<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO FORM 8-K ON FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 18, 2000
PentaStar Communications, Inc.
------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 0-27709 84-1502003
----------------------------------------------------------------------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
</TABLE>
1522 Blake Street, Denver CO 80202
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 825-4400
None
------
(Former name or former address, if changed since last report.)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
Audited Combined Financial Statements of US TeleCenters, Inc. and
Vermont Network Services Corp. for the years ended December 31,
1999 and 1998 together with report of independent public
accountants are attached as Exhibit 99.1.
(b) Pro forma financial information.
Unaudited Pro Forma Condensed Combined Financial Information for
PentaStar Communications, Inc. and Subsidiaries including
Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1999, Unaudited Pro Forma Condensed Combined
Statements of Operations for the years ended December 31, 1999
and 1998 and Notes to Unaudited Pro Forma Condensed Combined
Financial Information are attached as Exhibit 99.2.
(c) Exhibits.
99.1 Audited Combined Financial Statements of US TeleCenters, Inc.
and Vermont Network Services Corp. for the years ended
December 31, 1999 and 1998 together with report of independent
public accountants.
99.2 Unaudited Pro Forma Condensed Combined Financial Information
for PentaStar Communications, Inc. and Subsidiaries including
Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1999, Unaudited Pro Forma Condensed Combined
Statements of Operations for the years ended December 31, 1999
and 1998 and Notes to Unaudited Pro Forma Condensed Combined
Financial Information.
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 5, 2000 PENTASTAR COMMUNICATIONS, INC.
By: /s/ David L. Dunham
--------------------
David L. Dunham
Chief Financial Officer
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
99.1 Audited Combined Financial Statements of US TeleCenters, Inc.
and Vermont Network Services Corp. for the years ended
December 31, 1999 and 1998 together with report of independent
public accountants.
99.2 Unaudited Pro Forma Condensed Combined Financial Information
for PentaStar Communications, Inc. and Subsidiaries including
Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1999, Unaudited Pro Forma Condensed Combined
Statements of Operations for the years ended December 31, 1999
and 1998 and Notes to Unaudited Pro Forma Condensed Combined
Financial Information.
</TABLE>
<PAGE> 1
EXHIBIT 99.1
US TELECENTERS, INC. AND VERMONT NETWORK SERVICES CORP.
Combined Financial Statements
For the Years Ended December 31, 1999 and 1998
Together with
Report of Independent Public Accountants
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To US TeleCenters, Inc. and Vermont Network Services Corp.:
We have audited the accompanying combined balance sheets of US TeleCenters, Inc.
and Vermont Network Services Corp. (collectively, the Company) (see Note 1) as
of December 31, 1999 and 1998, and related combined statements of operations,
parent company's investment and cash flows for the years then ended. These
combined 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined 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 combined financial statements referred to above present
fairly in all material respects, the combined financial position of US
TeleCenters, Inc. and Vermont Network Services Corp. as of December 31, 1999 and
1998, and the combined results of its operations and its combined cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 11, on February 18, 2000, certain assets and liabilities of
the Company were acquired by a third-party and the Company ceased to exist as a
stand alone entity.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 11, 2000
<PAGE> 3
US TELECENTERS, INC. AND VERMONT NETWORK SERVICES CORP.
Combined Balance Sheets
As of December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash $ 65,978 $ 358,879
Accounts receivable, net of reserves of $409,694
and $233,863, respectively 1,234,993 2,371,335
Inventory 176,303 176,854
Other current assets 108,502 35,062
----------- -----------
Total current assets 1,585,776 2,942,130
PROPERTY AND EQUIPMENT, net 1,093,664 1,600,331
GOODWILL, net -- 2,300,064
OTHER ASSETS 83,550 100,139
----------- -----------
Total assets $ 2,762,990 $ 6,942,664
=========== ===========
LIABILITIES AND PARENT COMPANY'S INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 1,050,067 $ 636,012
Other accrued liabilities 627,524 387,022
Current portion of long-term debt 37,381 205,399
Accrued payroll and related costs 548,073 1,262,397
Due to Parent Company 2,957,590 3,539,046
Accrued restructuring costs -- 784,982
Other current liabilities 177,632 202,458
----------- -----------
Total current liabilities 5,398,267 7,017,316
----------- -----------
OTHER LONG-TERM LIABILITIES 165,443 232,720
----------- -----------
COMMITMENTS AND CONTINGENCIES (see Notes 7 and 8)
PARENT COMPANY'S INVESTMENT:
Common stock, par value $.01, 11,000,000 authorized
and 9,059,174 issued and outstanding at
December 31, 1999 and 1998, respectively 90,592 90,592
Additional paid-in capital 2,358,165 2,358,165
Accumulated deficit (5,249,477) (2,756,129)
----------- -----------
Total Parent Company's investment (2,800,720) (307,372)
----------- -----------
Total liabilities and Parent Company's investment $ 2,762,990 $ 6,942,664
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
US TELECENTERS, INC. AND VERMONT NETWORK SERVICES CORP.
Combined Statements of Operations
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
REVENUES $ 13,016,110 $ 21,078,661
------------ ------------
COSTS AND EXPENSES:
Costs of goods sold 1,822,132 3,238,943
Sales and marketing expenses 7,146,233 12,702,238
General and administrative expenses 4,091,860 3,514,801
Impairment of goodwill 2,133,510 --
Restructuring and merger costs 180,000 1,774,015
------------ ------------
Total costs and expenses 15,373,735 21,229,997
------------ ------------
LOSS FROM OPERATIONS (2,357,625) (151,336)
INTEREST EXPENSE (135,723) (186,895)
------------ ------------
NET LOSS $ (2,493,348) $ (338,231)
============ ============
NET LOSS PER COMMON SHARE (9,059,174 outstanding) $ (.28) $ (.04)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
US TELECENTERS, INC. AND VERMONT NETWORK SERVICES CORP.
Statement of Changes in Parent Company's Investment
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
ADDITIONAL
COMMON ACCUMULATED PAID-IN
STOCK DEFICIT CAPITAL TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ 90,592 $(2,417,898) $ 2,358,165 $ 30,859
Net loss -- (338,231) -- (338,231)
----------- ----------- ----------- -----------
Balance, December 31, 1998 90,592 (2,756,129) 2,358,165 (307,372)
Net loss -- (2,493,348) -- (2,493,348)
----------- ----------- ----------- -----------
Balance, December 31, 1999 $ 90,592 $(5,249,477) $ 2,358,165 $(2,800,720)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
US TELECENTERS, INC. AND VERMONT NETWORK SERVICES CORP.
Combined Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,493,348) $ (338,231)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 866,915 1,021,250
Impairment of goodwill 2,133,510 --
Changes in assets and liabilities:
Accounts receivable, net 1,136,342 589,419
Inventory 551 251,479
Other assets (56,851) 199,140
Accounts payable 414,055 (615,399)
Other accrued liabilities (1,932,363) (384,664)
----------- -----------
Net cash provided by operating activities 68,811 722,994
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (193,694) (434,180)
----------- -----------
Net cash used in investing activities (193,694) (434,180)
----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments on capital leases (168,018) (106,201)
----------- -----------
Net cash used in financing activities (168,018) (106,201)
----------- -----------
NET (DECREASE) INCREASE IN CASH (292,901) 182,613
CASH, beginning of year 358,879 176,266
----------- -----------
CASH, end of year $ 65,978 $ 358,879
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Operating activities reflect:
Interest paid $ (135,723) $ (152,032)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
US TELECENTERS, INC. AND VERMONT NETWORK SERVICES CORP.
Notes to Combined Financial Statements
December 31, 1999 and 1998
(1) THE BUSINESS
US TeleCenters, Inc. (UST), a Delaware corporation, was formed in 1986 to
establish a regional telecommunications and equipment distribution and
service business. UST designs, sells, manages and supports
telecommunications systems solutions for small and medium-sized
businesses. In November 1996, UST merged with View Tech, Inc. and became
a wholly-owned subsidiary of View Tech, Inc. (the Parent Company). In
1997, the Parent Company, through its wholly-owned subsidiary Vermont
Network Services Corp. (NSC), acquired the assets of Vermont
Telecommunications Network Services, Inc. (VTNSI). UST and NSC combined
have agency agreements with Bell Atlantic, Bell South, GTE and Sprint.
Subsequent to December 31, 1999, certain assets and liabilities of UST
and NSC were acquired by Pentastar Communications, Inc. (Pentastar) (see
Note 11).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of
UST and its affiliate, NSC (collectively, the Company). All significant
intercompany transactions related to these two entities have been
eliminated.
REVENUE RECOGNITION
The Company sells both products and services. Product revenue consists of
revenue from the sale of telephone equipment and is recognized at the
time of shipment.
The Company has agency agreements with various communications service
providers whereby the Company receives commissions for the sale of local
access, long-distance and Internet services on behalf of these providers.
The agreements are subject to annual renewals. The Company generally
recognizes revenue upon installation. Certain of the communications
service providers have the right to credit or charge back future
commission payments on orders canceled within a six month period from the
date of order. The Company has established a reserve for cancellations
based on historical results. As of December 31, 1999 and 1998, the
cancellation reserves were $381,598 and $203,863, respectively. These
cancellation reserves are included along with $28,096 and $30,000 of bad
debt reserves at December 31, 1999 and 1998, as reductions in accounts
receivable. The Company is not aware of any possible refunds or
charge-backs that these entities might be seeking, which have not been
reserved at December 31, 1999.
In addition, under its agreement with Bell Atlantic, the Company receives
commissions on management contracts. The Company recognizes these
revenues at the time the service is rendered.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB No. 101"). SAB No. 101, among other things, provides
guidance on revenue recognition when customer acceptance and installation
provisions exist. SAB No. 101 has been adopted by the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
<PAGE> 8
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity not
exceeding three months at the date of purchase to be cash equivalents.
INVENTORIES
Inventories are accounted for on the basis of the lower of cost or
market. Cost is determined on a FIFO (first-in, first-out) basis.
Included in inventory is refurbished and used equipment held for resale
in the ordinary course of business.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and include improvements that
significantly add to utility or extend useful lives. Depreciation of
property and equipment is provided using the straight-line method over
estimated useful lives ranging from one to ten years. Expenditures for
maintenance and repairs are charged to expense as incurred.
INTANGIBLES
The Company assesses the realizability of long-lived assets in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets. SFAS No. 121 requires among other things, that an
entity review its long-lived assets, including intangibles, for
impairment whenever changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. As of December 31, 1999,
the Company determined that the goodwill generated in connection with the
acquisition of VTNSI was not realizable through future cash flows as a
result of the sale of certain of its assets to Pentastar (see Note 11),
and wrote-off previously recorded assets of $2,133,510 which is included
as an operating charge in the combined statements of operations.
INCOME TAXES
As of December 31, 1999 and 1998, the Company was included in the
consolidated tax returns of the Parent Company. Any of the tax benefits
attributable to the Company's operation has been retained by the Parent
Company. No dividend payment to the Parent Company was recorded related
to the NOL carryforward asset due to their realization not being assured.
CONCENTRATION OF RISK
Items that potentially subject the Company to concentrations of credit
risk consist primarily of accounts receivable, cash and investments, and
the dependence on major clients.
Accounts receivable subject the Company to potential credit risk with
customers in the telecommunications industry. The Company performs
on-going credit evaluations of its customers' financial condition but
does not require collateral. The Company maintains its accounts with
highly rated financial institutions.
Approximately 86% of the Company's revenues are attributable to the sale
of network products and services provided by Bell Atlantic and GTE.
Termination or change of the Company's business relationship with Bell
Atlantic and/or GTE, disruption in supply, failure of these suppliers to
remain competitive in quality, function or price, or a determination by
such suppliers to reduce reliance on independent distributors such as the
Company could have an adverse effect on the Company. The Company believes
it could become a sales agent for other providers with comparable terms
if it were to lose its relationship with any of its providers. As of
January 31, 2000, GTE terminated their business relationship with the
Company (see Note 12).
RECLASSIFICATIONS
Certain prior year balances have been reclassified in order to conform to
the current year presentation.
2
<PAGE> 9
(3) ACQUISITIONS
VERMONT TELECOMMUNICATIONS NETWORK SERVICES, INC.
On November 13, 1997, the Parent Company, through its wholly-owned
subsidiary NSC, acquired the net assets of VTNSI, a Vermont corporation.
Pursuant to the terms of the Asset Purchase Agreement, (the "Agreement"),
NSC acquired ownership of the assets and assumed certain liabilities of
VTNSI, effective November 1, 1997. The aggregate purchase price for the
net assets of VTNSI consisted of (i) $2,000,000 cash paid at the closing,
(ii) a promissory note in the original amount of $250,000, bearing
interest at the rate of 8% per annum subsequently paid in full on
November 21, 1998, (iii) a contingent note in the original amount of
$250,000, bearing interest at the rate of 8% per annum payable in full on
November 21, 1999, and (iv) $400,000 paid by the issuance of 62,112
shares of the Parent Company's common stock. The excess of the
acquisition price over the net assets acquired was recorded as goodwill
and was being amortized over 15 years. As of December 31, 1999, the
remaining balance of goodwill was written off (see Note 2). The Parent
Company, UST and NSC, entered into a settlement and general release
agreement with the previous owner as of December 23, 1999 which relieved
the Company of any further payments to the previous owner in exchange for
$180,000. This settlement amount is included as a component of other
accrued liabilities on the accompanying combined balance sheet and as
restructuring and merger costs on the accompanying combined statement of
operations.
(4) INVENTORY
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Finished goods $108,765 $110,216
Used and refurbished 67,538 66,638
-------- --------
$176,303 $176,854
======== ========
</TABLE>
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Computer equipment and software $ 2,277,738 $ 2,175,515
Equipment 1,262,541 1,668,459
Furniture and fixtures 1,679,110 1,217,395
Leasehold improvements 417,011 381,337
----------- -----------
5,636,400 5,442,706
Less accumulated depreciation (4,542,736) (3,842,375)
----------- -----------
$ 1,093,664 $ 1,600,331
=========== ===========
</TABLE>
(6) LINES OF CREDIT
The Parent Company and its wholly-owned subsidiary, UST, entered into a
$15 million Credit Agreement (the "Credit Agreement") with a bank
effective November 21, 1997. The Credit Agreement provides for three
separate loan commitments consisting of (i) a Facility A Commitment of up
to $7 million; (ii) a Facility B Commitment of up to $5 million and (iii)
a Facility C Commitment of up to $3 million. The Facility B Commitment
expired on December 1, 1998. Amounts under the Credit Agreement are
collateralized by the assets of both the Parent Company and UST. Funds
available under the Credit Agreement will vary from time to time
depending on many factors including, without limitations, the amount of
Eligible Trade Accounts Receivable and Eligible Inventory of the Company,
as such terms are defined in the Credit Agreement. The Credit Agreement
requires both the Parent Company and UST to comply with various financial
and operating loan covenants. The debt was carried on the financial
statements of the Parent Company.
3
<PAGE> 10
On August 5, 1999, the Parent Company received a Notice of Event of
Default and Notice of Reservations of Rights from the bank. The Facility
C Commitment was terminated. On November 12, 1999, the Parent Company
received a commitment letter from the bank outlining the terms of a six
month forbearance. In conjunction with the acquisition of UST by
Pentastar (see Note 11), UST was relieved of any responsibility under the
Credit Agreement as of January 1, 2000.
(7) OTHER LONG-TERM LIABILITIES
CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment and furniture under capital lease
arrangements. The following is a schedule of future minimum lease
payments required under capital leases, together with their present value
as of December 31, 1999.
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
<S> <C>
2000 $ 51,795
2001 47,378
2002 42,238
2003 and thereafter 15,979
---------
Net minimum lease payments 157,390
Less amounts pertaining to interest (30,845)
---------
Present value of capital lease obligation $ 126,545
=========
</TABLE>
The current portion due under capital lease obligations at December 31,
1999 and 1998 was $ 37,381 and $205,399, respectively.
(8) COMMITMENTS AND CONTINGENCIES
The Company leases various facilities under operating leases expiring
through 2002. Certain leases require the Company to pay increases in real
estate taxes, operating costs and repairs over certain base year amounts.
Lease payments for the years ended December 31, 1999 and 1998, were
$648,404 and $729,478, respectively.
Minimum future rental commitments under noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
<S> <C>
2000 $418,470
2001 249,642
2002 32,672
2003 --
2004 and thereafter --
--------
$700,784
========
</TABLE>
These obligations were assumed by Pentastar pursuant to the asset
purchase agreement (see Note 11).
The Company has been named in employee related lawsuits. The Company is
vigorously defending itself against such matters and does not expect the
outcome to have a material adverse impact on its financial position.
4
<PAGE> 11
(9) RETIREMENT SAVINGS PLAN
The Company participates in 401(k) retirement plans for its employees.
Employer contributions to the 401(k) plans for the years ended December
31, 1999 and 1998 and were approximately $33,888 and $72,505,
respectively.
(10) RELATED PARTY TRANSACTIONS
As of December 31, 1999, the Company had a payable of $2,957,590 to its
Parent Company. Transactions between its Parent Company and the Company
primarily relate to the allocation of overhead, including general and
administrative expenses and accounts receivable UST had collected on
behalf of the Parent Company. In connection with the acquisition of the
Company by Pentastar subsequent to year end, all intercompany balances
were forgiven (see Note 11).
(11) OTHER EVENTS
UST's agency agreement for telemarketing services with GTE has been
terminated effective January 31, 2000, which accounted for 11% and 19% of
UST's revenue for the years ended December 31, 1999 and 1998,
respectively. UST continues to telemarket products for Bell Atlantic and
other communication service providers and expects to replace this
business with other service providers.
On February 18, 2000, Pentastar acquired certain assets and liabilities
of the Company in return for payment of cash and Pentastar common stock.
The Parent Company retained other liabilities and the Company ceased
operations as a stand alone entity. Total consideration received
approximated the value of the net assets sold.
5
<PAGE> 1
EXHIBIT 99.2
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 US TeleCenters, Inc. and its affiliate
Vermont Network Services Corp. (together, "UST") and (b) 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 UST occurred in the first quarter of fiscal 2000 and will be
accounted for using the purchase method of accounting. 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 December 31, 1999. The unaudited pro forma
condensed combined financial information is derived from the historical
financial statements of PentaStar, UST, Access and ICM.
The unaudited pro forma condensed combined balance sheet gives effect
to the acquisition of UST, as if it had occurred on December 31, 1999. The
unaudited pro forma condensed combined statements of operations give effect to
the acquisition of UST and the Predecessor Companies as if they had occurred at
the beginning of the earliest period presented on January 1, 1998. The purchase
accounting adjustments made in connection with the development of the pro forma
condensed combined financial information are preliminary and have been made
solely for purposes of developing such pro forma condensed combined financial
information.
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 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 thereto included elsewhere in this Current Report
on Form 8-K/A and in the Company's Annual Report on Form 10-KSB for the period
from inception (March 15, 1999) through December 31, 1999.
<PAGE> 2
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of December 31, 1999
(In thousands)
<TABLE>
<CAPTION>
ASSETS
PentaStar US TeleCenters,
Communications, Inc. and Vermont
Inc. and Network Pro Forma Pro Forma
Subsidiaries(1) Services Corp.(1) Adjustments Combined
---------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 8,137 $ 66 $ (277)(2) $ 7,926
Accounts receivable, net 1,092 1,235 -- 2,327
Prepaid expenses and other 804 285 100 (6) 1,189
------------- ------------- ------------- -------------
Total current assets 10,033 1,586 (177) 11,442
Property and equipment, net 555 1,094 -- 1,649
Goodwill, net 4,459 -- 220 (2) 4,679
Other assets 368 83 -- 451
------------- ------------- ------------- -------------
Total assets $ 15,415 $ 2,763 $ 43 $ 18,221
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to UST parent company $ -- $ 2,958 $ (2,958)(2) $ --
Other current liabilities 1,592 2,441 100 (6) 4,133
------------- ------------- ------------- -------------
Total current liabilities 1,592 5,399 (2,858) 4,133
Other long-term liabilities -- 165 -- 165
Shareholders' equity:
Series A preferred stock 86 -- -- 86
Common stock 1 91 (91)(2) 1
Additional paid-in capital 14,169 2,358 (2,258)(2) 14,269
Retained earnings (deficit) (433) (5,250) 5,250 (6) (433)
------------- ------------- ------------- -------------
Total shareholders' equity 13,823 (2,801) 2,901 13,923
------------- ------------- ------------- -------------
Total liabilities and shareholders'
equity $ 15,415 $ 2,763 $ 43 $ 18,221
============= ============= ============= =============
</TABLE>
See accompanying notes to pro forma financial information.
<PAGE> 3
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
ICM US TeleCenters,
PentaStar Communications Access Inc. and Vermont
Communications, Integration, Communications Network
Inc.(1) Inc.(1) (1) Services Corp.(1)
-------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Advanced communications services $ -- $ 3,681 $ 2,038 $ 4,457
Basic dial tone services -- 594 344 14,118
Equipment sales -- -- -- 2,504
-------------- -------------- -------------- --------------
-- 4,275 2,382 21,079
Costs and expenses:
Salaries and commissions -- 2,746 1,201 13,426
Cost of goods sold, equipment -- -- -- 1,754
Other general and administrative expenses -- 915 498 3,255
Depreciation and amortization -- 37 79 1,021
Restructuring and merger costs -- -- -- 1,774
-------------- -------------- -------------- --------------
Income (loss) from operations -- 577 604 (151)
-------------- -------------- -------------- --------------
Other (income) expense:
Interest (income) expense -- 1 52 187
Other (income) expense -- (9) (3) --
-------------- -------------- -------------- --------------
Other (income) expense -- (8) 49 187
-------------- -------------- -------------- --------------
Income (loss) from continuing operations before
provision for income taxes -- 585 555 (338)
Provision for income taxes -- 200 212 --
-------------- -------------- -------------- --------------
Net income (loss) from continuing operations $ -- $ 385 $ 343 $ (338)
============== ============== ============== ==============
Earnings per share - basic and diluted:
Net income from continuing operations per share
Shares used in computing net income per share
from continuing operations
<CAPTION>
Pro Forma Pro Forma
Adjustments Combined
-------------- --------------
Revenues:
Advanced communications services $ -- $ 10,176
Basic dial tone services -- 15,056
Equipment sales -- 2,504
-------------- --------------
-- 27,736
Costs and expenses:
Salaries and commissions (355)(5),(6) 17,018
Cost of goods sold, equipment -- 1,754
Other general and administrative expenses (200)(9) 4,468
Depreciation and amortization 56 (3),(4) 1,193
Restructuring and merger costs -- 1,774
-------------- --------------
Income (loss) from operations 499 1,529
-------------- --------------
Other (income) expense:
Interest (income) expense (203)(7) 37
Other (income) expense -- (12)
-------------- --------------
Other (income) expense (203) 25
-------------- --------------
Income (loss) from continuing operations before
provision for income taxes 702 1,504
Provision for income taxes 240 (10) 652
-------------- --------------
Net income (loss) from continuing operations $ 462 $ 852
============== ==============
Earnings per share - basic and diluted:
Net income from continuing operations per share (11) $ 0.18
Shares used in computing net income per share
from continuing operations (11) 4,803,822
</TABLE>
<PAGE> 4
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
<CAPTION>
Pro Forma Pro Forma
Adjustments Combined
-------------- --------------
Revenues:
Advanced communications services $ -- $ 7,842
Basic dial tone services -- 8,887
Equipment sales -- 1,794
-------------- --------------
-- 18,523
Costs and expenses:
Salaries and commissions (225)(5),(6) 12,805
Cost of goods sold, equipment -- 1,158
Other general and administrative expenses (312)(8) 4,044
Depreciation and amortization 27 (3),(4) 1,068
Noncash consulting expense -- 126
Impairment of goodwill (2,134)(4) --
Restructuring and merger costs (180)(8) --
-------------- --------------
Income (loss) from operations 2,824 (678)
-------------- --------------
Other (income) expense:
Interest (income) expense (152)(7) (28)
Other (income) expense -- 28
-------------- --------------
Other (income) expense (152) --
-------------- --------------
Income (loss) from continuing operations before
provision (benefit) for income taxes 2,976 (678)
Provision (benefit) for income taxes 256 (10) (166)
-------------- --------------
Net income (loss) from continuing operations $ 2,720 $ (512)
============== ==============
Earnings per share - basic and diluted:
Net income (loss) from continuing operations per share (11) ($0.11)
Shares used in computing net income (loss) per share
from continuing operations (11) 4,803,822
</TABLE>
<PAGE> 5
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. The unaudited pro forma condensed combined balance sheet as of
December 31, 1999 combines the balances of PentaStar and UST. The balances of
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 December 31, 1999. The unaudited
pro forma condensed combined statements of operations give effect to the
acquisition of UST, Access and ICM as if they had occurred at the beginning of
the earliest period presented on January 1, 1998. The historical statements of
operations of Access and ICM are presented separately for the year ended
December 31, 1998 and 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 UST, Access and ICM have been reclassified to conform to
PentaStar's classifications.
(2) ACQUISITION OF UST
In the first quarter of fiscal 2000, PentaStar completed the
acquisition of the assets of UST. The purchase price consideration consisted of
(a) $182 in cash, (b) 5,980 shares of PentaStar's common stock with a fair
market value of $100, (c) acquisition costs of $95 and (d) the assumption of
certain liabilities of UST. These liabilities exclude amounts due to the parent
company of UST. The purchase consideration will be allocated to the identifiable
assets and assumed liabilities of UST. In preparing the accompanying pro forma
condensed combined financial information a preliminary allocation of the
purchase price has been made below based upon the December 31, 1999 audited
financial statements of UST.
<TABLE>
<S> <C>
Cash................................. $ 182
Acquisition costs.................... 95
Common stock......................... 100
Total liabilities.................... 5,564
Excluded parent company liability.... (2,958)
Assets acquired...................... (2,763)
--------
Goodwill............................. $ 220
========
</TABLE>
The amount of excess consideration allocated to goodwill will be
amortized over twenty years. The result is annual amortization of $11.
As a result of the purchase accounting above, the historical equity of
UST was eliminated.
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.
<PAGE> 6
5. 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 EBITDA.
6. 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.
7. Reflects the elimination of interest expense on the liabilities
not assumed by PentaStar in the acquisitions of UST and the
Predecessor Companies.
8. Reflects non-recurring costs incurred by UST and the Predecessor
Companies related to expenses incurred in conjunction
with the acquisitions by PentaStar.
9. Reflects the elimination of a non-recurring corporate management
fee allocation of $200 from the former parent company of UST.
10. Reflects an adjustment for income taxes to record an income tax
provision (benefit) at an effective rate of 37.5%. Goodwill
amortization is not tax deductible.
11. The number of shares used in computing net income (loss) per
share from continuing operations includes the following:
<TABLE>
<S> <C>
Shares outstanding as of 12/31/99, excluding acquisitions.......... 4,427,842
Shares issued to acquire UST & Predecessor Companies............... 375,980
---------
Shares outstanding............................................ 4,803,822
</TABLE>
