<PAGE> 1
EXHIBIT 99.3
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
BASIS OF PRESENTATION
The following unaudited pro forma condensed combined financial information
gives effect to (a) the acquisition by PentaStar Communications, Inc.
("PentaStar") of the assets of the Network Services Agency Division of Telecomm
Industries Corp. ("TCMM"), (b) the acquisition by PentaStar of the assets of US
TeleCenters, Inc. and its affiliate Vermont Network Services Corp. (together,
"UST") and (c) the acquisitions by 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
"Predecessor Companies"). The acquisition of TCMM occurred in the second quarter
of fiscal 2000 and will be accounted for using the purchase method of
accounting. The acquisition of UST occurred in the first quarter of fiscal 2000
and its balances and operations have been reflected in the consolidated
financial statements of PentaStar as of March 31, 2000. The acquisition of the
Predecessor Companies occurred on October 26, 1999 and, accordingly, their
balances and operations have been reflected in the consolidated financial
statements of PentaStar as of March 31, 2000 and December 31, 1999. The
unaudited pro forma condensed combined financial information is derived from the
historical financial statements of PentaStar, TCMM, UST, Access and ICM.
The unaudited pro forma condensed combined balance sheet gives effect to
the acquisition of TCMM, as if it had occurred on March 31, 2000. The unaudited
pro forma condensed combined statements of operations give effect to the
acquisition of TCMM, UST and the Predecessor Companies as if they had occurred
at the beginning of the earliest period presented on January 1, 1999. 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.
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 TCMM, UST, Access and ICM 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
<PAGE> 2
thereto included elsewhere in this Current Report on Form 8-K/A, the Company's
Annual Report on Form 10-KSB for the period from inception (March 31, 1999)
through December 31, 1999 and the Company's Quarterly Report on Form 10-QSB for
the quarterly period ended March 31, 2000.
<PAGE> 3
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PentaStar Network Services
Communications, Agency Division of
Inc. and Telecomm Pro Forma Pro Forma
Subsidiaries(1) Industries, Corp.(1) Adjustments Combined
--------------- -------------------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 4,907 $ -- $(1,362)(2) $ 1,811
(1,734)(2)
Accounts receivable, net 2,583 3,783 (2,214)(11) 4,152
Prepaid expenses and other 659 405 (174)(2) 1,469
579 (11)
------- ------- ------- -------
Total current assets 8,149 4,188 (4,905) 7,432
Property and equipment, net 1,608 496 -- 2,104
Accounts receivable, net -- 4,190 (4,190)(11) --
Goodwill and other intangibles, net 8,109 3,341 11,232 (2)
(3,341)(2) 19,341
Prepaid expenses -- -- 1,016 (11) 1,016
Other assets 1,148 105 (105)(2) 1,148
------- ------- ------- -------
Total assets $19,014 $12,320 $ (293) $31,041
======= ======= ======= =======
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C>
Current liabilities:
Line of credit $ -- $ 2,428 $(1,734)(2) $ --
(694)(2)
Current portion of long-term debt -- 791 (14)(2) 777
Income taxes due to Parent -- 947 (947)(2) --
Other current liabilities 3,978 1,270 (868)(2) 4,597
217 (11)
------- ------- ------- -------
Total current liabilities 3,978 5,436 (4,040) 5,374
Long-term debt, less current portion -- 3,960 (202)(2) 3,758
Other long-term liabilities 156 1,822 (1,824)(2) 535
381 (11)
Shareholders' equity:
Series A preferred stock 87 -- -- 87
Common stock 1 -- -- 1
Additional paid-in capital 15,727 -- 6,494(2) 22,221
Retained earnings (deficit) (935) -- -- (935)
Divisional equity -- 1,102 (1,102)(2) --
------- ------- ------- -------
Total shareholders' equity 14,880 1,102 5,392 21,374
------- ------- ------- -------
Total liabilities and shareholders' equity $19,014 $12,320 $ (293) $31,041
======= ======= ======= =======
</TABLE>
See accompanying notes to pro forma financial information.
<PAGE> 4
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PentaStar Network Services
Communications, Agency Division of
Inc. and Telecomm Pro Forma Pro Forma
Subsidiaries(1) Industries, Corp.(1) Adjustments Combined
--------------- -------------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Advanced communications services $ 2,418 $ 988 $ (49)(11) 3,357
Basic dial tone services 1,715 864 (43)(11) 2,536
Product sales 307 -- -- 307
------- ------- ------- ----------
4,440 1,852 (92) 6,200
Costs and expenses:
Salaries and commissions 3,875 1,162 16 (10) 5,030
(23)(11)
Cost of product sales 131 -- -- 131
Other general and administrative expenses 977 234 -- 1,211
Depreciation and amortization 295 89 94(5) 478
------- ------- ------- ----------
Income (loss) from operations (838) 367 (179) (650)
------- ------- ------- ----------
Other (income) expense:
Interest (income) expense (103) 157 (58)(8) (4)
Other (income) expense 5 -- -- 5
------- ------- ------- ----------
Other (income) expense (98) 157 (58) 1
------- ------- ------- ----------
Income (loss) from continuing operations before
provision (benefit) for income taxes (740) 210 (121) (651)
Provision (benefit) for income taxes (239) 79 7(12) (153)
------- ------- ------- ----------
Net income (loss) from continuing operations $ (501) $ 131 $ (128) $ (498)
======= ======= ======= ==========
Preferred dividends (1) (1)
Net income (loss) from continuing operations - common ======= ==========
shareholders (502) $ (499)
======= ==========
Earnings per share - basic and diluted:
Net income (loss) from continuing operations per
common share $ (0.10) (13)$ (0.10)
Shares used in computing net income (loss) per
common share from continuing operations 4,806,557 (13) 5,085,506
</TABLE>
<PAGE> 5
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PentaStar ICM US TeleCenters,
Communications, Communications Access Inc. and Vermont
Inc. and Integration, Communications Network
Subsidiaries(1) Inc. (1) (1) Services Corp.(1)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Advanced communications services $ 622 $ 2,718 $ 1,457 $ 3,045
Basic dial tone services 72 527 111 8,177
Equipment sales -- -- -- 1,794
--------------- --------------- --------------- ---------------
694 3,245 1,568 13,016
Costs and expenses:
Salaries and commissions 796 2,322 1,138 8,774
Cost of goods sold, equipment -- -- -- 1,158
Other general and administrative expenses 432 1,247 417 2,260
Depreciation and amortization 74 38 62 867
Noncash consulting expense 126 -- -- --
Impairment of goodwill -- -- -- 2,134
Restructuring and merger costs -- -- -- 180
--------------- --------------- --------------- ---------------
Income (loss) from operations (734) (362) (49) (2,357)
--------------- --------------- --------------- ---------------
Other (income) expense:
Interest (income) expense (58) 9 37 136
Other (income) expense 1 -- 27 --
--------------- --------------- --------------- ---------------
Other (income) expense (57) 9 64 136
--------------- --------------- --------------- ---------------
Income (loss) from continuing operations before
provision (benefit) for income taxes (677) (371) (113) (2,493)
Provision (benefit) for income taxes (244) (137) (41) --
--------------- --------------- --------------- ---------------
Net income (loss) from continuing operations $ (433) $ (234) $ (72) $ (2,493)
=============== =============== =============== ===============
Earnings per share - basic and diluted:
Net income (loss) from continuing operations per share (0.12)
Shares used in computing net income (loss) per share
from continuing operations 3,507,116
</TABLE>
<TABLE>
<CAPTION>
Network Services
Agency Division of
Telecomm Pro Forma Pro Forma
Industries, Corp.(1) Adjustments Combined
-------------------- ------------- ---------------
<S> <C> <C> <C>
Revenues:
Advanced communications services $ 5,987 $ (637)(11) $ 13,192
Basic dial tone services 4,440 (473)(11) 12,854
Equipment sales -- -- 1,794
--------------- ------------- --------------
10,427 (1,110) 27,840
Costs and expenses:
Salaries and commissions 4,312 (125)(6) 17,056
(100)(7)
183 (10)
(244)(11)
Cost of goods sold, equipment -- -- 1,158
Other general and administrative expenses 1,238 (312)(9) 5,282
Depreciation and amortization 367 196 (3) 1,799
(169)(4)
364 (5)
Noncash consulting expense -- -- 126
Impairment of goodwill -- (2,134)(4) --
Restructuring and merger costs -- (180)(9) --
--------------- ------------- --------------
Income (loss) from operations 4,510 1,411 2,419
--------------- ------------- --------------
Other (income) expense:
Interest (income) expense 608 (396)(8) 336
Other (income) expense -- -- 28
--------------- ------------- --------------
Other (income) expense 608 (396) 364
--------------- ------------- --------------
Income (loss) from continuing operations before
provision (benefit) for income taxes 3,902 1,807 2,055
Provision (benefit) for income taxes 1,508 (16)(12) 1,070
--------------- ------------- --------------
Net income (loss) from continuing operations $ 2,394 $ 1,823 $ 985
=============== ============= ==============
Earnings per share - basic and diluted:
Net income (loss) from continuing operations per share
- basic (13)$ 0.19
Net income (loss) from continuing operations per share
- diluted (13) 0.19
Shares used in computing net income (loss) per share
from continuing operations - basic (13) 5,082,771
Shares used in computing net income (loss) per share
from continuing operations - diluted (13) 5,196,521
</TABLE>
<PAGE> 6
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
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 commenced its business operations as a
communications services agent for communications services including local
access, long distance, wireless and Internet services for voice and data
communications, upon the closing of the acquisitions of Access and ICM on
October 26, 1999. In the first quarter of fiscal 2000, PentaStar acquired the
assets of UST. In the second quarter of fiscal 2000, PentaStar acquired the
assets of TCMM. The unaudited pro forma condensed combined balance sheet as of
March 31, 2000 combines the balances of PentaStar and TCMM. The balances of UST,
Access and ICM are included in the presentation of PentaStar Communications,
Inc. and Subsidiaries in the unaudited pro forma condensed combined balance
sheet as a result of their acquisition prior to March 31, 2000. The unaudited
pro forma condensed combined statements of operations give effect to the
acquisition of TCMM, UST, Access and ICM as if they had occurred at the
beginning of the earliest period presented on January 1, 1999. The historical
statements of operations of Access and ICM are presented separately for the
period from January 1, 1999 to October 25, 1999. Subsequent to their acquisition
by PentaStar, the results of operations of Access and ICM are included in the
presentation of PentaStar Communications, Inc. and Subsidiaries in the unaudited
pro forma condensed combined statement of operations for the year ended December
31, 1999. Certain historical statement of operations amounts for TCMM, UST,
Access and ICM have been reclassified to conform to PentaStar's classifications.
(2) ACQUISITION OF TCMM
In the second quarter of fiscal 2000, PentaStar acquired the assets of
TCMM. The purchase price consideration consisted of (a) $1,065 in cash, (b)
278,949 shares of PentaStar's common stock with a fair market value of $6,494,
(c) acquisition costs of $297 and (d) the assumption of certain debt and
operating liabilities of TCMM based upon their estimated fair market values. The
purchase consideration will be allocated to the identifiable assets and assumed
liabilities of TCMM. In preparing the accompanying unaudited pro forma condensed
combined financial information a preliminary allocation of the purchase price
has been made below based upon the March 31, 2000 unaudited financial statements
of TCMM.
<TABLE>
<S> <C>
Cash .............................. $ 1,065
Acquisition costs ................. 297
--------
Cash consideration .............. 1,362
Stock consideration ............... 6,494
--------
Purchase consideration .......... 7,856
Divisional equity of TCMM ......... (1,102)
Liabilities not assumed ........... (4,549)
Historical goodwill of TCMM ....... 3,341
Adjustment to conform revenue
recognition (Note 11) ........... 5,407
Fair value adjustments:
Other current assets .............. 174
Other noncurrent assets ........... 105
--------
Goodwill .......................... $ 11,232
========
</TABLE>
The fair value of the stock consideration was determined based upon the
average closing price of PentaStar's shares three days before and after the
transaction was announced ($23.28 per share).
<PAGE> 7
The amount of excess consideration allocated to goodwill will be amortized
over twenty years. The result is annual amortization of $562.
In addition to the initial purchase consideration, there are potential
earnout payments to TCMM based upon certain operating performance criteria
during the period April 1, 2000 through March 31, 2001. The total purchase
consideration, including cash, stock and the assumed line of credit at closing,
cannot exceed $18 million. The earn-out will be recorded as additional purchase
consideration when and if realized by TCMM.
Historical obligations of TCMM, not assumed by PentaStar are as follows:
<TABLE>
<S> <C>
Line of credit ......................................................... $ 694
Income taxes due to parent ............................................. 947
Long-term debt ......................................................... 216
Other current liabilities .............................................. 868
Other noncurrent liabilities ........................................... 1,824
------
$4,549
======
</TABLE>
The assumed liabilities include the $1,734 of the line of credit
outstanding at March 31, 2000 related to TCMM's line of credit which was assumed
by PentaStar. PentaStar subsequently paid off the outstanding balance.
OTHER PRO FORMA ADJUSTMENTS
3. Reflects the amortization of goodwill related to the acquisition of
the Predecessor Companies. Goodwill of $4,501 was recorded at the time
of acquisition and is being amortized over twenty years. Annual
amortization expense for the Predecessor Companies is $225.
4. Reflects the elimination of the impairment and amortization of
goodwill from the historical financial statements of UST and
recognizes the amortization of goodwill related to PentaStar's
acquisition of UST. UST's historical financial statements had
reflected goodwill that was being amortized on an annual basis of
$180. During 1999, a charge to operations in the statement of
operations was recorded to write-off the remaining balance of
goodwill. Annual amortization of goodwill related to the acquisition
of UST by PentaStar is $11.
5. Reflects the elimination of amortization of goodwill from the
historical financial statements of TCMM and recognizes the
amortization of goodwill related to PentaStar's acquisition of TCMM.
Goodwill of $11,232 was recorded at the time of the acquisition and is
being amortized over twenty years. Annual amortization expense for
TCMM is $562.
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 Predecessor Companies. The new
agreements provide for salaries of $195 and bonuses of 5% of EBITA.
7. Reflects the net reduction in compensation of the president of UST. In
connection with the acquisition of UST, PentaStar entered into
consulting and noncompetition agreements whereby the president of UST
will not continue as an employee of PentaStar, but will receive
payments of $100 over a one year period as a consultant and for
performance under the terms of the noncompetition agreement. The
consulting agreement is for a three month period and the
noncompetition agreement is for a one year period. A current liability
and current asset have been recorded to reflect the future financial
obligation of PentaStar.
<PAGE> 8
8. Reflects the elimination of interest expense on the liabilities not
assumed by PentaStar in the acquisitions of TCMM, UST and the
Predecessor Companies.
9. Reflects non-recurring costs incurred by UST and the Predecessor
Companies in 1999 related to expenses incurred in conjunction with the
acquisitions by PentaStar.
10. Reflects a bonus of 5% of EBITA provided contractually to a key
employee of TCMM.
11. Reflects adjustments to conform TCMM's historical accounting policies
for recognition of future residual revenue streams and the related
commission expense to the policies adopted by PentaStar. TCMM
recognized estimated residual revenues and commissions upon
installation. PentaStar recognizes revenue for the future residual
streams and related commission at the time of cash receipt. These
adjustments reduce revenue and receivables recorded in TCMM's
historical financial statements. The related commission expense is
reduced and previously paid commissions are added to the balance sheet
as prepaid commissions to be expensed as the related revenue is
recognized in the future. A deferred tax liability has been recorded
at an effective tax rate of 37.5% to account for the timing difference
between cash commission payments for tax reporting purposes and the
recognition of commission expense for financial reporting purposes.
The effect of the adjustment to conform revenue is as follows:
<TABLE>
<S> <C>
Current receivables.............................................. $(2,214)
Noncurrent receivables........................................... (4,190)
Prepaid commissions-current...................................... 579
Prepaid commissions-noncurrent................................... 1,016
Current-deferred taxes........................................... (217)
Noncurrent deferred taxes........................................ (381)
-------
$(5,407)
=======
</TABLE>
12. Reflects an adjustment for income taxes to record an income tax
provision (benefit) at an effective rate of 37.5%, excluding the
effect of goodwill amortization, which is not tax deductible.
13. The number of shares used in computing net income (loss) per share
from continuing operations includes the following:
<TABLE>
<S> <C>
Weighted-average common shares outstanding as of 3/31/00,
excluding TCMM acquisition ......................................... 4,806,557
Shares issued to acquire TCMM ........................................ 278,949
---------
Shares outstanding as of 3/31/00............................ 5,085,506
</TABLE>
<TABLE>
<S> <C>
Shares outstanding as of 12/31/99, excluding acquisitions............. 4,427,842
Shares issued to acquire TCMM, UST & Predecessor Companies............ 654,929
---------
Shares outstanding as of 12/31/99-basic............................... 5,082,771
Common stock equivalents for unexercised stock options................ 113,750
---------
Shares outstanding as of 12/31/99-diluted............................. 5,196,521
</TABLE>
