection of any required
arbitrator, the selection shall be made by the American Arbitration Association.
The award of the arbitrators shall be final and
<PAGE> 6
Consulting Agreement
Page 6 of 6
binding and any court of competent jurisdiction may enter judgment on the award.
This submission and agreement to arbitrate shall be specifically enforceable.
7.9 Attorneys' Fees. The prevailing party or parties in any arbitration
or in any action to enforce or interpret this Agreement shall be entitled to all
reasonable out-of-pocket costs and expenses, including fees of the arbitrators
and reasonable attorneys' fees, incurred in connection therewith.
IN WITNESS WHEREOF, the parties have executed this Agreement as of day
and year first above written.
OPTIMAL COMMUNICATIONS, INC.
By: /s/ Craig J. Zoellner
-----------------------------
Craig J. Zoellner
Its: President
Date: August 10, 1999
---------------
BIBD, LLC
BY: BACE Industries, LLC, Member
By: /s/ Richard M. Tyler
-----------------------------
Richard M. Tyler
Its: Member
Date: August 10, 1999
---------------
<PAGE> 1
EXHIBIT 10.14
ESCROW AGREEMENT
ESCROW AGREEMENT, effective as of the ___ day of August, 1999, by and
among certain of the shareholders listed on Exhibit A to this Escrow Agreement
(the "Shareholders" or "Shareholder") of PENTASTAR COMMUNICATIONS, INC., a
Delaware corporation, (the "Company"), SCHNEIDER SECURITIES, INC. (the
"Representative") and AMERICAN SECURITIES TRANSFER & TRUST, INC. (the "Escrow
Agent").
WHEREAS, the Shareholders are the record and beneficial owners of
certain of the Company's $0.0001 par value common stock ("Common Stock") all as
more fully reflected on Exhibit A to this Escrow Agreement;
WHEREAS, the Company and the Representative of the several underwriters
(the "Underwriters") intend to enter into an underwriting agreement (the
"Underwriting Agreement") pursuant to which the Company will sell Common Stock
in a public offering pursuant to the registration provisions of the Securities
Act of 1933, as amended (the "1933 Act");
WHEREAS, as a condition to closing the proposed public offering of the
Company (the "Offering"), the Representative has required the Shareholders to
deposit an aggregate of 200,000 shares of Common Stock owned by such
Shareholders in Escrow with the Escrow Agent as reflected on Exhibit A (the
"Escrow Shares"); and
WHEREAS, the Shareholders wish to deposit the Escrow Shares in
Escrow in order to fulfill the requirements of the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, terms and conditions hereinafter set forth, the parties to this
Escrow Agreement agree as follows:
SECTION 1. DESIGNATION AND DEPOSIT OF ESCROW SHARES.
a. The Escrow Shares to be deposited in Escrow pursuant to
this Escrow Agreement consist of 200,000 shares of Common Stock of the
Company and are owned of record as of the date of this Escrow Agreement
by the Shareholders identified on Exhibit A.
b. On the date on which the Securities and Exchange Commission
declares the Company's Registration Statement on Form SB-2 (Reg. No.
333-_____) effective under the 1933 Act (the "Effective Date"), the
Shareholders shall deliver to the Escrow Agent any and all certificates
representing the Escrow Shares and a stock power endorsed in blank with
a medallion guarantee. Promptly after the Effective Date, the Escrow
Agent shall deliver a receipt therefor and, if requested by a
Shareholder, a new certificate representing each Shareholder's shares
of Common Stock represented by the certificates delivered but which are
not subject to this Escrow Agreement.
<PAGE> 2
SECTION 2. TITLE OF ACCOUNT. All certificates representing the
Escrow Shares delivered to the Escrow Agent pursuant to this Agreement shall be
deposited on the Effective Date by the Escrow Agent in an account designated
substantially as follows: "PentaStar Communications, Inc. Escrow Share
Account" (the "Escrow Account").
SECTION 3. TRANSFER OF ESCROW SHARES DURING ESCROW PERIOD.
a. During the Escrow Period (as defined below) none of the
Escrow Shares deposited in the Escrow Account shall be sold, pledged,
hypothecated or otherwise transferred or delivered out of the Escrow
Account except:
i. transfers by operation of law; and
ii. transfers of ownership of certificates
representing the Escrow Shares, certificates for which have
been deposited to the Escrow Account, shall remain subject to
the restrictions imposed hereby, including those persons, if
any, who become holders, by any means provided herein, of the
Escrow Shares during the Escrow Period.
SECTION 4. DURATION OF ESCROW PERIOD.
a. The Escrow Period shall commence on the Effective Date and
shall terminate on the earlier of the date on which all Escrow Shares
have been returned to the Shareholders pursuant to Sections 6(a), 6(b),
6(c) or 6(d) below.
b. This Agreement shall be of no force or effect in the event
the Underwriting Agreement is not executed on the Effective Date in
accordance with its terms.
SECTION 5. RECEIPT OF DISTRIBUTIONS AND DIVIDENDS. During the term of
the Escrow Period, if the Company issues any distributions, dividends, rights or
other property with respect to the Common Stock, then, in such event, the
Company shall be authorized to send evidence of such distributions, dividends,
rights or other property directly to the Escrow Agent, which is hereby
authorized to hold and retain possession of all such evidences of distributions,
dividends, rights or other property until termination of the Escrow Period in
accordance with Section 6 below. In the event the Escrow Shares are distributed
to the Shareholders pursuant to Sections 6(a), 6(b), 6(c), 6(d), 6(e) or 6(f)
below, then the Escrow Agent will distribute evidences of such distributions,
dividends, rights, or other property in the form the Escrow Agent received such
distributions, dividends, rights or other property from the Company. If the
Company recapitalizes, splits or combines its shares, such shares shall be
substituted, on a pro rata basis for the Escrow Shares. The Company will notify
the Escrow Agent of the occurrence of the events listed in this section.
2
<PAGE> 3
SECTION 6. RELEASE AND DELIVERY OF ESCROW SHARES.
a. In the event the Escrow Agent receives written notice from
the Representative and the Company confirming that the Company had pro
forma (based on a full 12-month period for all acquired operations,
giving effect to such acquisitions as if they had occurred on the first
day of fiscal year 2000 and giving retroactive effect for the period
from the first day of fiscal year 2000 to the date of acquisition to
prospective changes to salaries, bonuses, benefits, lease payments and
other expenses in a manner consistent with that used in the preparation
of the Unaudited Pro Forma Condensed Combined Financial Information of
the Company set forth in the prospectus used in connection with the
Offering) diluted earnings per share of $0.50 in fiscal year 2000, the
Escrow Agent shall return to each Shareholder a certificate for its
share of the Escrow Shares as are listed on Exhibit A. The Escrow Agent
shall return the Escrow Shares only to the entity named as the holder
of record in Exhibit A to this Escrow Agreement, as modified by any
transfers made pursuant to Section 3 above.
b. In the event the Escrow Agent receives written notice from
the Representative and the Company confirming the Company had pro forma
(based on a full 12-month period for all acquired operations, giving
effect to such acquisitions as if they had occurred on the first day of
fiscal year 2001 and giving retroactive effect for the period from the
first day of fiscal year 2001 to the date of acquisition to prospective
changes to salaries, bonuses, benefits, lease payments and other
expenses in a manner consistent with that used in the preparation of
the Unaudited Pro Forma Condensed Combined Financial Information of the
Company set forth in the prospectus used in connection with the
Offering) diluted earnings per share of $1.25 in fiscal year 2001, the
Escrow Agent shall return to each Shareholder a certificate for its
share of the Escrow Shares as are listed on Exhibit A. The Escrow Agent
shall return each certificate only to the entity named as the holder of
record in Exhibit A hereto, as modified by any transfers made pursuant
to Section 3 above.
3
<PAGE> 4
c. In the event the Escrow Agent receives written notice from
the Representative and the Company confirming that the Company has been
merged or consolidated, or has executed a share exchange, with another
company which is the survivor to the transaction or in which the
stockholders of the Company own less than 50% of the outstanding
capital stock of the surviving entity, or that the Company has sold all
or substantially all of its assets and the relevant transaction was
approved by the holders of a majority of the Company's outstanding
voting securities exclusive of the Escrow Shares held hereunder, the
Escrow Agent shall contemporaneously with the closing of any such
transaction return to each Shareholder a certificate for its share of
the Escrow Shares as are listed on Exhibit A. The Escrow Agent shall
return each certificate only to the person named as the holder of
record in Exhibit A hereto, as modified by any transfers made pursuant
to Section 3 above.
d. In the event none of the criteria for release specified in
subparagraphs (a), (b) or (c) above is reached by the Company, the
Escrow Shares shall remain in the Escrow Account until a date that is
seven years from the Effective Date. Upon termination of the Escrow
Period pursuant to the provisions of this Section 6(d), the Escrow
Agent shall, as promptly as possible, return to each Shareholder a
certificate for its share of the Escrow Shares as are listed on Exhibit
A. The Escrow Agent shall return each certificate only to the person
named as the holder of record in Exhibit A hereto, as modified by any
transfers made pursuant to Section 3 above.
e. At such time as the Escrow Agent shall have returned all
Escrow Shares as provided in this Section, the Escrow Agent shall be
discharged completely and released from any and all further liabilities
and responsibilities under this Escrow Agreement.
f. The determination of the criteria described above shall be
solely the responsibility of the Company and the Representative, and
the Escrow Agent shall have no liability or responsibility therefor.
SECTION 7. VOTING RIGHTS. During the Escrow Period, each Shareholder,
or any transferee receiving all or a portion of the Escrow Shares of such
Shareholder pursuant to Section 3 of this Escrow Agreement, shall have the right
to vote such Escrow Shares (to the extent the Escrow Shares have voting rights)
in the Escrow Account at any and all shareholder meetings without restriction.
SECTION 8. LIMITATION OF LIABILITY OF ESCROW AGENT. In acting pursuant
to this Escrow Agreement, the Escrow Agent shall be protected fully in every
reasonable exercise of its discretion and shall have no obligation hereunder to
either the Shareholders or to any other party except as expressly set forth
herein. In performing any of its duties hereunder, the Escrow Agent shall not
incur any liability to any person for any damages, losses or expenses, except
for willful default or negligence and it shall, accordingly, not incur any such
liability with respect to (1) any action taken or omitted in good faith upon
advice of its counsel, counsel for the Company or counsel for the Representative
given with respect to any question relating to the duties and responsibilities
of the Escrow Agent under this Agreement, and (2) any action taken or omitted in
reliance upon any instrument, including written notices provided for herein, not
only to its due execution and validity and effectiveness of its provisions, but
also to the truth and accuracy of any information
4
<PAGE> 5
contained therein, which the Escrow Agent shall in good faith believe to be
genuine, to have been signed and presented by a proper person or persons and to
be in compliance with the provisions of this Agreement.
SECTION 9. INDEMNIFICATION. The Company, the Representative and the
Shareholders shall indemnify and hold harmless the Escrow Agent against any and
all losses, claims, damages, liabilities and expenses, including reasonable
costs of investigation and counsel fees and disbursements, which may be imposed
upon the Escrow Agent or incurred by the Escrow Agent in connection with its
acceptance of appointment as Escrow Agent or the performance of its duties
hereunder, including any litigation arising from this Escrow Agreement or
involving the subject matter of this Escrow Agreement.
SECTION 10. PAYMENT OF FEES. The Company shall be responsible for all
reasonable fees and expenses of the Escrow Agent incurred by it in the course of
performing under this Escrow Agreement.
SECTION 11. CHANGE OF ESCROW AGENT. In the event the Escrow Agent
notifies the Company and the Representative that its acceptance of the duties of
Escrow Agent has been terminated by the Escrow Agent, or in the event the Escrow
Agent files for protection under the United States Bankruptcy Code or is
liquidated or ceases operations for any reason, the Company and the
Representative shall have the right to jointly designate a replacement Escrow
Agent who shall succeed to the rights and duties of the Escrow Agent hereunder.
Any such replacement Escrow Agent shall be a trust or stock transfer company
experienced in stock transfer, escrow and related matters and shall have a
minimum net worth of $5 million. Upon appointment of such successor Escrow
Agent, the Escrow Agent shall be discharged from all duties and responsibilities
hereunder.
SECTION 12. NOTICES. All notices, demands or requests required or
authorized hereunder shall be deemed given sufficiently if in writing and sent
by registered mail or certified mail, return receipt requested and postage
prepaid and by facsimile or cable:
In the case of the Representative to:
Schneider Securities, Inc.
The Chancery
1120 Lincoln Street, Suite 900
Denver, Colorado 80203
Attention: Thomas J. O'Rourke, President
With a copy to (which shall not constitute notice):
Robert W. Walter, Esq.
Berliner Zisser Walter & Gallegos, P.C.
One Norwest Center, Suite 4700
1700 Lincoln Street
Denver, Colorado 80203-4547
5
<PAGE> 6
In the case of the Escrow Agent to:
American Securities Transfer & Trust, Inc.
12039 West Alameda Parkway, Suite Z-2
Lakewood, Colorado 80228
In the case of the Company to:
PentaStar Communications, Inc.
1522 Blake Street
Denver, Colorado 80202
With a copy to (which shall not constitute notice):
B. Scott Pullara, Esq.
Sherman & Howard L.L.C.
633 Seventeenth Street, Suite 3000
Denver, Colorado 80202
In the case of the Shareholders to:
BACE Investments, LLC
1522 Blake Street
Denver, Colorado 80202
Black Diamond Capital, LLC
7101 LaVista Place, Suite 100
Niwot, Colorado 80503
6
<PAGE> 7
SECTION 13. COUNTERPARTS. This Escrow Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same Escrow Agreement. Facsimile signatures shall
be accepted as original signatures for all purposes.
SECTION 14. GOVERNING LAW. The validity, interpretation and
construction of this Escrow Agreement and of each part hereof shall be governed
by the laws of the State of Colorado.
IN WITNESS WHEREOF, the Shareholders, the Company, the Representative
and the Escrow Agent have executed this Escrow Agreement to be effective as of
the day and year first above written.
AMERICAN SECURITIES TRANSFER & TRUST, INC.
By:
--------------------------------------
Title:
-----------------------------------
PENTASTAR COMMUNICATIONS, INC.
By:
--------------------------------------
Title:
-----------------------------------
SCHNEIDER SECURITIES, INC.
By:
--------------------------------------
Title:
-----------------------------------
7
<PAGE> 8
THE SHAREHOLDERS:
BACE INVESTMENTS, LLC
By:
----------------------------------
Craig J. Zoellner
BLACK DIAMOND CAPITAL, LLC
By:
----------------------------------
Blair W. McNea
8
<PAGE> 9
EXHIBIT A
TO ESCROW AGREEMENT
NAME TOTAL SHARES
---- ------------
BACE INVESTMENTS, LLC 140,000
BLACK DIAMOND CAPITAL, LLC 60,000
9
<PAGE> 1
EXHIBIT 21.1
Subsidiaries
OC Mergerco 1, Inc., a Delaware corporation
OC Mergerco 2, Inc., a Delaware corporation
PentaStar Internet, Inc., a Delaware corporation
<PAGE> 1
EXHIBIT 23.2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
for PentaStar Communications, Inc. dated August 10, 1999; ICM Communications
Integration Inc., dated July 23, 1999; and DMA Ventures, Inc., d.b.a. Access
Communications dated August 6, 1999 (No. 333-85281) and to all references to our
Firm included in this Registration Statement on Form SB-2 dated September 23,
1999.
/s/ ARTHUR ANDERSEN
Denver, Colorado,
September 23, 1999.
<PAGE> 1
EXHIBIT 99.1
CONSENT TO BE NAMED
The undersigned consents to being named in the Form SB-2 Registration
Statement (Registration No. 333-85281) of PentaStar Communications, Inc.
("PentaStar") as the person who will become PentaStar's chief executive officer
and a director upon the offering described in such Registration Statement.
Date: September 20, 1999 /s/ Robert S. Lazzeri
------------------------------------
Robert S. Lazzeri
<PAGE> 1
EXHIBIT 99.2
CONSENT TO BE NAMED
The undersigneds consent to being named in the Form SB-2 Registration
Statement (Registration No. 333-85281) of PentaStar Communications, Inc.
("PentaStar") as the person who will become PentaStar's president and chief
operating officer upon the offering described in such Registration Statement.
Date: September 20, 1999 /s/ R. Neal Tomblyn
------------------------------------
R. Neal Tomblyn
<PAGE> 1
EXHIBIT 99.3
CONSENT TO BE NAMED
The undersigned consents to being named in the Form SB-2 Registration
Statement (Registration No. 333-85281) of PentaStar Communications, Inc.
("PentaStar") as the person who will become PentaStar's chief financial officer
upon the offering described in such Registration Statement.
Date: September 20, 1999 /s/ David L. Dunham
------------------------------------
David L. Dunham
<PAGE> 1
EXHIBIT 99.4
CONSENT TO BE NAMED
The undersigned consents to being named in the Form SB-2 Registration
Statement (Registration No. 333-85281) of PentaStar Communications, Inc.
("PentaStar") as a person who will become an employee of PentaStar upon
PentaStar's acquisition of ICM Communications Integration, Inc. in connection
with the offering described in such Registration Statement.
Date: September 20, 1999 /s/ Dennis W. Schillinger
------------------------------------
Dennis W. Schillinger
<PAGE> 1
EXHIBIT 99.5
CONSENT TO BE NAMED
The undersigned consents to being named in the Form SB-2 Registration
Statement (Registration No. 333-85281) of PentaStar Communications, Inc.
("PentaStar") as a person who will become an employee of PentaStar upon
PentaStar's acquisition of DMA Ventures, Inc. in connection with the offering
described in such Registration Statement.
Date: September 20, 1999 /s/ Jeffrey A. Veres
------------------------------------
Jeffrey A. Veres
