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EXHIBIT 99.2
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
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TELECOM INDUSTRIES CORP.
TABLE OF CONTENTS
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PAGE(S)
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Financial Statements:
Balance Sheets as of March 31, 2000 and December 31, 1999 3
Statements of Operations for the three months ended March 31, 2000 and 1999 4
Statements of Cash Flows for the three months ended March 31, 2000 and 1999 5
Notes to Financial Statements 6-8
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TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
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MARCH 31, DECEMBER 31,
ASSETS 2000 1999
(UNAUDITED) (AUDITED)
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Current assets:
Accounts receivable, net $ 3,783,247 $ 4,210,971
Prepaid expenses 404,460 312,624
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Total current assets 4,187,707 4,523,595
Property and equipment, net 496,502 521,089
Accounts receivable, net 4,189,950 4,121,843
Intangibles and other assets, net 3,341,045 3,395,148
Deferred income taxes 104,671 104,671
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Total assets $ 12,319,875 $ 12,666,346
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LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Line of credit $ 2,428,072 $ 1,868,182
Current portion of long-term debt 791,073 790,980
Accounts payable 51,077 146,709
Accrued payroll and related expenses 48,029 46,350
Accrued commissions and bonus 234,172 194,289
Deferred income taxes 868,152 868,152
Income taxes payable to Parent 947,421 947,421
Other accrued expenses 68,261 200,963
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Total current liabilities 5,436,257 5,063,046
Long-term debt, less current portion 3,959,630 4,157,365
Deferred income taxes 1,821,719 1,742,924
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Total liabilities 11,217,606 10,963,335
Commitments and contingencies
Divisional equity 1,102,269 1,703,011
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Total liabilities and divisional equity $ 12,319,875 $ 12,666,346
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TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
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2000 1999
(UNAUDITED) (UNAUDITED)
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Network service revenue $ 1,777,039 $ 2,267,429
Long distance and other revenue 74,712 83,141
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Net revenues 1,851,751 2,350,570
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Commission, contractor fees and related expenses 39,268 2,968
Sales and service costs 132,790 127,548
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Net cost of commissions, contractor fees
and related expenses 172,058 130,516
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Selling, general and administrative expenses 1,312,498 1,275,853
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Operating income 367,195 944,201
Other income (expense):
Interest expense (157,076) (138,422)
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(157,076) (138,422)
Income from operations before income tax expense 210,119 805,779
Income tax expense 78,795 302,167
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Net income $ 131,324 $ 503,612
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TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS MARCH 31, 2000 AND 1999
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2000 1999
(UNAUDITED) (UNAUDITED)
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Cash flows from operating activities:
Net income $ 131,324 $ 503,612
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 89,022 91,564
Deferred income taxes, net 78,795 302,167
Deferred financing fees 8,355 2,786
Changes in assets and liabilities:
Accounts receivable, net 427,724 708,551
Accounts receivable, net - long-term portion (68,107) (424,687)
Prepaid expenses (91,836) (56,937)
Employee advances -- 40,300
Accounts payable (95,632) (248,975)
Accrued payroll and related expenses 1,679 43,315
Accrued commissions and bonus 39,883 (66,485)
Other accrued expenses (132,702) (74,857)
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Total adjustments 257,181 316,742
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Net cash provided by operating activities 388,505 820,354
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Cash flows from investing activities:
Purchases of property and equipment (18,687) (7,112)
Cash flows from financing activities:
Proceeds (payments) on long-term debt (197,642) (132,606)
Net borrowings (payments) under line of credit 559,890 385,638
Distributions to Telecomm Industries Corp., net (732,066) (1,066,274)
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Net cash (used in) financing activities (369,818) (813,242)
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Net change in cash -- --
Cash at beginning of period -- --
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Cash at end of period $ -- $ --
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1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Telecomm Industries Corp.-Network Services Agency Division (the
"Division") is wholly owned by Telecomm Industries Corp. ("Telecomm") and
consists of the operations and related assets and liabilities of Telecomm
required to service the Ameritech Distributor Agreement between Telecomm
and Ameritech. Telecomm is incorporated under the laws of the State of
Delaware and has its principal offices in Naperville, Illinois.
On July 19, 2000, PentaStar Communications, Inc. ("PentaStar"), through
a wholly-owned subsidiary, completed the acquisition of the assets of the
Division pursuant to a Purchase Agreement ("Agreement") dated April 15,
2000.
The initial purchase consideration paid at closing for the assets
consisted of $1,065,000 of cash, the issuance of 278,949 shares of
PentaStar's common stock, $.0001 par value (which shares had a fair
market value as defined in the agreement of $6,465,000), and the
assumption of certain debt and operating liabilities of TCMM. In
addition, there are potential earnout payments to Telecomm based upon
certain operating performance criteria during the period from April 1,
2000 through March 31, 2001. The total amount of cash and stock
consideration and assumed short-term debt paid at closing cannot exceed
$18,000,000. The 278,949 shares of PentaStar common stock were placed in
a general indemnification escrow until the date in which the earnout
amount is determined. The initial stock consideration is subject to
post-closing adjustments based upon achievement, or non-achievement of a
certain EBITA amount during the earn-out period.
BASIS OF PRESENTATION
The financial statements as of March 31, 2000 and for the three months
ended March 31, 2000 and March 31, 1999, are unaudited and prepared
pursuant to the interim reporting rules and regulations of the Securities
and Exchange Commission; however, the financial statements 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 the periods. The results of operations for
interim periods are not necessarily indicative of the results that may be
expected for the entire year.
The accompanying financial statements are a carve-out of amounts reported
for Telecomm, that have been prepared using Division-specific information
where available and allocations where data is not maintained on a
Division specific basis within Telecomm's books and records.
The following accounts are maintained by Telecomm and presented in these
financial statements on a Division specific basis: receivables, prepaid
expenses, intangible assets, accounts payable and accrued expenses,
revenue, commissions, and certain other expense amounts. Property, plant,
and equipment, except items that were not specifically identifiable to
any particular aspect of Telecomm, were also presented on a Division
specific basis. All other balance sheet amounts were allocated to the
Division based on a variety of factors such as the Division's relative
proportion of revenue, employee-headcount, space, and time and effort, to
the Telecomm total.
The Division's financial statements include allocated expenses from the
sharing of certain executive, administrative, accounting, marketing,
personnel, engineering and other support services being performed by
Telecomm. These amounts were allocated to the Division based on
allocation methodologies described above.
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Management believes that these estimates and allocations were based on
reasonable methodologies, and the resulting financial statement amounts
properly depict the financial position and results of operations of the
Division. Furthermore, the accompanying statements reflect historical
Telecomm ownership and operation, with no pro-forma adjustments for
specific contract terms governing transfer to a specific buyer or for any
anticipated change in methods of operation. Therefore, actual results
could differ significantly if the Division operated as a separate entity
or as part of another entity other than Telecomm.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles 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 dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. The
Division receives commission sales revenue from Ameritech that is based
upon the submission of valid sales contracts. Sales transactions in
support of commission sales revenue are subject to adjustment upon
review. Actual results may differ from those estimates.
CAPITAL ACCOUNTS
Separate equity accounts are not maintained for the Division. For the
purposes of these statements, net intercompany activity has been
summarized as Divisional Equity.
REVENUE RECOGNITION
Revenues are recognized when earned and are recorded net of estimated
cancellations and chargebacks.
Network services or chargebacks will be recognized as earned when the
Division receives notification from the carrier that the service has been
installed or discontinued. The residual stream is recognized as earned
only if it can be reasonably estimated and the carrier's contract
stipulates a buyout clause for those future monies, otherwise it will be
recognized on a monthly basis over the term of the contract.
In December 1999, the SEC issued Staff Accounting Bulletin Number ("SAB
No.") 101. "Revenue Recognition in Financial Statements," which provides
additional guidance in applying generally accepted accounting principles
for revenue recognition. The Division is currently evaluating the impact,
if any, that SAB No. 101 may have on its revenue recognition policies.
Although the Division has not yet determined whether SAB No. 101 will
require any changes in its revenue recognition practices, management
expects that any such changes would be accounted for prospectively as a
cumulative effect of a change in accounting policy as permitted by the
SAB No. 101. The SEC initially required any changes resulting from SAB
No. 101 to be reflected in the Division's first quarter 2000 financial
statements. However, on March 25, 2000, the SEC issued SAB No. 101A which
defers required implementation of any changes resulting from SAB No. 101
until the Division's second quarter of 2000. Management does not expect
that any changes in its accounting policies as a result of SAB No. 101
will have a material impact on its 2000 operating results and management
believes that any such change will have no impact on the Division's
previously reported financial position, results of operations or cash
flows.
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INCOME TAXES
The Division did not file a separate tax return but rather was included
in the income tax returns filed by Telecomm. The Division's allocated
share of Telecomm's income tax provision was based on the "separate
return" method.
3. DEBT:
Long-term debt at March 31, 2000 and December 31, 1999 consists of the
following:
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Note payable to a financial institution, collateralized by a blanket filing on
corporate assets. Interest accrues at 2.4% over the 30-Day Commercial Paper
Rate. The note required interest only payments for the three months with
principal and interest payable thereafter in 60 monthly installments. Monthly
principal payments of $64,776 commenced March 1, 1999 with
a balloon payment due on February 1, 2004 of $1,554,619. $ 4,534,316 $ 4,728,644
Note payable to a related party in connection with the acquisition of
Long-Tell, Inc. Principal is due on January 2, 2002. Interest is payable
quarterly at 9% per annum. 200,000 200,000
Capitalized lease obligations payable in monthly installments ranging from $262
to $5,401 (including interest ranging from 4.8% to 29.8%) through
November 2003, collateralized by equipment. 16,387 19,701
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Total long-term debt 4,750,703 4,948,345
Less current portion 791,073 790,980
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$ 3,959,630 $ 4,157,365
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Telecomm also has a line of credit (the "Line") with Merrill Lynch for an
amount up to $4,000,000, of which $2,428,072 and $1,868,182 was
outstanding at March 31, 2000 and December 31, 1999, respectively.
Interest is due monthly at an annualized rate of 2.4% above the 30-day
commercial paper rate. The line of credit is renewable on September 30,
2000, and is secured by all assets of the Division.
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