<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 12, 1999
REGISTRATION NO. 333-85281
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
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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<S> <C> <C>
DELAWARE 4813 84-1502003
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation Classification Code Number) Identification No.)
or organization)
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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)
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)
Copies to:
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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
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this registration statement becomes effective.
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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The information contained in this prospectus is not complete and may be changed.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission. We may not sell these securities until the
registration statement is effective. This prospectus is not an offer to sell
these securities and we are not selecting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 12, 1999
PROSPECTUS
[PENTASTAR]
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's common stock has been accepted for listing 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 5.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price....................... $ $
Underwriting discounts...................... $ $
Proceeds to PentaStar....................... $ $
</TABLE>
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
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
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Where You Can Find Additional Information................... 15
Forward Looking Statements.................................. 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 37
Management.................................................. 50
Certain Transactions........................................ 55
Principal Shareholders...................................... 57
Description of Capital Stock................................ 59
Shares Eligible for Future Sale............................. 62
Underwriting................................................ 65
Legal Matters............................................... 67
Experts..................................................... 67
Index to Financial Statements............................... F-1
</TABLE>
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
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, and assumes the issuance of 86 shares
of Series A preferred stock as payment in full of $86,000 of indebtedness,
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. PentaStar believes there are a number of
significant advantages for agents and ISPs to join it, including enhanced
revenue opportunities and reduced costs that PentaStar believes are inherent in
a larger organization within its industry.
PentaStar's activities to date have consisted of:
- organizing PentaStar;
- developing PentaStar's business plan, management and corporate structure;
- pursuing the acquisitions of ICM and Access; and
- 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,
PentaStar will commence its business operations as a communications services
agent. PentaStar 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.
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:
- assessing the customers' needs for current and future communications
services;
- analyzing and designing specific customer solutions;
- helping customers integrate those communications services into their
operations;
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- selecting the providers that best match the customers' requirements;
- facilitating the ordering and installation of communications services;
- staying current with developing technologies and pricing plans and
analyzing how they may be applicable to our customers; and
- 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 International Communications
Management, Inc., to provide communications consulting and sell comprehensive
communications services to small to medium-sized businesses. 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 April 1999, Access discontinued 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, LLC, 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 all 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.
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THE OFFERING
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 acquisitions of ICM and Access; to
make other complementary acquisitions or
investments; and for working capital, systems
investment and other general corporate purposes.
Nasdaq SmallCap Market
symbol................... PNTA
The 1,500,000 shares offered by this prospectus do not include any of the
shares of PentaStar's common stock that will be issued in the acquisitions of
ICM and Access.
The number of shares of common stock to be outstanding after this offering
does not include shares underlying options or warrants we have agreed to issue
or shares reserved for issuance under our stock option plan. For an explanation,
please refer to the "Capitalization" section on page 18.
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
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1998 1998 1999
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<S> <C> <C> <C>
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
====== ====== ======
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
</TABLE>
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SUMMARY PRO FORMA BALANCE SHEET DATA AS OF JUNE 30, 1999
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<CAPTION>
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
====== =======
</TABLE>
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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 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 in addition to those set
forth elsewhere in this prospectus before you decide to buy our common stock. If
any of the events described in the following risks or elsewhere in this
prospectus 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
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.
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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:
- we may be unable to identify suitable acquisition candidates at
reasonable prices;
- costs of these acquisitions, including the amortization of intangible
assets, could adversely affect our operating results and profitability;
- 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
- 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. 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 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 mergers or stock acquisitions. In those types of
acquisitions, as a matter of law we will be responsible for all liabilities of
the acquired entities, including liabilities that are contingent, undisclosed or
unknown. 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:
- rapidly changing technology and communications delivery methods;
- constantly evolving industry standards and practices;
- frequent new service introductions and enhancements; and
- 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.
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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. Future
events or changes in circumstances may result in a reduction in the 20-year
amortization period, which would result in increased annual goodwill expense. In
addition, if we are required to write-off a significant portion of any
unamortized intangible asset our net income would decline.
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, Carleton A. Brown and
Reynaldo U. Ortiz will be the directors who, at the closing of this offering,
will not be affiliated with BIBD, BACE Industries or Black Diamond. 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.
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
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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 ONLY HAVE TWO INDEPENDENT DIRECTORS.
Upon this offering, our board of directors will consist of five persons,
only two of whom will not be affiliated with PentaStar.
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.
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 or 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.
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<PAGE> 12
A DECLINE IN THE QUALITY OF SERVICES OR COMPETITIVENESS OF PRICING PROVIDED BY
THE COMMUNICATIONS 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.
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 service
providers and 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.
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
9
<PAGE> 13
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 material 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.
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 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:
- we will not control decisions regarding availability of service at any
particular time;
- 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;
- we may not be able to increase access capacity sufficiently to respond to
increased subscriber demand; and
- we may not be able to negotiate favorable interconnect agreements with
other communications service providers.
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<PAGE> 14
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:
- the market for Internet access services fails to continue to develop;
- the Internet market develops more slowly than expected; or
- 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 forces 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.
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
11
<PAGE> 15
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 information
service providers, including 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.
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.
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<PAGE> 16
RISKS RELATED TO OUR STOCK AND THIS OFFERING
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION OF APPROXIMATELY $7.60 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
$7.60, 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 of the underwriters and options for
465,000 shares of common stock to two directors, two executive officers, some
employees of ICM and Access and a consultant. You may experience 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. Our common stock has been accepted for listing on the Nasdaq SmallCap
Market, 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:
- variations and fluctuations in our operating results, revenues and pace
of acquisitions, and related public announcements by us;
- failure to meet analyst and investor expectations with respect to our
operating results, revenues and acquisitions;
- changes in our industry, including regulatory conditions;
- general economic and market conditions that impact the needs of customers
and potential customers for communications services; and
- 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 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
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<PAGE> 17
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 (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> 18
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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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>
PentaStar's acquisition strategy is to primarily acquire agents that
provide small to medium-sized businesses with solutions for local access, long
distance, wireless or Internet services for their voice and data communications
needs. In most instances, PentaStar believes that these agents will sell only
communications services. If an agent also sells communications equipment, and
PentaStar is unable to acquire only the services business, PentaStar may acquire
an equipment business that it would then seek to sell. Agent businesses that
PentaStar would consider acquiring will likely:
- be established agents of RBOCs or other communications service providers;
- serve a critical mass of small to medium-sized business customers within
a local market;
- demonstrate a commitment to superior customer service and in-depth
knowledge of communications services, technologies and pricing plans; and
- be owned by an individual or group, the active members of which are
interested in continuing management responsibilities and receiving stock
as partial consideration for the purchase.
PentaStar will also seek to acquire ISPs in small markets. In all instances,
acquisitions and expenditures of funds related to acquisitions will be approved
by a minimum of four of the five members of PentaStar's board of directors.
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 acquisitions of ICM
and Access, we currently have no understandings, commitments or agreements for
any material acquisition or investment.
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 support anticipated 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
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<PAGE> 20
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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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. Our
capitalization is presented (in thousands, except share data):
- on an actual basis;
- 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
- 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, and the
issuance of 86 shares of our Series A preferred stock as payment in full
of certain indebtedness.
<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, actual or
pro forma; 86 shares designated as Series A preferred
stock, $.0001 par value, issued and outstanding, pro
forma as adjusted...................................... $-- $ -- $ 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 15,814
--- ------ -------
TOTAL CAPITALIZATION........................................ $25 $5,778 $15,814
=== ====== =======
</TABLE>
- ---------------
(1) Common stock has been restated for a 3,417.96 for one stock split.
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
465,000 shares of our common stock to two directors, 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.
18
<PAGE> 22
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>
<CAPTION>
PER SHARE
---------
<S> <C> <C>
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 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
465,000 shares of our common stock to two directors, 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.
19
<PAGE> 23
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 communications 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>
- ---------------
(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.
20
<PAGE> 24
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 communications 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>
- ---------------
(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.
21
<PAGE> 25
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:
- effect the 3,417.96 for 1 split of its common stock described elsewhere
in this prospectus;
- provide for a classified board of directors;
- cause its authorized capital stock to conform to the "Description of
Capital Stock" section of this prospectus; and
- otherwise cause its certificate of incorporation to contain provisions
PentaStar believes appropriate for a public company.
PentaStar's activities to date have consisted of:
- organizing PentaStar;
- developing PentaStar's business plan, management and corporate structure;
- pursuing the acquisitions of two agents, ICM and Access; and
- 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, PentaStar
will commence its 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 comprehensive service solutions that include local access,
long-distance, wireless and Internet services of various communications service
providers.
We also intend to acquire communications agents in major metropolitan
areas. We have 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 the underwriters of this offering to the
closing of this offering.
22
<PAGE> 26
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 ICM 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. 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 Access 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. 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 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. Future events or changes in circumstances may result in a reduction in
the 20-year amortization period, which would result in increased annual goodwill
expense.
23
<PAGE> 27
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 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 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:
- data transmission oriented services;
- dedicated high capacity transmission services;
- high speed real time communications access, including digital subscriber
line, or DSL;
- packet-based transmission for wide area networks, including frame relay
service; and
- 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
24
<PAGE> 28
dispute for installed services and arise primarily from differences in
documentation between ICM or Access and U S WEST relating to:
- the commission percentages earned;
- the type of services sold; and
- 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 a review by ICM and
Access of all of the commissions due on installed services, and PentaStar
believes the allowances are adequate. As a result of the continuing
relationships of ICM and Access with U S WEST, changes have been implemented in
the process of receiving payment for installed services, which have resulted in
1999 disputed receivables being cleared in a timely manner.
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 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
up-front 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.
The assignment of an amortization period of 20 years was influenced by the
attributes and market position of each of ICM and Access. Future events or
changes in circumstances may result in a reduction in the 20-year amortization
period, which would result in increased annual goodwill expense. We anticipate
that we will acquire additional agents and ISPs in the future and we expect to
incur goodwill in those acquisitions. Future acquisitions may warrant
amortization periods of less than 20 years.
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.
25
<PAGE> 29
Results of Operations
The following table sets forth selected financial data for ICM for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1997 1998 1998 1999
-------------- -------------- -------------- --------------
(UNAUDITED)
(DOLLARS IN THOUSANDS) (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
------ ----- ------ ----- ------ ----- ------ -----
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. 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.
26
<PAGE> 30
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.
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
27
<PAGE> 31
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 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 shareholders 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 DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------- ---------------------------
1997 1998 1998 1999
-------------- -------------- ------------ ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS) (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>
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.
28
<PAGE> 32
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 from
operations 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 an 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.
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
29
<PAGE> 33
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.
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 $369,000 provided by operations for the first
six months of 1998, primarily due to a decrease in accounts receivable between
periods. 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 from its
financing activities, which reflected net proceeds from capital contributions of
$113,000, $95,000 in borrowings under its line of credit and payments to fund
capital lease obligations and long-term borrowings. 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
30
<PAGE> 34
under this line of credit. PentaStar will repay any interest bearing
indebtedness and terminate the line of credit when it acquires Access. The cash
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 currently amortize goodwill for these two acquisitions evenly
over a 20-year period. Future events or changes in circumstances may result in a
reduction in the 20-year amortization period, which would result in increased
annual goodwill expense. 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.
31
<PAGE> 35
The following table sets forth unaudited pro forma combined condensed
financial information for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1998 1999
-------------- --------------
(UNAUDITED)
<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.
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 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 U S WEST 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
U S WEST due to documentation deficiencies and discrepancies in payment amounts
will decrease in future periods.
32
<PAGE> 36
FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
We believe the following significant factors may affect our future
operating results:
- our ability to successfully implement our acquisition strategy;
- continued reliance on RBOCs and other service providers for
communications services; and
- our ability to increase revenues from service providers other than local
access service providers.
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:
- our corporate management team;
- executing our acquisition strategy; and
- 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 sole shareholder, all by Access.
During the first six months of 1999, the acquired companies generated $367,000
of pro forma EBITDA, a $72,000 increase over the first six months of 1998 of
$295,000. The increase was 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 and for working capital, systems investment and other general
corporate purposes.
33
<PAGE> 37
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:
- identifying all items that may be affected by the year 2000;
- investigating those items for year 2000 compliance;
- assessing the potential impact of year 2000 non-compliance;
- identifying solutions for non-compliant items;
- repairing and replacing any non-compliant items;
- testing those repairs and replacements; and
- 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.
34
<PAGE> 38
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>
Access and ICM have contacted their 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 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:
- an interruption in our ability to collect amounts due from U S WEST and
other vendors;
- loss of sales due to customers focusing on year 2000 issues rather than
new communications services;
- loss of accurate accounting records;
- loss of phone service; and
- 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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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
currently 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:
- organizing PentaStar;
- developing PentaStar's business plan, management and corporate structure;
- pursuing the acquisitions of ICM and Access; and
- 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,
PentaStar will commence its business operations as a communications services
agent. PentaStar 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 with 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,
- ICM and Access are agents for U S WEST for local access and other
services, including wireless and Internet;
- Access is an agent for Qwest for long distance services; and
- ICM can sell AT&T and Qwest long distance services and Epoch Internet
services utilizing the agent relationships of a company owned by a
majority of 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:
- assistance in sorting through the abundance of confusing technology
options;
- management of the ordering and installation of communications services;
- more effective and timely responses to problems encountered with
communications service providers than can generally be obtained by an
individual customer;
- ongoing evaluation of new solutions that could better suit the future
communications needs of our customers;
- development and maintenance of customer-specific databases that allow us
to better apply our knowledge and experience to each customer's
communications needs; and
- payment of most of our fees by the communications service provider.
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We believe that we offer compelling reasons for communications service
providers to view us as a strategic partner. Those reasons are as follows:
- we are an effective sales force for our service providers, with a
competitive, variable cost to them;
- we provide the ability to retain customers and increase revenues from
customers;
- we provide a professional staff to handle the installation of services
and ongoing interface between the customer and the service provider;
- we can sell into markets that may not be economical for the service
providers to support directly; and
- 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 International Communications
Management, Inc., a corporation that provided training for communications
service providers. ICM was formed to provide communications consulting and sell
communications services to small to medium-sized businesses. In January 1995,
the ICM division was spun-off into a separate corporation owned by International
Communications Management, Inc. In July 1997, ICM was spun-off as a separate
corporation to the shareholders of International Communications Management, 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. ICM has offered Qwest long distance
services since October 1998 and AT&T long distance services since April 1999. In
June 1998, ICM began offering Epoch Internet services.
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 April 1999, Access discontinued 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, and has marketed U S WEST's wireless
services since December 1998 and U S WEST's Internet services since January
1998. Access has been an agent for Qwest long distance services since January
1999.
We also intend to acquire communications agents in major metropolitan
areas. We have 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 multi-regional 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.
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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 in customizing the services that
we recommend for each customer.
Grow Through Acquisitions
We intend to build a multi-regional 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:
- access to ongoing analysis of available communications and Internet
technologies and pricing plans;
- shared systems, administration and infrastructure support;
- lower costs resulting from planned economies of scale;
- availability of multiple long distance, wireless and Internet options;
- access to other acquired companies' "best practices" models;
- greater access to capital for future growth;
- improved commission structures resulting from aggregating sales;
- add-on sales to local operations of regional customers; and
- 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
communications 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
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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.
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 his area's operating
earnings before amortization expense. Managers of acquired ISPs will participate
in bonus programs based upon their ISPs operating earnings before amortization
expense and will also participate 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:
- establishes relationships with customers;
- assists the customer in analyzing its communications needs;
- arranges for the communications service providers to provide the customer
with the communications services that best suit the customer's needs; and
- 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.
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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, which 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:
- RBOCs;
- CLECs;
- long distance service providers;
- wireless service providers; and
- 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 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:
- control the line to customer locations;
- have an established customer base; and
- have greater financial and other resources to deploy new technologies.
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As the local access market continues to offer greater service choices and face
increased competition, we believe that agents which are:
- cost effective,
- offer an efficient method of attracting and retaining customers, and
- 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 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 telephones, 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.
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
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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 are local businesses. We believe that currently less than 15% of
the 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, including basic dial tone and advanced communications 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:
- data transmission oriented services;
- dedicated high-capacity transmission services;
- high speed real time communications access, including digital subscriber
line, or DSL;
- packet-based transmission for wide area networks, including frame relay
service; and
- 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 a majority 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.
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 a
majority of the former shareholders of ICM.
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Project Management
The combination of wireless technologies, computer networking integration,
telephone 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:
- Internet and wireless technologies for voice and data communications;
- wireless receptor technologies, such as dish relay, satellite and radio
towers and cable networks for communications; and
- intra-company networks.
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, small to medium-size
businesses 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:
- on-going contract maintenance, including service and billing problem
dispute resolution with the communications service provider;
- 7-day a week emergency assistance for service interruption or
degradation;
- ongoing audits and needs analysis to ensure that all services are
functioning appropriately;
- regular audits and analysis of the services in place and the need for new
services; and
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- 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.
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:
- interconnect companies;
- value-added resellers;
- computer network integrators;
- telephone system integrators; and
- 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:
- the direct sales forces of communications service providers, such as U S
WEST, AT&T, Qwest, MCI/ WorldCom and numerous CLECs;
- other communications services agents;
- 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
- communications consultants, such as groups within Electronic Data Systems
and Andersen Consulting.
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We believe the primary competitive factors in our market include:
- the ability to provide a solution that satisfies all the customer's
communications needs;
- pricing;
- customer service during and after installation;
- quality and reliability of communications services;
- access to multiple communications service provider options; and
- 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:
- other local and regional ISPs;
- national ISPs, such as MindSpring and Verio;
- on-line information providers, such as America Online and Prodigy;
- large national communications providers, such as AT&T, Qwest,
MCI/WorldCom and the RBOCs; and
- traditional cable television providers, such as Time-Warner and AT&T.
In our target ISP market, we believe that the following are the principal
competitive factors:
- maintaining high-speed access options and adequate capacity;
- affordable pricing;
- the ability to assist customers in implementing services and resolving
problems; and
- offering a variety of services in addition to basic access.
GOVERNMENT REGULATION
Agent Business
PentaStar is not, and following our acquisitions 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
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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 the statutorily mandated
criteria. The 1996 Act also allows long distance carriers to provide local
services in the RBOCs' territories. Long distance carriers are also permitted to
offer combined packages of long distance and resold RBOC local services.
However, large 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:
- the services and the pricing that can be offered by RBOCs; and
- 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. On October 4, 1999,
the FCC filed a petition for rehearing of this case.
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
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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.
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 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.
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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, ICM and Access 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
Reynaldo U. Ortiz......................... 52 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 over 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 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.
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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.
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.
Reynaldo U. Ortiz will become a director of PentaStar upon this offering.
Since July 1999, Mr. Ortiz has been president and chief executive officer of
Highpoint Telecommunications, Inc., a company engaged in providing international
facilities-based voice and data services in North America and Europe. From
January 1999 until July 1999, Mr. Ortiz performed work related to the
development and formation of Highpoint. From October 1997 until December 1998,
Mr. Ortiz served as managing director and senior vice president, international
for Qwest Communications International. From May 1997 until October 1997, Mr.
Ortiz served as a consultant to Qwest and the Anshutz Corporation, a company
involved in the telecommunications, railroad and other industries. From July
1996 until May 1997, Mr. Ortiz was president and chief executive officer of
SOPHIA Communications, Inc., a two-way wireless data messaging network service
company. From March 1996 until July 1996, Mr. Ortiz was president and chief
executive officer of LYNCSTAR Integrated Communications, LLC, a company he
founded which focused on providing wireless cable television and telephone
service for multi-dwelling complexes. From October 1995 to March 1996, Mr. Ortiz
was chairman of the strategic alliances and development group, and from December
1993 to October 1995, was the chief executive officer of the Jones Education
Network, of Jones International, Inc., a cable television and interactive
multimedia company. From 1986 to 1993, Mr. Ortiz held various positions at U S
WEST, including president and chief executive officer of U S WEST New Vector
Group (U S WEST's cellular and paging subsidiary), president and chief executive
officer of U S WEST International, Inc., and vice president of development and
ventures of U S WEST Diversified Group. Since September 1999, Mr. Ortiz has been
a director of Global Light Telecommunications, Inc., a company with interests in
companies engaged in international voice, data and Internet services. Global
Light is listed on the American Stock Exchange. Since April 1992, he has been a
director of Public Service Company of New Mexico, a public utility company
primarily engaged in the generation, transmission and sale of electricity and
natural gas in the state of New Mexico. Public Service Company of New Mexico is
listed on the New York Stock
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Exchange. Mr. Ortiz holds a B.S. degree from New Mexico State University and a
M.S. in Management from Stanford 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 International
Communications Management, Inc. Mr. Schillinger served as a vice president of
International Communications Management, Inc., in charge of ICM's business,
until ICM was spun-off from International Communications Management, 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 a majority of 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.
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 five 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 and Mr. Ortiz will be the class I directors, Mr. Lazzeri will be the
class II director and Mr. Tyler and Mr. Zoellner are the class III directors. 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 will consist 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.
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The audit committee will consist of Mr. Brown, Mr. Ortiz and Mr. Zoellner.
The functions of the audit committee are to:
- review the scope of the audit procedures utilized by our independent
auditors;
- review with the independent auditors our accounting practices and
policies;
- consult with PentaStar's independent auditors during the year;
- approve the audit fee charged by the independent auditors; and
- 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:
- options intended to qualify as incentive stock options within the meaning
of Section 422 of the Internal Revenue Code; and
- 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 465,000 shares of our common stock to two directors, 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 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.
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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:
- accelerate or partially accelerate the vesting and exercise date of any
outstanding options or make all such options fully vested and
exercisable;
- 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;
- 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;
- cause the surviving or acquiring corporation to substitute or assume the
options; and
- 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.
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:
- breach of the director's duty of loyalty to PentaStar;
- acts or omissions not in good faith or involving intentional misconduct;
- knowing violations of law;
- any transaction from which the director derived an improper personal
benefit;
- improper transactions between the director and PentaStar; and
- 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.
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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.
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:
- PentaStar's termination of the consulting agreement for cause;
- BIBD's termination of the consulting agreement on 30 days prior notice;
or
- 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 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
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principal amount of the notes. The issuance of the Series A preferred stock has
been approved by the existing shareholders and by our sole independent director.
The Series A preferred stock will:
- have a stated value of $1,000 per share for dividend and liquidation
purposes;
- bear dividends on the stated value at the rate of 5% per year, payable
annually;
- be non-voting (except for the limited voting rights mandated by the
Delaware General Corporation Law);
- not be convertible into common stock or any other capital stock of
PentaStar;
- not be redeemable or callable; and
- 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.
BACE Investments, Black Diamond, Mr. Lazzeri and Mr. Veres have entered
into an agreement with PentaStar and Schneider Securities, Inc. restricting the
transfer of their stock as set forth in the "Shares Eligible for Future Sale"
section.
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 certain of these transactions were
entered into, we lacked sufficient disinterested independent directors to ratify
those transactions. Those transactions 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 approved by a majority of the
disinterested independent 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. The
board of directors may obtain independent counsel or other independent advice to
assist in that determination. We currently have only one independent director.
Upon completion of this offering, we will have two independent directors.
At June 30, 1999, Network Communications, Inc., or NCI, owed ICM
approximately $494,000 for cash advances, commissions payable to ICM and shared
expenses. The account receivable from NCI will be acquired by PentaStar in
connection with its acquisition of ICM. NCI is owned by Dennis W. Schillinger,
Nicolas van Gelder, Norma Douthit, John Hall and Charles Gibson, who are also
shareholders of ICM. Those individuals are also guarantors of ICM's $150,000
bank line of credit. The line of credit will be terminated upon PentaStar's
acquisition of ICM. None of these individuals are founders, directors, executive
officers or shareholders of PentaStar. Upon PentaStar's acquisition of ICM, they
will become shareholders of PentaStar.
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<PAGE> 60
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:
- each shareholder known by PentaStar to beneficially own more than 5% of
our common stock;
- each person who is or will be an executive officer or director following
completion of this offering; and
- 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..................................... 732,419 23.4 732,419 14.6
7101 LaVista Place, Suite 100
Niwot, Colorado 80503
Robert S. Lazzeri.................................. 469,499 15.0 469,499 9.4
Jeffrey A. Veres................................... 219,100 7.0 424,100 8.5
7076 S. Alton Way, Bldg. A
Englewood, Colorado 80112
R. Neal Tomblyn.................................... 0 -- 55,000 1.1
David L. Dunham.................................... 0 -- 18,750 *
Carleton A. Brown.................................. 0 -- 10,000 *
Reynaldo U. Ortiz.................................. 0 -- 10,000 *
All directors and executive officers as a group (7
persons)......................................... 2,144,299 68.5 2,238,049 43.9
</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
57
<PAGE> 61
will have voting but not dispositive power until the occurrence of 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.
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 the occurrence of 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.
The shares listed for Mr. Ortiz 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.
58
<PAGE> 62
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, including the
86 shares currently designated as Series A preferred stock, in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including:
- dividend rights;
- conversion rights;
- voting rights;
- terms of redemption;
- liquidation preferences;
- sinking fund terms; and
- 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.
We have no present plan to issue any shares of preferred stock other than
the 86 shares of Series A preferred stock to be issued immediately prior to this
offering as described in the "Certain Transactions" section. Please see that
section for a description of the Series A preferred stock.
59
<PAGE> 63
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.
Our certificate of incorporation provides for a board of directors that is
divided into three classes:
- the directors in class I will hold office until the first annual meeting
of shareholders following this offering;
- the directors in class II will hold office until the second annual
meeting of shareholders following this offering; and
- 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:
- shareholders may not act by written consent;
- special meetings of shareholders may be called by the board of directors,
the chairman of the board or the chief executive officer;
- only the board of directors may change the authorized number of
directors;
- no director can be removed without cause, subject to the right of any
holders of preferred stock; and
- directors may be removed for cause only by a majority vote of the
shareholders.
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<PAGE> 64
LISTING
Our common stock has been accepted for listing on the Nasdaq SmallCap
Market under the trading symbol "PNTA."
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust, Inc. has been appointed as the
transfer agent and registrar for our common stock.
61
<PAGE> 65
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 465,000 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.
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 465,000 shares of
our common stock to two directors, 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:
- the representative's warrants and any other warrants or options
exercisable at or above the public offering price of the common stock;
- options that are issued or reserved for issuance to employees or
consultants that are not promoters under a qualified stock option plan;
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<PAGE> 66
- options or warrants granted to unaffiliated institutional investors in
connection with loans, subject to satisfaction of certain additional
conditions; and
- 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.
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:
- 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;
- 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;
- 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
- 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.
BACE Investments, Black Diamond, Robert S. Lazzeri and Jeffrey A. Veres are
contractually bound by PentaStar and Schneider Securities, Inc., as the
representative of the underwriters, not to sell or otherwise dispose of any of
the 3,095,818 shares of PentaStar common stock that they own prior to the date
of this prospectus, or any stock dividends issued on those shares, for 24 months
after the completion of this offering. They may sell up to 33.33% of the shares
after 24 months, an additional 16.67% after 36 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. The
representative of the underwriters has agreed that it will not
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<PAGE> 67
waive, shorten or otherwise modify these transfer restrictions. The restrictions
on sale described in this paragraph will not apply to any transfers among such
shareholders or to charitable contributions, nor to any transaction approved by
a majority of the shareholders of PentaStar other than BACE Investments, Black
Diamond, Mr. Lazzeri and Mr. Veres.
Finally, all other 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 or
otherwise dispose of 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> 68
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.
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 partners of the representative, underwriters, the selling group
members and their officers, 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.
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<PAGE> 69
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.
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:
- the information set forth in this prospectus and otherwise available;
- the history and the prospects for the industries in which PentaStar will
compete;
- the ability of PentaStar's management;
- the prospects for future earnings of PentaStar;
- the present state of PentaStar's development and its current financial
condition;
- the general condition of the securities markets at the time of this
offering; and
- 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.
66
<PAGE> 70
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.
67
<PAGE> 71
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PENTASTAR COMMUNICATIONS, INC.
Unaudited Pro Forma Condensed Combined Financial
Information, Basis of Presentation..................... F-2
Unaudited Pro Forma Condensed Combined Balance Sheet...... F-3
Unaudited Pro Forma Condensed Combined Statement of
Operations............................................. F-4
Notes to Unaudited Pro Forma Condensed Combined Financial
Information............................................ F-6
PENTASTAR COMMUNICATIONS, INC.
Report of Independent Public Accountants.................. F-8
Balance Sheet............................................. F-9
Statement of Operations................................... F-10
Statement of Shareholders' Equity (Deficit)............... F-11
Statement of Cash Flows................................... F-11
Notes to Financial Statements............................. F-12
ICM COMMUNICATIONS INTEGRATION, INC.
Report of Independent Public Accountants.................. F-14
Balance Sheets............................................ F-15
Statement of Operations................................... F-16
Statement of Shareholders' Equity......................... F-17
Statement of Cash Flows................................... F-18
Notes to Financial Statements............................. F-19
DMA VENTURES, INC., DBA ACCESS COMMUNICATIONS
Report of Independent Public Accountants.................. F-25
Balance Sheets............................................ F-26
Statement of Operations................................... F-27
Statement of Shareholder's Equity......................... F-28
Statement of Cash Flows................................... F-29
Notes to Financial Statements............................. F-30
</TABLE>
F-1
<PAGE> 72
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 condensed combined balance sheet gives effect to
the Acquisitions and related transactions, and the Offering, as if they had
occurred on June 30, 1999. The effect of the Acquisitions and related
transactions is reflected in the Pro Forma column within the unaudited pro forma
condensed combined balance sheet. The combined effect of the Acquisitions and
related transactions and the Offering is reflected in the Pro Forma As Adjusted
column within the unaudited pro forma condensed combined balance sheet. The
unaudited pro forma condensed 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 combined effect of the Acquisitions and
related transactions and the Offering is reflected in the Pro Forma Combined
columns within the unaudited pro forma condensed combined statements of
operations. 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 condensed 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
condensed 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 condensed
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> 73
PENTASTAR COMMUNICATIONS, INC. AND ACQUIRED COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
ICM
PENTASTAR COMMUNICATIONS ACCESS PRO FORMA PRO FORMA
COMMUNICATIONS, INTEGRATION, COMMUNICATIONS ACQUISITION OFFERING
INC.(9) INC.(9) (9) ADJUSTMENTS PRO FORMA ADJUSTMENTS
--------------- -------------- -------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents... $ 1 $ 210 $ 4 $ (214)(2) $ 1 $(2,423)(3)
12,400 (4)
59 (11)
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 10,036
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 $10,036
=== ====== ==== ======= ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current borrowings.......... $27 $ 29 $206 $ (235)(2) $2,450 $(2,423)(3)
2,423 (3) (27)(11)
Other current liabilities... -- 1,338 394 (612)(2) 1,120 --
--- ------ ---- ------- ------ -------
Total current
liabilities......... 27 1,367 600 1,576 3,570 (2,450)
Long-term borrowings.......... -- -- 156 (156)(2) -- --
Shareholders' equity:
Series A preferred stock.... -- -- -- -- -- 86 (11)
Common stock................ -- -- 114 (114)(5) -- --
Additional paid in
capital................... -- -- -- 3,330 (2) 3,330 12,400 (4)
Retained earnings
(deficit)................. (2) 1,038 (2) (1,036)(5) (2) --
--- ------ ---- ------- ------ -------
Total shareholders'
equity.............. (2) 1,038 112 2,180 3,328 12,486
--- ------ ---- ------- ------ -------
Total liabilities and
shareholders'
equity.............. $25 $2,405 $868 $ 3,600 $6,898 $10,036
=== ====== ==== ======= ====== =======
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
Current assets:
Cash and cash equivalents... $10,037
Accounts receivable, net.... 1,565
Prepaid and other........... 442
-------
Total current
assets.............. 12,044
Property and equipment, net... 569
Goodwill...................... 3,814
Other......................... 507
-------
Total assets.......... $16,934
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current borrowings.......... $ --
Other current liabilities... 1,120
-------
Total current
liabilities......... 1,120
Long-term borrowings.......... --
Shareholders' equity:
Series A preferred stock.... 86
Common stock................ --
Additional paid in
capital................... 15,730
Retained earnings
(deficit)................. (2)
-------
Total shareholders'
equity.............. 15,814
-------
Total liabilities and
shareholders'
equity.............. $16,934
=======
</TABLE>
See accompanying notes to pro forma financial information.
F-3
<PAGE> 74
PENTASTAR COMMUNICATIONS, INC. AND ACQUIRED COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINED 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 communications
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 (255)(6) 3,692
Other general and
administrative
expenses................. -- 952 577 180 (7) 1,709
Goodwill amortization...... -- -- -- 191 (2) 191
---- ------ ------ ----- ----------
Income from
operations........ -- 577 604 (116) 1,065
---- ------ ------ ----- ----------
Other (Income) Expense:
Interest expense........... -- 1 52 (53)(2) --
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 48 (8) 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> 75
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 communications 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 (141)(6) 1,884
Other general and administrative
expenses......................... 2 438 280 90 (7) 810
Goodwill amortization............... -- -- -- 95 (2) 95
--- ------ ----- ----- ----------
Income (loss) from
operations................ (2) 341 (88) (44) 207
--- ------ ----- ----- ----------
Other (Income) Expense:
Interest expense.................... -- 4 15 (19)(2) --
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) (26)(8) 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> 76
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>
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 legal and regulatory issues, future
changes in technology, anticipated market demand and competition. The result is
annual amortization of $191 ($95 for six months).
F-6
<PAGE> 77
PENTASTAR COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION -- (CONTINUED)
The assignment of an amortization period of twenty years was influenced by
the attributes and market positions of each of ICM and Access. PentaStar will
evaluate the period of amortization continually to determine whether events and
circumstances warrant reduced useful lives. Annual amortization would increase
$63 ($32 for six months) for a five year reduction in the goodwill amortization
period. Future acquisitions may warrant amortization periods of less than twenty
years.
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 $2,600.
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 EBITA.
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:
<TABLE>
<S> <C>
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
</TABLE>
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-7
<PAGE> 78
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
of 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-8
<PAGE> 79
PENTASTAR COMMUNICATIONS, INC.
BALANCE SHEET
AS OF JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<S> <C>
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-9
<PAGE> 80
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-10
<PAGE> 81
PENTASTAR COMMUNICATIONS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
RETAINED SHAREHOLDERS'
EARNINGS EQUITY
-------- -------------
<S> <C> <C>
Balance, March 15, 1999..................................... $ -- $ --
Net Loss.......................................... (2) (2)
---- ----
Balance, June 30, 1999...................................... $ (2) $ (2)
==== ====
</TABLE>
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-11
<PAGE> 82
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 multi-regional 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. businesses (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
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 acquisitions 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.
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.
F-12
<PAGE> 83
PENTASTAR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
- ICM Communications Integration, Inc.
- 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.
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-13
<PAGE> 84
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-14
<PAGE> 85
ICM COMMUNICATIONS INTEGRATION, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
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 Receivable............... 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-15
<PAGE> 86
ICM COMMUNICATIONS INTEGRATION, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------- -----------------
1997 1998 1998 1999
------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Advanced communications 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-16
<PAGE> 87
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-17
<PAGE> 88
ICM COMMUNICATIONS INTEGRATION, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE SIX
ENDED 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-18
<PAGE> 89
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 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.
F-19
<PAGE> 90
ICM COMMUNICATIONS INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
In arriving at these allowances, the Company has preformed a review of all
of its disputed receivables. The Company and U S WEST have established a plan to
clear the disputed receivables from 1997 and 1998. As a result of the Company's
continuing relationship with U S WEST, the Company and U S WEST have implemented
changes in the process of receiving payment for installed services, which have
resulted in 1999 disputed receivables being cleared in a timely manner.
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.
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.
F-20
<PAGE> 91
ICM COMMUNICATIONS INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
OBLIGATION COMMITMENTS OBLIGATION
---------- ----------- ----------
<S> <C> <C> <C>
Years Ended December 31 --
1999...................................................... $195 $ 49 $146
2000...................................................... 199 49 150
2001...................................................... 182 49 133
2002...................................................... 150 45 105
---- ---- ----
$726 $192 $534
==== ==== ====
</TABLE>
F-21
<PAGE> 92
ICM COMMUNICATIONS INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
F-22
<PAGE> 93
ICM COMMUNICATIONS INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
FOR THE SIX MONTHS
YEAR ENDED 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>
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.
F-23
<PAGE> 94
ICM COMMUNICATIONS INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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-24
<PAGE> 95
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-25
<PAGE> 96
DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
------ ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
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-26
<PAGE> 97
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 communications 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-27
<PAGE> 98
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-28
<PAGE> 99
DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR SIX MONTHS
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-29
<PAGE> 100
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.
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.
F-30
<PAGE> 101
DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
In arriving at these allowances, the Company has preformed a review of all
of its disputed receivables. The Company and U S WEST have established a plan to
clear the disputed receivables from 1997 and 1998. As a result of the Company's
continuing relationship with U S WEST, the Company and U S WEST have implemented
changes in the process of receiving payment for installed services, which have
resulted in 1999 disputed receivables being cleared in a timely manner.
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
F-31
<PAGE> 102
DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-32
<PAGE> 103
DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Notes Payable
At December 31, 1997 and 1998, notes payable consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----- ----
<S> <C> <C>
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
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>
<S> <C>
Years Ending December 31 --
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-33
<PAGE> 104
DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, future lease payments under capital leases are as
follows:
<TABLE>
<S> <C>
Years Ended December 31 --
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
------ -------
<S> <C> <C>
Years Ended December 31 --
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.
(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>
F-34
<PAGE> 105
DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
<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>
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.
F-35
<PAGE> 106
DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
<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.
(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
F-36
<PAGE> 107
DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
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 pursuant to which all outstanding shares of
the Company's stock will be exchanged for cash and shares of PentaStar common
stock.
F-37
<PAGE> 108
1,500,000 SHARES
[PENTASTAR]
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> 109
PART II
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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.
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 Lock-up
Agreement dated October 8, 1999 among PentaStar
Communications, Inc., Schneider Securities, Inc., BACE
Investments, LLC, Black Diamond Capital, LLC, Robert S.
Lazzeri and Jeffrey A. Veres. (Only the Lock-up Agreement
is filed as part of Amendment No. 3 to PentaStar's
Registration Statement. See Exhibit 10.12.)
</TABLE>
II-1
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.10**** -- Stock Purchase Agreement dated March 31, 1999 between
Optimal Communications, Inc. (nka PentaStar
Communications, Inc.) and Black Diamond Capital, LLC and
Lock-up Agreement dated October 8, 1999 among PentaStar
Communications, Inc., Schneider Securities, Inc., BACE
Investments, LLC, Black Diamond Capital, LLC, Robert S.
Lazzeri and Jeffrey A. Veres. (Only the Lock-up Agreement
is filed as part of Amendment No. 3 to PentaStar's
Registration Statement. See Exhibit 10.12.)
10.11**** -- Stock Purchase Agreement dated March 31, 1999 between
Optimal Communications, Inc. (nka PentaStar
Communications, Inc.) and Jeffrey A. Veres and Lock-up
Agreement dated October 8, 1999 among PentaStar
Communications, Inc., Schneider Securities, Inc., BACE
Investments, LLC, Black Diamond Capital, LLC, Robert S.
Lazzeri and Jeffrey A. Veres. (Only the Lock-up Agreement
is filed as part of Amendment No. 3 to PentaStar's
Registration Statement. See Exhibit 10.12.)
10.12**** -- Lock-up Agreement dated October 8, 1999 among PentaStar
Communications, Inc., Schneider Securities, Inc., BACE
Investments, LLC, Black Diamond Capital, LLC, Robert S.
Lazzeri and Jeffrey A. Veres.
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.
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-2
<PAGE> 111
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. 3 to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Denver, State of Colorado, on the 12th day of
October, 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. 3 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
--------- ----- ----
<C> <S> <C>
/s/ CRAIG J. ZOELLNER President, Treasurer and October 12, 1999
- --------------------------------------------------- Director (Principal Executive
Craig J. Zoellner Officer and Principal
Financial Accounting Officer)
/s/ RICHARD M. TYLER Vice President, Secretary and October 12, 1999
- --------------------------------------------------- Director
Richard M. Tyler
Director
- ---------------------------------------------------
Carleton A. Brown
</TABLE>
II-3
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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.
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 Lock-up
Agreement dated October 8, 1999 among PentaStar
Communications, Inc., Schneider Securities, Inc., BACE
Investments, LLC, Black Diamond Capital, LLC, Robert S.
Lazzeri and Jeffrey A. Veres. (Only the Lock-up Agreement
is filed as part of Amendment No. 3 to PentaStar's
Registration Statement. See Exhibit 10.12.)
</TABLE>
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.10**** -- Stock Purchase Agreement dated March 31, 1999 between
Optimal Communications, Inc. (nka PentaStar
Communications, Inc.) and Black Diamond Capital, LLC and
Lock-up Agreement dated October 8, 1999 among PentaStar
Communications, Inc., Schneider Securities, Inc., BACE
Investments, LLC, Black Diamond Capital, LLC, Robert S.
Lazzeri and Jeffrey A. Veres. (Only the Lock-up Agreement
is filed as part of Amendment No. 3 to PentaStar's
Registration Statement. See Exhibit 10.12.)
10.11**** -- Stock Purchase Agreement dated March 31, 1999 between
Optimal Communications, Inc. (nka PentaStar
Communications, Inc.) and Jeffrey A. Veres and Lock-up
Agreement dated October 8, 1999 among PentaStar
Communications, Inc., Schneider Securities, Inc., BACE
Investments, LLC, Black Diamond Capital, LLC, Robert S.
Lazzeri and Jeffrey A. Veres. (Only the Lock-up Agreement
is filed as part of Amendment No. 3 to PentaStar's
Registration Statement. See Exhibit 10.12.)
10.12**** -- Lock-up Agreement dated October 8, 1999 among PentaStar
Communications, Inc., Schneider Securities, Inc., BACE
Investments, LLC, Black Diamond Capital, LLC, Robert S.
Lazzeri and Jeffrey A. Veres.
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.
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.
<PAGE> 1
EXHIBIT 4.1
PENTASTAR COMMUNICATIONS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
20,000,000 AUTHORIZED SHARES $.0001 PAR VALUE PER SHARE
CUSIP 709632 10 3
THIS CERTIFIES THAT
Is The Owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF $.0001 PAR VALUE
PER SHARE COMMON STOCK OF
PENTASTAR COMMUNICATIONS, INC.
transferable only on the books of the Company in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid unless countersigned by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the said Company has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officers and to be
sealed with the facsimile seal of the Company.
Dated:
SECRETARY VICE PRESIDENT
American Securities Transfer & Trust, Inc.,
P.O. Box 1596, Denver, Colorado 80201
By ________________________________________
Transfer Agent & Registrar Authorized
Signature.
<PAGE> 2
PENTASTAR COMMUNICATIONS, INC.
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM -as tenants in common UNIF GIFT MIN ACT-..............Custodian..............
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act .................................
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
- --------------------------------------------------------------------------------
For Value Received, ______________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________ attorney-in-fact
to transfer the said stock on the books of the within-named Corporation, with
full power of substitution in the premises.
Dated ________________
-----------------------------------------------------
-----------------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
- -------------------------------------
The signature(s) must be guaranteed by an eligible guarantor institution (Banks,
Stockbrokers, Savings and Loan Associations and Credit Unions with membership in
an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule
17Ad-15.
<PAGE> 1
EXHIBIT 5.1
ATTORNEYS & COUNSELORS AT LAW
633 SEVENTEENTH STREET, SUITE 3000
SHERMAN & HOWARD L.L.C. DENVER, COLORADO 80202
TELEPHONE: (303) 297-2900
FAX: (303) 298-0940
OFFICES IN: COLORADO SPRINGS
RENO * LAS VEGAs
October 12, 1999
PentaStar Communications, Inc.
1522 Blake Street
Denver, CO 80202
Re: Validity of Common Stock
Ladies and Gentlemen:
We have acted as special counsel to PentaStar Communications,
Inc., a Delaware corporation (the "Company"), in connection with its
Registration Statement on Form SB-2 (Registration No. 333-85281) (the
"Registration Statement") relating to 1,500,000 shares, plus up to an additional
225,000 shares pursuant to the underwriters' over-allotment option, of the
Company's common stock, $.0001 par value per share ("Common Stock").
We have examined the Company's Certificate of Incorporation
and Bylaws and the minutes of the proceedings of the Board of Directors of the
Company authorizing the issuance of the Common Stock.
Based upon the foregoing examination, we advise you that, in
our opinion, the shares of Common Stock being offered pursuant to the
Registration Statement have been duly authorized and, when issued and sold as
contemplated in the Registration Statement, will be validly issued, fully paid
and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the Registration Statement. In giving this consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the Rules of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ SHERMAN & HOWARD L.L.C.
<PAGE> 1
EXHIBIT 10.12
LOCK-UP AGREEMENT
This Lock-up Agreement, dated as of October 8, 1999, is by and among
PentaStar Communications, Inc. (the "Company"), Schneider Securities, Inc. (the
"Representative"), BACE Investments, LLC ("BACE"), Black Diamond Capital, LLC
("Black Diamond"), Robert S. Lazzeri ("Lazzeri") and Jeffrey A. Veres ("Veres;"
BACE, Black Diamond, Lazzeri and Veres being collectively referred to
hereinafter as the "Founding Shareholders").
WHEREAS, on or about March 17, 1999, the Company entered into a lock-up
agreement with BACE (the "Prior Lock-up Agreement"); and
WHEREAS, on March 31, 1999, the Company entered into stock purchase
agreements ("Stock Purchase Agreements") together with addendums ("Addendums")
thereto, with Black Diamond, Lazzeri and Veres (collectively, the "Stock
Purchase Agreements and Addendums"); and
WHEREAS, as a result of discussions with various state securities
administrators concerning the lockup provisions of the Prior Lock-up Agreement
and the Stock Purchase Agreements and Addendums, the parties have determined to
enter into this Lock-up Agreement, which shall supercede in its entirety the
Prior Lock-up Agreement and the Addendums to the Stock Purchase Agreements; and
WHEREAS, the Representative has agreed to become a party to this
Lock-up Agreement such that the Representative shall have an enforceable
interest hereunder;
NOW THEREFORE, in consideration of the mutual agreements and covenants
of the parties herein contained, and of other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged by all of the
parties hereto, the parties agree as follows:
1. The following shares of Common Stock of the Company that are owned
by the Founding Shareholders shall be subject to the terms of this Agreement:
<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT
FOUNDING SHAREHOLDER TO LOCK-UP AGREEMENT
-------------------- ------------------------
<S> <C>
BACE Investments, LLC.................................. 1,674,800
Black Diamond Capital, LLC............................. 732,419
Robert S. Lazzeri...................................... 469,499
Jeffrey A. Veres....................................... 219,100
---------
Total.................................................. 3,095,818
=========
</TABLE>
Such 3,095,818 shares of Common Stock of the Company owned by the
Founding Shareholders are hereinafter referred to as the "Shares."
2. Except as otherwise provided herein, the Founding Shareholders agree
that they shall not transfer, sell, pledge, hypothecate, encumber, contract to
sell, grant any option for the sale of, grant any security interest in, or
otherwise sell or dispose of any of the Shares which shall expressly include any
stock dividends issued by the Company and attributable to the Shares during the
term hereof, for a period of three years from the effective date (the "Effective
<PAGE> 2
Date") of the Company's Registration Statement on Form SB-2 (SEC File No.
333-85281). Moreover, the Company shall not recognize any attempted transfer,
sale, pledge, hypothecation or encumbrance of the Shares for a period of three
years from the Effective Date except as otherwise provided herein.
3. Provided that the Shares remain subject to the terms hereof
following any transfer authorized in this Paragraph 3, the Founders may transfer
the Shares (i) by gift to family members, not more remote than first cousins,
(ii) to trusts, limited partnerships or other estate planning entities of which
the transferring Founder is the beneficiary for estate planning purposes, (iii)
any charitable organization that qualifies for receipt of charitable
contributions under Section 170(c) of the Internal Revenue Code of 1986, as
amended, (iv) by any method or transaction approved by majority of the
shareholders of the Company other than the Founders, or (v) among or between any
Founders or Founder that is a party hereto.
4. After the expiration of 24 months from the Effective Date, each
Founder shall have released to him and shall be eligible to sell in accordance
with applicable federal and state securities laws 33.33% of such Founder's
Shares, or an aggregate total of 1,031,836 Shares. Upon the expiration of 36
months from the Effective Date, each Founder shall be eligible to sell an
additional 16.67% of such Founder's Shares, or an aggregate of 516,073 Shares.
The remaining 1,547,909 Shares shall be eligible for sale by the Founders only
upon the earlier to occur of (i) the sale of substantially all of the assets or
stock of the Company, or (ii) five years after the completion of the public
offering.
5. Notwithstanding any other language to the contrary set forth
elsewhere herein, this Lock-up Agreement and the restrictions set forth herein
shall automatically be released if (i) for 60 consecutive trading days
commencing at least 90 days after the Effective Date, the Company's securities
trade in a public market at a price of not less than 150% of the offering price
per share of the Company's Common Stock, (ii) for 90 consecutive trading days
commencing at least 12 months after the Effective Date, the Company's securities
trade in a public market at a price of not less than 110% of the offering price
per share of Common Stock, (iii) for any fiscal year ending after the Effective
Date, the Company has earnings per share of at least (a) 5% of the public
offering price per share of Common Stock for that fiscal year, (b) 4% of the
public offering price per share of Common Stock for that fiscal year and for the
prior fiscal year, calculated independently, whether or not such prior fiscal
year ended after the Effective Date, or (c) 3% of the public offering price per
share of Common Stock for that fiscal year and for each of the two prior fiscal
years, calculated independently, whether or not such prior fiscal years ended
after the Effective Date, or (iv) the securities become "covered securities" as
that term is defined in subsection 18(b)(1)(a) of the Securities Act of 1933.
6. During the term of this Lock-up Agreement, the Founders shall
continue to have all voting and other rights to which they are entitled by
ownership of the Shares. In the event a Founder sells any of the Shares in
violation of this Agreement, any profits realized by such selling Founder shall
inure to and be recoverable by the Company.
7. The Representative shall not agree or permit the waiver or
modification of any of the terms of this Lock-up Agreement. In addition, the
Company's Registration Statement, as amended, shall include disclosure providing
that the Representative will not waive, shorten or otherwise modify the transfer
restrictions agreed to by the parties hereto.
IN WITNESS WHEREOF, and based upon which the Representative shall
undertake the public offering of the Company's Common Stock, the parties have
executed this Lock-Up
<PAGE> 3
Agreement to be effective on the date specified above.
THE COMPANY: THE REPRESENTATIVE:
PENTASTAR COMMUNICATIONS, INC. SCHNEIDER SECURITIES, INC.
By: By:
---------------------------------- -----------------------------
Craig J. Zoellner, President Thomas J. O'Rourke, President
THE FOUNDERS:
BACE INVESTMENTS, LLC
By:
----------------------------------
Craig J. Zoellner, Managing Member
BLACK DIAMOND CAPITAL, LLC
By:
----------------------------------
Blair W. McNea, Managing Member
- -------------------------------------
Robert S. Lazzeri
- -------------------------------------
Jeffrey A. Veres
<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 October 12,
1999.
/s/ ARTHUR ANDERSEN
Denver, Colorado,
October 12, 1999.
