<PAGE>
As filed with the Securities and Exchange Commission on August 11, 1999
Registration No. 333-75861
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 3
to
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
CENTERPRISE ADVISORS, INC.
(Exact name of registrant as specified in its charter)
Delaware 8700 36-4272852
(State or other
jurisdiction of
incorporation or
organization)
(Primary Standard Industrial Classification Code No.)
(I.R.S. Employer
Identification No.)
225 West Washington Street, 16th Floor, Chicago, Illinois 60606; (312) 578-9600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Robert C. Basten
President and Chief Executive Officer
225 West Washington Street, 16th Floor
Chicago, Illinois 60606
(312) 578-9600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Howard S. Lanznar, Esq.
Marguerite M. Elias, Esq.
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
(312) 902-5200
----------------
Approximate date of commencement of proposed sale to the public: Upon
consummation of the Mergers described herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of 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, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Price Registration
Registered Registered (1) Per Share (2) Fee (2)
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<S> <C> <C> <C> <C>
Common Stock ($.01 par
value)................. 12,569,367 N/A $24,313,000 $6,760
</TABLE>
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(1) Represents the maximum number of shares of Centerprise Advisors, Inc.
common stock, par value $.01 per share, to be issued pursuant to the merger
agreements. Such shares are also the subject of a rescission offer
contained herein.
(2) The registration fee has been calculated pursuant to Rule 457(f)(2) of
Regulation C under the Securities Act of 1933, as amended, and was
previously paid.
----------------
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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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<PAGE>
CENTERPRISE ADVISORS, INC.
PROSPECTUS
This prospectus relates to an offer by Centerprise Advisors, Inc. to rescind
possible offers to sell or sales of securities that may have been made to
owners of eleven companies that have entered into merger agreements with
Centerprise and subsidiaries of Centerprise and employees of one of those
companies who were informed that they would receive shares of Centerprise's
common stock following the mergers. These companies are:
(1) Berry, Dunn, McNeil & Parker, Chartered;
(2) Follmer, Rudzewicz & Company, P.C.;
(3) Grace & Company, P.C.;
(4) Holthouse Carlin & Van Trigt LLP;
(5) Self-Funded Benefits, Inc., d/b/a Insurance Design Administrators;
(6) Mann Frankfort Stein & Lipp, P.C.;
(7) Reppond, which includes three related entities:
(a)The Reppond Company Inc.
(b)Reppond Administrators, L.L.C.
(c)VeraSource Excess Risk Ltd.;
(8) Reznick Fedder & Silverman, Certified Public Accountants, A
Professional Corporation;
(9) Robert F. Driver Co., Inc.;
(10) Simione, Scillia, Larrow & Dowling LLC; and
(11) Urbach Kahn & Werlin PC.
RESCISSION OFFER
The following information is qualified in its entirety by reference to the
accompanying prospectus. Centerprise urges you to read the prospectus in its
entirety in order to make an independent evaluation with respect to this
rescission offer.
Centerprise hereby extends an offer to rescind possible offers to sell or
sales that may have previously occurred when the founding company owners signed
merger, voting and/or escrow agreements, or otherwise, in connection with the
proposed mergers with Centerprise. If offers or sales did occur, they may not
have satisfied the requirements of the Securities Act of 1933, as amended.
To accept the rescission offer you must complete, sign and return to
Centerprise the enclosed Rescission Acceptance Form. To reject the rescission
offer you must complete, sign and return the enclosed Rescission Rejection
Form. If you do not complete and return a Rescission Acceptance Form or a
Rescission Rejection Form prior to the expiration of the rescission offer, you
will be deemed to have rejected the rescission offer.
If you reject the rescission offer you will continue to have such rights of
redress as are permitted under the Securities Act and its statute of
limitations. See "Effect of the Rescission Offer on its Recipients" on page R-3
for a description of the legal consequences of accepting or rejecting the
rescission offer.
This rescission offer will expire at the earlier of 5:00 p.m., central time,
on , 1999 or Centerprise's receipt of a properly completed Rescission
Acceptance Form or Rescission Rejection Form from each recipient of the
rescission offer. Centerprise urges you to read thoroughly this rescission
offer and the accompanying prospectus. You may call Centerprise at
(312) 578-9600 if you have any questions concerning the terms and conditions of
the rescission offer.
Centerprise makes no recommendation as to whether you should accept the
rescission offer or reject the rescission offer. You must make your own
decision as to whether to accept or reject the rescission offer.
The date of this rescission offer is , 1999.
R-1
<PAGE>
Purpose of the Rescission Offer
On or about March 31, 1999, Centerprise entered into merger agreements with
the founding companies and many of the owners of the founding companies. At the
same time, owners of each founding company with votes sufficient to approve the
merger executed voting agreements and the shareholders of Driver executed
escrow agreements in connection with the proposed merger. Previously, some
Reznick employees were informed that they would receive shares of Centerprise
common stock pursuant to a bonus plan to be adopted by Reznick contemporaneous
with the mergers. The Securities and Exchange Commission has raised an issue as
to whether actions taken in connection with the proposed mergers, in particular
the execution by the owners of merger agreements, voting agreements and escrow
agreements, constituted "offers" and/or "sales" by Centerprise within the
meaning of Section 5 of the Securities Act. If these or other actions did
constitute offers or sales, the offers and sales may not have satisfied the
requirements of the Securities Act. In response to the issue raised, and in
order to limit its potential liability under the Securities Act, Centerprise
hereby extends to the founding company owners and the Reznick employees an
offer to rescind the alleged offers to sell and/or sales of common stock that
may have previously taken place. In making the rescission offer, Centerprise is
not admitting to any violation of applicable securities laws. No founding
company owner or other person has asserted or threatened to assert any claim
with respect to the alleged offers and sales.
Procedures for Accepting or Rejecting the Rescission Offer
To accept the rescission offer you are required to complete and return to
Centerprise the enclosed Rescission Acceptance Form prior to the expiration of
the rescission offer as described below. By accepting the offer, owners will
inform Centerprise and their founding company that they no longer wish to be
bound by the merger agreement, voting agreement or escrow agreement to which
they are a signatory and will instruct Centerprise and the founding company
that they are to be removed as a party to such agreements, and Reznick
employees will inform Centerprise and Reznick that they acknowledge that they
may no longer receive shares of Centerprise common stock pursuant to the bonus
plan. Promptly upon completion of the rescission offer, these instructions will
be carried out as described below under "Effects of the Rescission Offer on the
Proposed Mergers," owners who accept the rescission offer will have no further
obligations under any of these agreements and the Reznick employees who accept
the rescission offer will have no right to receive shares pursuant to the bonus
plan. You will receive no consideration other than termination of these
obligations and rights as a result of accepting the rescission offer.
To reject the rescission offer you are required to complete and return to
Centerprise the enclosed Rescission Rejection Form prior to the expiration of
the rescission offer. By rejecting the offer, founding company owners will
inform Centerprise and their founding company that they affirm and are willing
to be bound by the obligations contained in the voting, merger or escrow
agreements to which they are a signatory and the Reznick employees will inform
Centerprise and Reznick of their refusal to acknowledge that they may no longer
receive shares of Centerprise common stock pursuant to the bonus plan. If you
do not accept or reject the offer prior to the expiration date, you will be
deemed by Centerprise to have rejected the offer.
This rescission offer will expire at the earlier of:
(a) 5:00 p.m., central time, on , 1999 or
(b) Centerprise's receipt of a properly completed Rescission Acceptance Form or
Rescission Rejection Form from each recipient of the rescission offer.
The Rescission Acceptance Form or Rescission Rejection Form may be delivered
by hand, courier service, facsimile or mail to Centerprise to the attention of
Dennis W. Bikun, Centerprise Advisors, Inc., 225 West Washington Street, 16th
Floor, Chicago, Illinois 60606 (facsimile: 312-368-1988).
Effects of the Rescission Offer on the Proposed Mergers
The execution by Centerprise and the founding companies of the merger
agreements was predicated in part upon the willingness of the founding company
owners to enter into voting, merger and/or escrow
R-2
<PAGE>
agreements. If any founding company owners accept the rescission offer, thereby
terminating their obligations under the agreements, Centerprise and each
founding company will reexamine whether and under what conditions they are
willing to proceed with the mergers. In order to carry out the instructions of
founding company owners, if any, who wish to accept the rescission offer,
Centerprise and each founding company have agreed that promptly upon completion
of the rescission offer, and depending upon the number of persons who accept
and reject the offer and the magnitude of their ownership interests, they will
either amend the merger, voting and escrow agreements to remove as a party any
owner who has accepted the offer and to make such other changes, if any, to
which they mutually agree or terminate the agreements. If any of the Reznick
employees accept the rescission offer, Centerprise and Reznick will reexamine
whether and under what conditions Reznick is willing to adopt a bonus plan
similar to that previously discussed with those persons, or otherwise.
Effects of the Rescission Offer on its Recipients
Recipients of the rescission offer may accept the rescission offer or reject
the rescission offer. Centerprise takes the position that, if a recipient
accepts the rescission offer, Centerprise's potential liability to the
recipient based upon any possible failure of Centerprise to comply with the
Securities Act by effecting offers or sales prior to delivery of a prospectus
will be eliminated. Recipients who reject the rescission offer will retain
whatever rights they may have under the Securities Act in connection with the
alleged offers or sales.
The rights remaining to recipients of a rescission offer are not delineated
under the Securities Act. The staff of the Securities and Exchange Commission
has taken the position that a person's federal right of rescission may survive
a rescission offer. However, a court could hold that the legal remedies
available to the recipients of the rescission offer are eliminated or
diminished as a result of the recipients' having received the rescission offer.
As to persons who accept the rescission offer, a court could find, among other
things, that these persons are thereafter unable to satisfy the damages element
of a claim under federal securities laws. As to people who reject the
rescission offer, a court could find, among other things, that these persons
have waived or are estopped from asserting rights of rescission by failing to
accept the rescission offer.
R-3
<PAGE>
CENTERPRISE ADVISORS, INC.
PROSPECTUS
For 12,569,367 Shares of Common Stock
JOINT INFORMATION STATEMENT
FOR THE ENTITIES LISTED BELOW
This document serves as a joint information statement in connection with the
meetings of the security holders of the following entities regarding the
proposed merger with Centerprise Advisors, Inc.:
(1) Berry, Dunn, McNeil & Parker, Chartered, a Maine professional service
corporation.
(2) Follmer, Rudzewicz & Company, P.C., a Michigan professional
corporation.
(3) Grace Capital, LLP, a Missouri limited liability partnership.
(4) Holthouse Carlin & Van Trigt LLP, a California limited liability
partnership.
(5) Self-Funded Benefits, Inc., d/b/a Insurance Design Administrators, a
New Jersey corporation.
(6) Mann Frankfort Stein & Lipp, P.C., a Texas professional corporation.
(7) Reppond, which includes three related entities:
(a)The Reppond Company Inc., a Washington corporation;
(b)Reppond Administrators, L.L.C., a Washington limited liability
company; and
(c)VeraSource Excess Risk Ltd., a Washington corporation.
(8) Reznick Fedder & Silverman, Certified Public Accountants, A
Professional Corporation, a Maryland professional corporation.
(9) Robert F. Driver Co., Inc., a Delaware corporation.
(10) Simione, Scillia, Larrow & Dowling LLC, a Connecticut limited
liability company.
(11) Urbach Kahn & Werlin PC, a New York professional corporation.
The mergers of these entities with Centerprise and the Centerprise common
stock to be issued in the mergers involve risks that are described in "Risk
Factors," beginning on page 6.
This document also serves as the prospectus relating to an aggregate of
12,569,367 shares of Centerprise common stock to be issued in the mergers. For
a summary of the structure and provisions of the merger agreements, see "The
Merger Agreements."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these mergers or the securities to be
issued in the mergers or determined if this joint information
statement/prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this joint information statement/prospectus is , 1999.
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Dear Stockholders:
We will hold a special meeting of stockholders of Berry, Dunn, McNeil &
Parker, Chartered, a Maine professional service corporation, at a.m., local
time, on , 1999 at , Portland, Maine 04104. At the meeting, we will ask
you to vote on:
1. A proposal to approve and adopt the agreement, dated as of March 31, 1999
among Centerprise Advisors, Inc., Berry Dunn Mergersub Inc., Berry Dunn, BDM&P
Holdings, LLC and certain of its members, and the arrangement through which:
. Each outstanding share of Berry Dunn will be contributed to BDM&P
Holdings, a newly formed limited liability company owned by the Berry
Dunn stockholders;
. Berry Dunn will be converted from a Maine professional service
corporation to a Maine business corporation;
. each outstanding share of Berry Dunn will be converted into the right to
receive cash and shares of Centerprise common stock; and
. Berry Dunn will become a wholly-owned subsidiary of Centerprise.
2. Such other business as may properly come before the meeting or any
postponement or adjournment of the meeting.
The closing of the merger will occur simultaneously with the closing of the
initial public offering of Centerprise. Under the merger agreement, BDM&P
Holdings, LLC will receive $ in cash and shares of Centerprise common
stock for all of the shares of Berry Dunn.
Approval of the merger with Centerprise and related transactions requires
the affirmative vote of the holders of more than two-thirds of the shares of
Berry Dunn entitled to vote on this matter. Certain stockholders of Berry Dunn,
who collectively own the requisite number of shares to approve the merger, have
agreed with Centerprise to vote all of the Berry Dunn shares owned by them in
favor of the merger. In addition, the closing of the Berry Dunn merger is
contingent on the closing of each of the other mergers described in the
accompanying joint information statement/prospectus.
On , 1999, Centerprise commenced an offer to rescind alleged offers
and sales that may have occurred when the owners of Berry Dunn and the other
merging companies executed voting, merger and other agreements with Centerprise
and employees of one of the merging companies were informed that they would
receive shares of Centerprise common stock under a bonus plan. The rescission
offer will remain open for 10 days unless all offerees accept or reject the
offer prior to such time. Owners who accept the rescission offer will be
removed as signatories to the voting, merger and other agreements they
previously signed and their obligations under such agreements will terminate.
Upon the completion of the rescission offer, Centerprise will provide you with
a supplemental prospectus that informs you of the results of the rescission
offer.
After careful consideration, your board of directors has unanimously
approved the merger agreement and the transactions provided for therein and has
concluded that they are in the best interests of Berry Dunn and its
stockholders. Your board of directors recommends a vote in favor of the merger
agreement and the merger.
<PAGE>
Only stockholders of record at the close of business on , 1999 are
entitled to notice of, and will be entitled to vote at, the meeting or any
postponements or adjournment of the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
_____________________________________
Clerk
Berry, Dunn, McNeil & Parker,
Chartered
Portland, Maine
, 1999
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Dear Stockholders:
We will hold a special meeting of stockholders of Follmer, Rudzewicz &
Company, P.C., a Michigan professional corporation, at a.m., local time, on
, 1999 at 26200 American Dr., Southfield, Michigan 48086-5004. At the
meeting, we will ask you to vote on:
1. A proposal to approve and adopt the agreement, dated as of March 31, 1999
between Follmer and Centerprise Advisors, Inc. and the arrangement through
which:
. each outstanding share of Follmer will be contributed to FRF Holding
LLC, a newly formed limited liability company owned by the Follmer
stockholders;
. Follmer will be converted from a Michigan professional corporation to
a Michigan business corporation;
. each outstanding share of Follmer will be converted into the right to
receive cash and shares of Centerprise common stock; and
. Follmer will become a wholly-owned subsidiary of Centerprise.
2. Such other business as may properly come before the meeting or any
postponement or adjournment of the meeting.
The closing of the merger will occur simultaneously with the closing of the
initial public offering of Centerprise common stock. Under the merger
agreement, FRF Holding LLC will receive a total of $ in cash and shares
of Centerprise common stock for the shares of Follmer it owns.
Approval of the merger with Centerprise and related transactions requires
the affirmative vote of the holders of a majority of the shares of Follmer
entitled to vote on this matter. Certain stockholders of Follmer, who
collectively own the requisite number of shares to approve the merger, have
agreed with Centerprise to vote all of the Follmer shares owned by them in
favor of the merger. In addition, the closing of the Follmer merger is
contingent on the closing of each of the other mergers described in the
accompanying joint information statement/prospectus.
On , 1999, Centerprise commenced an offer to rescind alleged
offers and sales that may have occurred when the owners of Follmer and the
other merging companies executed voting, merger and other agreements with
Centerprise and employees of one of the merging companies were informed that
they would receive shares of Centerprise common stock under a bonus plan. The
rescission offer will remain open for 10 days unless all offerees accept or
reject the offer prior to such time. Owners who accept the rescission offer
will be removed as signatories to the voting, merger and other agreements they
previously signed and their obligations under such agreements will terminate.
Upon the completion of the rescission offer, Centerprise will provide you with
a supplemental prospectus that informs you of the results of the rescission
offer.
After careful consideration, your board of directors has unanimously
approved the merger agreement and the transactions provided for therein and has
concluded that they are in the best interests of Follmer and its stockholders.
Your board of directors recommends a vote in favor of the merger agreement and
the merger.
Only stockholders of record at the close of business on , 1999 are
entitled to notice of, and will be entitled to vote at, the meeting or any
postponements or adjournment of the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
_________________________________
Secretary
Follmer, Rudzewicz & Company, P.C.
Southfield, Michigan
, 1999
<PAGE>
GRACE CAPITAL, LLP
----------------
NOTICE OF SPECIAL MEETING OF PARTNERS
Dear Partners:
We will hold a special meeting of partners of Grace Capital, LLP, a Missouri
limited liability partnership, at a.m., local time, on , 1999 at 3117
South Big Bend Boulevard, Suite 100, St. Louis, Missouri 63143. At the meeting,
we will ask you to vote on:
1. A proposal to cause Grace Capital to approve and adopt the agreement,
dated as of March 31, 1999 among Centerprise Advisors, Inc., Grace Mergersub
Inc., Grace & Company, P.C., Grace Capital and its partners, and the
arrangement through which:
. Grace will be converted from a Missouri professional corporation to a
Missouri business corporation;
. each outstanding share of Grace will be converted into the right to
receive cash and shares of Centerprise common stock; and
. Grace will become a wholly-owned subsidiary of Centerprise.
2. Such other business as may properly come before the meeting or any
postponement or adjournment of the meeting.
The closing of the merger will occur simultaneously with the closing of the
initial public offering of Centerprise common stock. Under the merger
agreement, Grace Capital will receive a total of $ in cash and shares of
Centerprise common stock for the Grace shares it owns.
Approval of the merger with Centerprise and related transactions requires
the affirmative vote of Grace Capital which, in turn, requires the affirmative
vote of the holders of a majority of the partnership interests of Grace
Capital. Certain partners of Grace Capital who collectively own the requisite
percentage of its partnership interests to approve the merger have agreed with
Centerprise to vote all of their partnership interests in favor of causing
Grace Capital to approve the merger. In addition, the closing of the merger is
contingent on the closing of each of the other mergers described in the
accompanying joint information statement/prospectus.
On , 1999, Centerprise commenced an offer to rescind alleged
offers and sales that may have occurred when the owners of Grace and the other
merging companies executed voting, merger and other agreements with Centerprise
and employees of one of the merging companies were informed that they would
receive shares of Centerprise common stock under a bonus plan. The rescission
offer will remain open for 10 days unless all offerees accept or reject the
offer prior to such time. Owners who accept the rescission offer will be
removed as signatories to the voting, merger and other agreements they
previously signed and their obligations under such agreements will terminate.
Upon the completion of the rescission offer, Centerprise will provide you with
a supplemental prospectus that informs you of the results of the rescission
offer.
After careful consideration, your management committee has concluded that
the merger agreement and the transactions provided for therein are in the best
interests of Grace Capital and its partners, and recommends a vote in favor of
the merger agreement and the merger.
Only partners of record at the close of business on , 1999 are entitled
to notice of, and will be entitled to vote at, the meeting or any postponements
or adjournment of the meeting.
BY THE ORDER OF THE OPERATING
COMMITTEE
_____________________________________
Larry Porschen
Managing Partner
Grace Capital, LLP
St. Louis, Missouri
, 1999
<PAGE>
HOLTHOUSE CARLIN & VAN TRIGT LLP
PHILIP J. HOLTHOUSE, AN ACCOUNTANCY CORPORATION
JAMES S. CARLIN, AN ACCOUNTANCY CORPORATION
JOHN E. VAN TRIGT, AN ACCOUNTANCY CORPORATION
GREGORY J. HUTCHINS, AN ACCOUNTANCY CORPORATION
BLAKE E. CHRISTIAN, AN ACCOUNTANCY CORPORATION
ZACHARY G. SHUMAN, AN ACCOUNTANCY CORPORATION
WILLIAM WARBURTON, AN ACCOUNTANCY CORPORATION
J. PASS LLC
----------------
NOTICE OF SPECIAL JOINT MEETING OF
PARTNERS, STOCKHOLDERS AND MEMBER
Dear Partners, Stockholders and Member:
We will hold a special meeting of partners of Holthouse Carlin & Van Trigt
LLP, a California limited liability partnership, and the stockholders and
member of each such partner of Holthouse, in each case at
a.m., local time, on , 1999 at 11845 Olympic Boulevard, Suite
1177, Los Angeles, California 90064. At the meeting, we will ask you to vote
on:
1. A proposal to approve and adopt the agreement, dated as of March 31, 1999
between Holthouse, its corporate partners and each of their respective sole
stockholders, its partner which is and will be a limited liability company and
such company's sole member, and Centerprise Advisors, Inc. and the arrangement
through which:
. Holthouse will transfer substantially all of its assets to a newly
formed Delaware limited liability company;
. the partners of Holthouse will dissolve Holthouse and will receive
allocated interests in the newly formed company;
. the partners of Holthouse that are professional corporations will
convert into business corporations;
. the partner of Holthouse who is an individual will transfer her interest
in the newly formed company to a newly formed limited liability company;
. each corporate partner will be merged with and into a wholly-owned
subsidiary of Centerprise, with each such corporate partner continuing
as the surviving entity;
. the LLC partner will be merged with and into a newly formed limited
liability company and wholly-owned subsidiary of Centerprise, with the
LLC partner continuing as the surviving entity;
. the corporate partner stock and the LLC partner membership interests
will be converted into the right to receive cash and shares of common
stock of Centerprise; and
. the newly formed company will become a wholly-owned subsidiary of
Centerprise.
2. Such other business as may properly come before the meeting or any
postponement or adjournment of the meeting.
The closing of these mergers will occur simultaneously with the closing of
the initial public offering of Centerprise common stock. Under the merger
agreement, the partners of Holthouse will receive an aggregate of $
in cash and shares of Centerprise common stock for all of the
equity interests in Holthouse.
<PAGE>
Approval of the merger with Centerprise and related transactions requires
the affirmative vote of the shareholders or members of each of the partners and
the holders of a majority of the partnership interests of Holthouse entitled to
vote on this matter. Certain equityholders of Holthouse, who collectively own
the requisite number of the outstanding shares or membership interests of each
of Holthouse's partners to approve the merger, have agreed with Centerprise to
vote all of the shares and membership interests owned by them in favor of the
merger. In addition, the closing of the Holthouse merger is contingent on the
closing of each of the other mergers described in the accompanying joint
information statement/prospectus.
On , 1999, Centerprise commenced an offer to rescind alleged
offers and sales that may have occurred when the owners of Holthouse and the
other merging companies executed voting, merger and other agreements with
Centerprise and employees of one of the merging companies were informed that
they would receive shares of Centerprise common stock under a bonus plan. The
rescission offer will remain open for 10 days unless all offerees accept or
reject the offer prior to such time. Owners who accept the rescission offer
will be removed as signatories to the voting, merger and other agreements they
previously signed and their obligations under such agreements will terminate.
Upon the completion of the rescission offer, Centerprise will provide you with
a supplemental prospectus that informs you of the results of the rescission
offer.
After careful consideration, the partners of Holthouse have unanimously
approved the merger agreement and the transactions provided for therein and
have concluded that they are in the best interests of Holthouse, its partners
and the equityholders of such partners. Your partners recommend a vote in favor
of the merger agreement and the merger.
Only partners, shareholders and members of record at the close of business
on , 1999 are entitled to notice of, and will be entitled to vote at,
the meeting or any postponements or adjournment of the meeting.
BY ORDER OF THE PARTNERS
-------------------------------------
Secretary
Holthouse Carlin & Van Trigt LLP
Los Angeles, California
, 1999
<PAGE>
SELF-FUNDED BENEFITS, INC.,
D/B/A INSURANCE DESIGN ADMINISTRATORS
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Dear Stockholders:
We will hold a special meeting of stockholders of Self-Funded Benefits,
Inc., d/b/a Insurance Design Administrators, a New Jersey corporation, at
a.m., local time, on , 1999 at 169 Ramapo Valley Road, Oakland, New
Jersey 07436. At the meeting, we will ask you to vote on:
1. A proposal to approve and adopt the agreement, dated as of March 31, 1999
between IDA and Centerprise Advisors, Inc. and the arrangement through which:
. a wholly-owned subsidiary of Centerprise will be merged with and into
IDA with IDA continuing as the surviving corporation;
. each outstanding share of IDA will be converted into the right to
receive cash and shares of Centerprise common stock; and
. IDA will become a wholly-owned subsidiary of Centerprise.
2. Such other business as may properly come before the meeting or any
postponement or adjournment of the meeting.
The closing of the merger will occur simultaneously with the closing of the
initial public offering of Centerprise common stock. Under the merger
agreement, shareholders of IDA will receive an aggregate of $ in cash
and shares of Centerprise common stock for all of the outstanding shares
of IDA.
Approval of the merger with Centerprise and related transactions requires
the affirmative vote of the holders of a majority of the shares of IDA entitled
to vote on this matter. Certain stockholders of IDA, who collectively own the
requisite number of shares to approve the merger, have entered into an
agreement with CenterPoint to vote all of the IDA shares owned by them in favor
of the merger. In addition, the closing of the IDA merger is contingent on the
closing of each of the other mergers described in the accompanying joint
information statement/prospectus.
On , 1999, Centerprise commenced an offer to rescind alleged
offers and sales that may have occurred when the owners of IDA and the other
merging companies executed voting, merger and other agreements with Centerprise
and employees of one of the merging companies were informed that they would
receive shares of Centerprise common stock under a bonus plan. The rescission
offer will remain open for 10 days unless all offerees accept or reject the
offer prior to such time. Owners who accept the rescission offer will be
removed as signatories to the voting, merger and other agreements they
previously signed and their obligations under such agreements will terminate.
Upon the completion of the rescission offer, Centerprise will provide you with
a supplemental prospectus that informs you of the results of the rescission
offer.
After careful consideration, your board of directors has unanimously
approved the merger agreement with Centerprise and the transactions provided
for therein and has concluded that they are in the best interests of IDA and
its stockholders. Your board of directors recommends a vote in favor of the
merger agreement and the merger.
Only members of record at the close of business on , 1999 are
entitled to notice of, and will be entitled to vote at, the meeting or any
postponements or adjournment of the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
-------------------------------------
Secretary
Self-Funded Benefits, Inc.,
d/b/a Insurance Design
Administrators
Oakland, New Jersey
, 1999
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Dear Stockholders:
We will hold a special meeting of stockholders of Mann Frankfort Stein &
Lipp, P.C., a Texas professional corporation, at 10:00 a.m., local time, on
, 1999 at 12 Greenway Plaza, 8th Floor, Houston, Texas 77046. At the
meeting, we will ask you to vote on:
1. A proposal to approve and adopt the agreement, dated as of March 31, 1999
between Mann Frankfort and Centerprise Advisors, Inc. and the arrangement
through which:
. Mann Frankfort will be converted from a Texas professional corporation
to a Texas business corporation;
. each outstanding share of Mann Frankfort will be converted into the
right to receive cash and shares of Centerprise common stock; and
. Mann Frankfort will become a wholly-owned subsidiary of Centerprise.
2. Such other business as may properly come before the meeting or any
postponement or adjournment of the meeting.
The closing of the merger will occur simultaneously with the closing of the
initial public offering of Centerprise common stock. Under the merger
agreement, the stockholders of Mann Frankfort will receive an aggregate of $
in cash and shares of Centerprise common stock for all the outstanding
shares of Mann Frankfort.
Under the Texas Business Corporation Act and the agreement of shareholders
of Mann Frankfort, approval of the merger with Centerprise and related
transactions requires the approval in writing of the holders owning not less
than 80% of the outstanding shares of Mann Frankfort, plus the written approval
of more than 50% of the number of stockholders entitled to vote on this matter.
Certain stockholders of Mann Frankfort, who collectively own the requisite
number of shares to approve the merger and constitute more than 50% of the
total number of stockholders, have agreed with Centerprise to vote all of the
Mann Frankfort shares owned by them in favor of the merger. In addition, the
closing of the Mann Frankfort merger is contingent on the closing of each of
the other mergers described in the accompanying joint information
statement/prospectus.
On , 1999, Centerprise commenced an offer to rescind alleged
offers and sales that may have occurred when the owners of Mann Frankfort and
the other merging companies executed voting, merger and other agreements with
Centerprise and employees of one of the merging companies were informed that
they would receive shares of Centerprise common stock under a bonus plan. The
rescission offer will remain open for 10 days unless all offerees accept or
reject the offer prior to such time. Owners who accept the rescission offer
will be removed as signatories to the voting, merger and other agreements they
previously signed and their obligations under such agreements will terminate.
Upon the completion of the rescission offer, Centerprise will provide you with
a supplemental prospectus that informs you of the results of the rescission
offer.
Mann Frankfort stockholders may dissent by voting against the merger. A
dissenting holder who complies with the requirements of Articles 5.11 and 5.12
of the Texas Business Corporation Act will have the right to demand payment
for, and appraisal of, the value of his or her shares. In the event that a
holder exercises such dissenters' rights, the aggregate consideration to be
received by the Mann Frankfort stockholders will be reduced by the number of
shares of Centerprise common stock and amount of cash that such dissenting
security holder would have received in the merger. Under applicable law, no
dissenting security holder has any right to contest the validity of the merger
or to have the merger set aside or rescinded, except in an action to test
whether the number of shares or other interests required to approve the merger
have been legally voted in favor of the merger. The shareholders of Mann
Frankfort have agreed to indemnify Centerprise for any costs relating
<PAGE>
to any payment with respect to dissenting shares. See "The Merger Agreements--
Dissenters' Rights Regarding the Mergers" in the accompanying joint information
statement/prospectus.
After careful consideration, your board of directors has unanimously
approved the merger agreement and the transactions provided for therein and has
concluded that they are in the best interests of Mann Frankfort and its
stockholders. Your board of directors recommends a vote in favor of the merger
agreement and the merger.
Only stockholders of record at the close of business on , 1999 are
entitled to notice of, and will be entitled to vote at, the meeting or any
postponements or adjournment of the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
_____________________________________
Secretary
Mann Frankfort Stein & Lipp, P.C.
Houston, Texas
, 1999
<PAGE>
THE REPPOND COMPANY, INC.
REPPOND ADMINISTRATORS, L.L.C.
VERASOURCE EXCESS RISK LTD.
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS AND MEMBERS
Dear Stockholders and Members:
We will hold a special meeting of Reppond, which includes stockholders of
The Reppond Company, Inc., a Washington corporation, VeraSource Excess Risk
Ltd., a Washington corporation and members of Reppond Administrators, L.L.C., a
Washington limited liability company, at a.m., local time, on ,
1999 at 10900 N.E. 4th Street, Suite 1200, Bellevue, Washington 98004. At the
meeting, we will ask you to vote on:
1. A proposal to approve and adopt the agreement, dated as of March , 1999
between Reppond and Centerprise Advisors, Inc. and the arrangement through
which:
. wholly-owned subsidiaries of Centerprise will be merged with and into
Reppond with Reppond continuing as the surviving entities;
. each outstanding share of Reppond Company and VeraSource and the
membership interest of Reppond Administrators will be converted into the
right to receive promissory notes and shares of Centerprise common
stock; and
. Reppond Company, VeraSource and Reppond Administrators will become
wholly-owned subsidiaries of Centerprise.
2. Such other business as may properly come before the meeting or any
postponement or adjournment of the meeting.
The closing of the merger will occur simultaneously with the closing of the
initial public offering of Centerprise common stock. Under the merger
agreement, owners of Reppond will receive an aggregate of $ in
promissory notes and shares of Centerprise common stock for all of the
equity interests in Reppond.
You may dissent by voting against the merger. A dissenting holder who
complies with the requirements of the Washington Corporation Business Act or
the Washington Limited Liability Company Act, as applicable, will have the
right to demand payment for, and appraisal of, the value of his or her shares
or membership interests. In the event that a holder exercises such dissenters'
rights, the aggregate consideration to be received by the Reppond stockholders
or members will be reduced by the number of shares of Centerprise common stock
and amount of cash that such dissenting security holder would have received in
the merger. Under applicable law, no dissenting security holder has any right
to contest the validity of the merger or to have the merger set aside or
rescinded, except in an action to test whether the number of shares or other
interests required to approve the merger have been legally voted in favor of
the merger or unless the merger is fraudulent with respect to the shareholder
or the corporation. The owners of Reppond have agreed to indemnify Centerprise
for any costs relating to any payment with respect to dissenting shares. See
"The Merger Agreements--Dissenters' Rights Regarding the Mergers" in the
accompanying joint information statement prospectus.
Approval of the merger with Centerprise and related transactions requires
the affirmative vote of the holders of a majority of the shares of Reppond
Company and VeraSource and members holding a majority of the ownership
interests of Reppond Administrators entitled to vote on this matter. Certain
equity holders of Reppond, who collectively own the requisite number of
interests to approve the merger, have entered into an agreement with
Centerprise to vote all of their shares and ownership interests in favor of the
merger. In addition, the closing of the Reppond merger is contingent on the
closing of each of the other mergers described in the accompanying joint
information statement/prospectus.
<PAGE>
On , 1999, Centerprise commenced an offer to rescind alleged
offers and sales that may have occurred when the owners of Reppond and the
other merging companies executed voting, merger and other agreements with
Centerprise and employees of one of the merging companies were informed that
they would receive shares of Centerprise common stock under a bonus plan. The
rescission offer will remain open for 10 days unless all offerees accept or
reject the offer prior to such time. Owners who accept the rescission offer
will be removed as signatories to the voting, merger and other agreements they
previously signed and their obligations under such agreements will terminate.
Upon the completion of the rescission offer, Centerprise will provide you with
a supplemental prospectus that informs you of the results of the rescission
offer.
After careful consideration, the boards of directors of Reppond Company and
VeraSource and the manager of Reppond Administrators have unanimously approved
the merger agreement with Centerprise and the transactions provided for therein
and have concluded that they are in the best interests of Reppond and their
respective stockholders and members. The boards of directors of Reppond Company
and VeraSource and the manager of Reppond Administrators recommend a vote in
favor of the merger agreement and the merger.
Only stockholders and members of record at the close of business on
, 1999 are entitled to notice of, and will be entitled to vote at, the
meeting or any postponements or adjournment of the meeting.
BY ORDER OF THE BOARDS OF DIRECTORS
-------------------------------------
Secretary
The Reppond Company, Inc.
VeraSource Excess Risk Ltd.
-------------------------------------
Managing Member
Reppond Administrators, L.L.C.
Bellevue, Washington
, 1999
2
<PAGE>
REZNICK FEDDER & SILVERMAN, CERTIFIED PUBLIC ACCOUNTANTS,
A PROFESSIONAL CORPORATION
REZNICK FEDDER & SILVERMAN, C.P.A.s, L.L.C.
--------------
NOTICE OF SPECIAL MEETING
Dear Members:
We will hold a special meeting of the members of Reznick Fedder &
Silverman, C.P.A.s, L.L.C., a Maryland limited liability company, at a.m.,
local time, on , 1999 at 4520 East West Highway, Bethesda, Maryland 20814.
At the meeting, we will ask you to vote on:
1. A proposal to cause Reznick LLC to approve and adopt the agreement,
dated as of March 31, 1999 among Centerprise Advisors, Inc., Reznick Mergersub
Inc., Reznick Fedder & Silverman, Certified Public Accountants, A Professional
Corporation, Reznick LLC and the members of Reznick LLC and the arrangement
through which:
.Reznick will be converted from a Maryland professional corporation to a
Maryland business corporation;
. each outstanding share of Reznick will be converted into the right to
receive cash and shares of Centerprise common stock; and
.Reznick will be become a wholly-owned subsidiary of Centerprise.
2. Such other business as may properly come before the meeting or any
postponement or adjournment of the meeting.
The closing of the merger will occur simultaneously with the closing of the
initial public offering of Centerprise. Under the merger agreement, Reznick
LLC will receive a total of $ in cash and shares of Centerprise common
stock for all of the Reznick shares.
Approval of the merger with Centerprise and related transactions requires
the affirmative vote of Reznick LLC which, in turn, requires the affirmative
vote of the holders of 75% of Reznick LLC's membership interests. Certain
members of Reznick LLC who collectively own the requisite number of membership
interests to approve the merger, have agreed with Centerprise to vote their
membership interests in Reznick LLC in favor of the merger. In addition, the
closing of the Reznick merger is contingent on the closing of each of the
other mergers described in the accompanying joint information
statement/prospectus.
On , 1999, Centerprise commenced an offer to rescind alleged
offers and sales that may have occurred when the owners of Reznick and the
other merging companies executed voting, merger and other agreements with
Centerprise and some Reznick employees were informed that they would receive
shares of Centerprise common stock under a bonus plan. The rescission offer
will remain open for 10 days unless all offerees accept or reject the offer
prior to such time. Owners who accept the rescission offer will be removed as
signatories to the voting, merger and other agreements they previously signed
and their obligations under such agreements will terminate. Reznick employees
who accept the rescission offer will acknowledge that they may no longer
receive shares of Centerprise common stock pursuant to the bonus plan. Upon
the completion of the rescission offer, Centerprise will provide you with a
supplemental prospectus that informs you of the results of the rescission
offer.
After careful consideration, the board of directors of Reznick and the
management committee of Reznick LLC have concluded that the transactions
contemplated in the merger agreement are in the best interests of Reznick and
the members of Reznick LLC and recommends a vote in favor of the merger
agreement and the merger.
Only members of record at the close of business on , 1999 are entitled
to notice of, and will be entitled to vote at, the meeting or any
postponements or adjournment of the meeting.
REZNICK FEDDER & SILVERMAN, CERTIFIED
PUBLIC ACCOUNTANTS, A PROFESSIONAL
CORPORATION
REZNICK FEDDER & SILVERMAN, C.P.A.s,
L.L.C.
By: _______________________________________
<PAGE>
ROBERT F. DRIVER CO., INC.
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Dear Stockholders:
We will hold a special meeting of stockholders of Robert F. Driver Co.,
Inc., a Delaware Corporation, at a.m., local time, on , 1999 at 1620
Fifth Avenue, San Diego, California 92101-2797. At the meeting, we will ask you
to vote on:
1. A proposal to approve and adopt the agreement, dated as of March 31, 1999
between Driver and Centerprise Advisors, Inc. and the arrangement through
which:
. a wholly-owned subsidiary of Centerprise will be merged with and into
Driver with Driver continuing as the surviving corporation;
. each outstanding share of Driver will be converted into the right to
receive cash and shares of Centerprise common stock; and
. Driver will become a wholly-owned subsidiary of Centerprise.
2. Such other business as may properly come before the meeting or any
postponement or adjournment of the meeting.
The closing of the merger will occur simultaneously with the closing of the
initial public offering of Centerprise. Under the merger agreement, the
stockholders of Driver will receive an aggregate of $ in cash and shares
of Centerprise common stock for all the outstanding shares of Driver.
Driver stockholders may dissent by voting against the merger. A dissenting
holder who complies with the requirements of either the California Corporations
Code or the Delaware General Corporation Law will have the right to demand
payment for, and appraisal of, the value of his or her shares. In the event
that a holder exercises such dissenters' rights, the aggregate consideration to
be received by the Driver stockholders will be reduced by the number of shares
of Centerprise common stock and amount of cash that such dissenting security
holder would have received in the merger. Under applicable law, no dissenting
security holder has any right to contest the validity of the merger or to have
the merger set aside or rescinded, except in an action to test whether the
number of shares or other interests required to approve the merger have been
legally voted in favor of the merger. The Driver shareholders have agreed to
indemnify Centerprise for any costs relating to any payment with respect to
dissenting shares. See "The Merger Agreements--Dissenters' Rights Regarding the
Mergers" in the accompanying joint information statement/prospectus.
Approval of the merger with Centerprise and related transactions requires
the affirmative vote of the holders of a majority of the shares of Driver
entitled to vote on this matter. Certain stockholders of Driver, who
collectively own the requisite number of shares to approve the merger, have
agreed with Centerprise to vote all of the shares owned by them in favor of the
merger. In addition, the closing of the Driver merger is contingent on the
closing of each of the other mergers described in the accompanying joint
information statement/prospectus.
<PAGE>
On , 1999, Centerprise commenced an offer to rescind alleged
offers and sales that may have occurred when the owners of Driver and the other
merging companies executed voting, merger and other agreements with Centerprise
and employees of one of the merging companies were informed that they would
receive shares of Centerprise common stock under a bonus plan. The rescission
offer will remain open for 10 days unless all offerees accept or reject the
offer prior to such time. Owners who accept the rescission offer will be
removed as signatories to the voting, merger and other agreements they
previously signed and their obligations under such agreements will terminate.
Upon the completion of the rescission offer, Centerprise will provide you with
a supplemental prospectus that informs you of the results of the rescission
offer.
After careful consideration, your board of directors has unanimously
approved the merger agreement and the transactions provided for therein and has
concluded that they are in the best interests of Driver and its stockholders.
Your board of directors recommends a vote in favor of the merger agreement and
the merger.
Only stockholders of record at the close of business on , 1999 are
entitled to notice of, and will be entitled to vote at, the meeting or any
postponements or adjournment of the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
_____________________________________
Secretary
Robert F. Driver Co., Inc.
San Diego, California
, 1999
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
--------------
NOTICE OF SPECIAL MEETING OF MEMBERS
Dear Members:
We will hold a special meeting of members of Simione, Scillia, Larrow &
Dowling LLC, a Connecticut limited liability company, at a.m., local time,
on , 1999 at 555 Long Wharf Drive, 12th Floor, New Haven, Connecticut
06511. At the meeting, we will ask you to vote on:
1. A proposal to approve and adopt the agreement, dated as of March 31,
1999 between Simione and Centerprise Advisors, Inc. and the arrangement
through which:
. SSLD LLC, a Delaware limited liability company, wholly owned by Simione,
will be merged with and into a wholly-owned subsidiary of Centerprise,
with such subsidiary continuing as the surviving company;
. the outstanding interests of the Company will be converted into the
right to receive cash and shares of Centerprise common stock; and
. the Company will become a wholly-owned subsidiary of Centerprise.
2. Such other business as may properly come before the meeting or any
postponement or adjournment of the meeting.
The closing of the merger will occur simultaneously with the closing of the
initial public offering of Centerprise common stock. Under the merger
agreement, Simione will receive $ in cash and shares of Centerprise
common stock.
Approval of the merger with Centerprise and related transactions requires
the approval of all of the managers of Simione and the affirmative vote of the
holders of a majority of the interests of SSLD. Certain members of Simione,
who collectively own the requisite number of membership interests to approve
the merger, have agreed with Centerprise to vote their ballots as managers of
Simione and cause the membership interests of the Company owned by Simione be
voted in favor of the merger. In addition, the closing of the Simione merger
is contingent on the closing of each of the other mergers described in the
accompanying joint information statement/prospectus.
On , 1999, Centerprise commenced an offer to rescind alleged
offers and sales that may have occurred when the owners of Simione and the
other merging companies executed voting, merger and other agreements with
Centerprise and employees of one of the merging companies were informed that
they would receive shares of Centerprise common stock under a bonus plan. The
rescission offer will remain open for 10 days unless all offerees accept or
reject the offer prior to such time. Owners who accept the rescission offer
will be removed as signatories to the voting, merger and other agreements they
previously signed and their obligations under such agreements will terminate.
Upon the completion of the rescission offer, Centerprise will provide you with
a supplemental prospectus that informs you of the results of the rescission
offer.
After careful consideration, your managers have unanimously approved the
merger agreement and the transactions provided for therein and have concluded
that they are in the best interests of Simione and its members. Your managers
recommend a vote in favor of the merger agreement and the merger.
Only members of record at the close of business on , 1999 are entitled
to notice of, and will be entitled to vote at, the meeting or any
postponements or adjournment of the meeting.
BY ORDER OF THE MANAGERS
___________________________________________
Secretary
Simione, Scillia, Larrow & Dowling LLC
New Haven, Connecticut
, 1999
<PAGE>
URBACH KAHN & WERLIN PC
UKW MANAGEMENT LLC
----------------
NOTICE OF SPECIAL JOINT MEETING OF
STOCKHOLDERS AND MEMBERS
Dear Stockholders and Members:
We will hold a special joint meeting of stockholders of Urbach Kahn & Werlin
PC, a New York professional corporation, and the members of UKW Management LLC,
a Delaware limited liability company, at a.m., local time, on , 1999 at
66 State Street, Albany, New York 12207. At the meeting, we will ask you to
vote on:
1. A proposal to approve and adopt the agreement, dated as of March 31, 1999
between Urbach and Centerprise Advisors, Inc. and the arrangement through
which:
. Urbach will merge with and into Urbach, Kahn & Werlin, P.C., a
Massachusetts professional corporation, and convert to a business
corporation;
. Following this merger, Urbach stockholders will transfer their shares to
UKW Management;
. A wholly-owned subsidiary of Centerprise will merge with and into Urbach
leaving Urbach as the surviving company and a wholly-owned subsidiary of
Centerprise; and
. Each outstanding share of Urbach will be converted into the right to
receive cash and shares of Centerprise common stock.
2. Such other business as may properly come before the meeting or any
postponement or adjournment of the meeting.
The closing of these mergers and the exchange will occur simultaneously with
the closing of the initial public offering of Centerprise common stock. Under
the merger agreement, UKW Management, as the sole shareholder of Urbach, will
receive an aggregate of $ in cash and shares of Centerprise common stock
for all of the Urbach shares.
Urbach stockholders may dissent from the first-step merger by voting against
the merger. A dissenting holder who complies with the requirements of Section
910 of the New York Business Corporation Law will have the right to demand
payment for, and appraisal of, the value of his or her shares. In the event
that a holder exercises such dissenters' rights, the aggregate consideration to
be received by the Urbach stockholders will be reduced by the number of shares
of Centerprise common stock and amount of cash that such dissenting security
holder would have received in the merger. Under applicable law, no dissenting
security holder has any right to contest the validity of the merger or to have
the merger set aside or rescinded, except in an action to test whether the
number of shares or other interests required to approve the merger have been
legally voted in favor of the merger. The shareholders of Urbach have agreed to
indemnify Centerprise for any costs relating to any payment with respect to
dissenting shares. See "The Merger Agreements--Dissenters' Rights Regarding the
Mergers" in the accompanying joint information statement/prospectus.
<PAGE>
Approval of these mergers, the exchange and related transactions with
Centerprise requires (1) for the first-step merger under the New York Business
Corporation Law and the exchange, the affirmative vote of the holders of 66
2/3% of the shares of Urbach entitled to vote on this matter and (2) for the
second-step merger under the Massachusetts Business Corporation Law, the
affirmative vote of the holders of 66 2/3% of the membership interests of UKW
Management, as the sole stockholder of Urbach entitled to vote on this matter.
Certain stockholders of Urbach, who collectively own the requisite number of
shares to approve the merger, have agreed with Centerprise to vote all of the
Urbach shares owned by them in favor of the merger agreement and the series of
transactions that will ultimately result in a merger. In addition, the closing
of the mergers and the exchange is contingent on the closing of each of the
other mergers described in the accompanying joint information
statement/prospectus.
On , 1999, Centerprise commenced an offer to rescind alleged
offers and sales that may have occurred when the owners of Urbach and the other
merging companies executed voting, merger and other agreements with Centerprise
and employees of one of the merging companies were informed that they would
receive shares of Centerprise common stock under a bonus plan. The rescission
offer will remain open for 10 days unless all offerees accept or reject the
offer prior to such time. Owners who accept the rescission offer will be
removed as signatories to the voting, merger and other agreements they
previously signed and their obligations under such agreements will terminate.
Upon the completion of the rescission offer, Centerprise will provide you with
a supplemental prospectus that informs you of the results of the rescission
offer.
After careful consideration, each of the executive committee of Urbach and
the operating committee of UKW Management has unanimously approved the merger
agreements and the exchange agreement and the transactions provided for therein
and have concluded that they are in the best interests of Urbach and its
Stockholders and UKW Management and its members. Each of the executive
committee of Urbach and the operating committee of UKW Management recommends a
vote in favor of the merger agreement and the exchange and merger.
Only stockholders and members of record at the close of business on ,
1999 are entitled to notice of, and will be entitled to vote at, the meeting or
any postponements or adjournment of the meeting.
BY ORDER OF THE EXECUTIVE COMMITTEE
_____________________________________
Secretary
Urbach Kahn & Werlin PC
BY ORDER OF THE OPERATING COMMITTEE
_____________________________________
Secretary
UKW Management LLC
Albany, New York
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Questions and Answers About the Centerprise Mergers with the Centerprise
Companies................................................................ ii
Summary................................................................... 1
Risk Factors.............................................................. 6
Forward-Looking Statements................................................ 15
The Meetings.............................................................. 16
Approval of the Mergers and Related Transactions.......................... 22
The Merger Agreements..................................................... 29
Centerprise Selected Financial Data....................................... 40
Centerprise Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 42
Industry Overview......................................................... 51
Business of Centerprise After the Mergers................................. 53
Centerprise Management.................................................... 65
Certain Transactions...................................................... 73
Information Regarding the Centerprise Companies........................... 78
Description of Centerprise Capital Stock.................................. 108
Comparison of Rights of Security Holders of Centerprise and the
Centerprise Companies.................................................... 110
Security Ownership of Management and Principal Stockholders of
Centerprise.............................................................. 139
Experts................................................................... 141
Legal Matters............................................................. 141
Where You Can Find More Information....................................... 142
Index to Financial Statements............................................. F-1
<CAPTION>
Appendices
<S> <C>
A California Dissenters' Rights Statute (California Corporations Code
Sections 1300 to 1304)................................................. A-1
B Delaware Dissenters' Rights Statute (Delaware General Corporations Law
Section 262)........................................................... B-1
</TABLE>
<TABLE>
<S> <C>
C Washington Dissenters' Rights Statute (Washington Business Corporations
Act Section 23B.13.020 and Washington Limited Liability Company Act
Section 25.15.430)..................................................... C-1
</TABLE>
i
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE CENTERPRISE MERGERS WITH THE CENTERPRISE
COMPANIES
This joint information statement/prospectus provides you with the material
information concerning the proposed Centerprise mergers with the Centerprise
companies. You are encouraged to read this entire document carefully before
voting on the mergers at your company's special meeting. In addition,
Centerprise has filed a Registration Statement on Form S-4 with the SEC under
the Securities Act concerning the common stock offered by this prospectus. You
may obtain information about Centerprise from the Registration Statement.
Q: Why are Centerprise and the Centerprise companies proposing these mergers?
A: Centerprise and the eleven Centerprise companies believe that the
complementary nature of our respective businesses creates a combination
that is more valuable to clients and owners than the sum of our individual
parts. Our ability to achieve these anticipated benefits is subject to
certain risks discussed on pages 6 to 15. To review the reasons for the
mergers in greater detail, and related uncertainties, see pages 22 and 23.
Q: What will I receive for my ownership interest in a Centerprise company?
A: Following the mergers, security holders of the Centerprise companies will
receive, directly or indirectly, shares of Centerprise common stock and
cash. Please see the notice of meeting applicable to you. You will receive
cash in place of any fractional share of CenterPoint stock you would
otherwise be entitled to receive.
Q: Should I send in my certificate now?
A: No. Where necessary, after the arrangement is completed, we will send
security holders of each Centerprise company written instructions for
exchanging the certificates evidencing their ownership interests.
Q: When do you expect to complete the mergers?
A: We expect to complete the mergers by 1999.
Q: What are the tax consequences of the mergers?
A: Your receipt of Centerprise stock in the mergers will be tax free for
federal income tax purposes. Your receipt of cash in the merger, including
cash received for a fractional share, will be taxable. You will recognize
taxable income equal to the lesser of:
(a) the cash you receive in the merger or
(b) the difference between the cash and value of Centerprise stock you
receive in the merger and your basis in the ownership interest in the
Centerprise company involved in the merger.
For more detail, see pages 26 and 27 of this joint information
statement/prospectus.
Q: Will my rights as a stockholder or owner of a Centerprise company change as
a result of the merger?
A: Yes. Centerprise stockholder rights are governed by Delaware law and
Centerprise's charter and bylaws, whereas each of the Centerprise companies
is governed by the corporate or limited liability company law of the state
in which it is organized and their governance documents. For a summary of
material differences between the rights of Centerprise stockholders and the
rights of owners of the Centerprise companies, see "Comparison of Rights of
Security Holders of Centerprise and the Centerprise Companies" beginning on
page 110.
Q: Am I entitled to dissenters' rights?
A: You may be entitled to dissenters' rights. Please see pages 33 to 38 for a
description of the rights afforded by the laws of the state in which your
company is organized.
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Q: Who can I call with questions?
A: If you have any questions about the merger agreement or the merger and
related transactions, please call:
Berry Dunn Charles H. Roscoe (207) 775-2387
Follmer Anthony P. Frabotta (810) 254-1040
Grace Larry Porschen (314) 615-1200
Holthouse Philip J. Holthouse
(310) 477-5551
IDA Robert F. Gallo
(201) 337-0007
Mann Richard H. Stein (800) 949-1706
Frankfort
Reppond Ben Reppond
(425) 451-8000
Reznick Rhea Voloshen (301) 652-9100
Driver Thomas W. Corbett (619) 238-1828
Simione Anthony P. Scillia (203) 777-1099
Urbach Steven N. Fischer (518) 449-3166
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SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
mergers fully and for a more complete description of the legal terms of the
mergers, you should read carefully this entire document and the documents to
which we have referred you.
Centerprise will acquire in separate transactions eleven companies that
collectively provide professional, business and financial services and
products.
Unless we tell you otherwise, all financial information and share and per
share data in this prospectus
. have been adjusted to give effect to the mergers,
. give effect to the approximate 221.17903-for-1 stock split that will
occur prior to the closing of Centerprise's initial public offering, and
. assume that the underwriters' over-allotment option is not exercised in
the IPO.
Centerprise and the Founding Companies
Centerprise was recently formed to acquire eleven founding companies in
order to create a leading provider of professional, business and financial
services and products to middle-market clients. Centerprise intends to provide
clients with personalized, local service backed by the resources and
capabilities of a national firm. Centerprise has assembled a group of founding
companies with expert capabilities, reputations for quality, effective
leadership and strong "trusted advisor" relationships with clients. These
companies have been in business an average of 27 years. On a combined
historical basis, their revenues increased from $169.8 million in fiscal 1997
to $201.0 million in fiscal 1998, representing an annual growth rate of 18.4%.
Upon completion of the mergers, Centerprise will offer a full range of
consulting, accounting and tax services, as well as complementary business and
financial services and products, such as insurance brokerage and employee
benefits design and administration.
The principal executive office of Centerprise is:
Centerprise Advisors, Inc.
225 West Washington Street, 16th Floor
Chicago, Illinois 60606
The principal executive office of each Centerprise company is as follows:
Berry, Dunn, McNeil & Parker, Chartered
100 Middle Street
Portland, Maine 04104
(207) 775-2387
Follmer, Rudzewicz & Company, P.C.
12900 Hall Road, Suite 500
Sterling Heights, Michigan 48313
(810) 254-1040
Grace & Company, P.C.
3117 South Big Bend Boulevard
Suite 100
St. Louis, Missouri 63143
(314) 615-1200
Holthouse Carlin & Van Trigt LLP
11845 West Olympic Boulevard
Suite 1177
Los Angeles, California 90064
(310) 477-5551
Self Funded Benefits, Inc.,
d/b/a Insurance Design Administration
169 Ramapo Valley Road
Oakland, New Jersey 07436
(201) 337-0007
Mann Frankfort Stein & Lipp, P.C.
12 Greenway Plaza
8th Floor
Houston, Texas 77046
(800) 949-1706
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The Reppond Company, Inc.
Reppond Administrators, L.L.C.
VeraSource Excess Risk Ltd.
10900 N.E. 4th Street
Suite 1200
Bellevue, Washington 98004
(425) 451-8000
Reznick Fedder & Silverman,
Certified Public Accountants, A
Professional Corporation
4520 East West Highway
Bethesda, Maryland 20814-3319
(301) 652-9100
Robert F. Driver Co., Inc.
1620 Fifth Avenue
San Diego, California 92101
(619) 238-1828
Simione, Scillia, Larrow & Dowling LLC
555 Long Wharf Drive
12th Floor
New Haven, Connecticut 06511
(203) 777-1099
Urbach Kahn & Werlin PC
66 State Street
Albany, New York 12207
(518) 449-3166
Special Meetings of the Security Holders of the Companies
Each company will hold a special meeting, at which its board of directors or
other governing body will ask the security holders to approve a merger
agreement and its merger with Centerprise. Details on the time, place and date
of each special meeting, the record date for the determination of who is
entitled to vote, the number of votes required and quorum requirements are
given at pages 16 to 21.
Recommendations to Security Holders
The board of directors or other governing board of each company has
unanimously approved its merger agreement with Centerprise, and recommends that
the security holders of its company approve the merger. The board considered
the potential benefits and adverse effects of the merger. See pages 22 and 23.
Centerprise's Reasons for the Mergers
We believe that certain industry trends have created a significant
opportunity for a company that provides high quality professional, business and
financial services and products to middle-market clients.
The Mergers
The merger agreement is the legal document that governs the merger. Each
merger agreement has been filed as an exhibit to Centerprise's registration
statement on Form S-4. We encourage you to read the merger agreement applicable
to you.
Conditions to the Mergers
The completion of the mergers depends upon meeting a number of conditions
including:
. The SEC must declare Centerprise's registration statements on Form S-1
and Form S-4 effective;
. The security holders of each company must approve its merger agreement
and merger; and
. All of the mergers and the IPO must close simultaneously.
Termination
Either Centerprise or any company may terminate its merger agreement if the
merger is not completed by , 1999, and in certain other
circumstances. See pages 32 and 33.
Expenses; Fees
In general, each party will pay the fees and expenses it incurs in
connection with each merger agreement, whether or not the merger is completed.
Centerprise will pay the fees and expenses associated with its IPO and this
joint information statement/prospectus, whether or not the IPO is completed.
Interested Persons in the Mergers
Prospective directors and officers of Centerprise and its subsidiaries have
interests in the mergers that
2
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are different from or in addition to those of the founding companies' security
holders generally. See pages 23 through 26.
Dissenters' Rights Regarding the Mergers
You may be entitled to dissenters' rights with respect to the merger
applicable to you under state law. See pages 33 to 38.
Certain Income Tax Considerations
Centerprise stock you receive in the mergers will be tax free for federal
income tax purposes. Cash you receive in the mergers, including cash you
receive for a fractional share, will be taxable to the extent described on
pages 26 and 27.
Accounting Treatment
Centerprise will record the mergers under the purchase accounting method.
3
<PAGE>
Summary Unaudited Pro Forma Combined Financial Data
(in thousands, except share and per share data)
Centerprise will acquire eleven companies simultaneously with the closing of
the IPO. For financial statement presentation purposes, Centerprise has been
identified as the "accounting acquiror." The following presents summary
unaudited pro forma combined financial data for Centerprise, as adjusted for:
. the completion of the mergers;
. pro forma adjustments to the historical financial statements; and
. the completion of, and the application of the estimated net proceeds
from, the offering, at an assumed initial public offering price of $12.50
per share.
The pro forma combined statement of operations data assume that the mergers
and the IPO were completed on January 1, 1998. The pro forma combined balance
sheet data assume that the mergers were completed on March 31, 1999. The
statement of operations and balance sheet data are not necessarily indicative
of the results of operations or financial position that would have been
achieved had these events actually occurred on the assumed dates and should not
be viewed as representative of Centerprise's future results of operations or
financial position. You should read this data together with the unaudited pro
forma combined financial statements and the related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Pro Forma Combined
-----------------------------------
Three Months Ended
Year Ended March 31,
December 31, ----------------------
1998 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Professional services (1).............. $ 150,096 $ 50,300 $ 59,056
Business and financial services........ 53,128 12,814 16,328
---------- ---------- ----------
Total revenues....................... 203,224 63,114 75,384
Expenses:
Professional services compensation and
related costs (2)..................... 95,367 29,923 38,218
Business and financial services
compensation and related costs (2).... 35,358 7,606 9,613
Other operating expenses............... 36,940 9,182 10,711
Non-cash stock compensation (3)........ 18,375 -- 3,442
Amortization of goodwill (4)........... 16,478 4,119 4,119
Depreciation expense................... 4,927 978 1,182
---------- ---------- ----------
Income (loss) from operations............ (4,221) 11,306 8,099
Other income (expense), net (5).......... 126 (228) 228
---------- ---------- ----------
Income (loss) before income taxes........ (4,095) 11,078 8,327
Provision for income taxes (6)........... 4,953 6,079 4,979
---------- ---------- ----------
Net income (loss)........................ $ (9,048) $ 4,999 $ 3,348
========== ========== ==========
Net income (loss) per share, basic and
diluted................................. $ (0.34) $ 0.19 $ 0.13
========== ========== ==========
Shares used in computing net income
(loss) per share (7).................... 26,343,290 26,343,290 26,343,290
========== ========== ==========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Combined
As Adjusted
March 31,
1999
-----------
<S> <C>
Balance Sheet Data:
Working capital deficit........................................... $ 2,208
Total assets...................................................... 313,459
Total long-term debt, net of current portion...................... 8,980
Stockholders' equity.............................................. 246,643
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Combined
----------------------------
Three Months
Year Ended Ended March 31,
December 31, ---------------
1998 1998 1999
------------ ------- -------
<S> <C> <C> <C>
Other Data:
EBITDA (8)...................................... $18,057 $16,517 $13,662
Income from operations before goodwill
amortization (8)............................... 12,257 15,425 12,218
Net income before goodwill amortization(8)...... 7,430 9,118 7,467
</TABLE>
- --------
(1) Includes pro forma revenues associated with services agreements of $63,785,
$23,912 and $26,469 for the year ended December 31, 1998 and the three
months ended March 31, 1998 and 1999, respectively. The services agreements
are non-exclusive and, with twelve months notice, the attest firms may
change their staffing requirements. Accordingly, the pro forma services
agreement revenues reflected above are not necessarily representative of
Centerprise's results of operations for any future period. However,
Centerprise believes that were the agreements in place for the historical
periods, the profits recognized by Centerprise would have materially
approximated the profits derived from attest services.
(2) Reflects pro forma reductions in compensation and benefits to owners and
employees of the founding companies. Such amounts include an aggregate of
approximately $21,980, $9,186 and $7,457 for the year ended December 31,
1998 and the three months ended March 31, 1998 and 1999, respectively.
These individuals have agreed to these reductions in employment and
incentive compensation agreements which will take effect upon completion of
the IPO.
(3) Reflects non-cash, non-recurring stock compensation charges resulting from
the issuance of stock to Centerprise employees of $18,375 and $2,657 in the
year ended December 31, 1998 and the three months ended March 31, 1999,
respectively, and the issuance of stock to Driver employees of $785 in the
three months ended March 31, 1999. Centerprise anticipates no such stock
compensation charges for issuances of stock in the future.
(4) Reflects a non-cash amortization charge over a 15-year period related to
$247,163 of goodwill to be recorded as a result of the mergers and computed
on the basis described in the notes to the unaudited pro forma combined
financial statements.
(5) Reflects a reduction of net interest expense associated with long-term debt
of Driver to be repaid from the proceeds of the offering of $939, $11 and
$425 for the year ended December 31, 1998 and the three months ended March
31, 1998 and 1999, respectively.
(6) Assumes all income is subject to a corporate income tax rate of 40% and
assumes all goodwill is non-deductible.
(7) Includes:
(a) 12,569,367 shares to be issued to the owners and employees of the
founding companies in the mergers;
(b) 3,870,633 shares held by initial investors and management of
Centerprise; and
(c) 9,903,290 of the 10,500,000 shares of common stock sold in the IPO, net
of underwriting discounts, necessary to pay the cash portion of the
merger consideration, to repay indebtedness and fund other obligations
of the founding companies and to pay estimated expenses of the IPO.
(8) EBITDA represents net income before interest, income taxes, depreciation
and amortization. EBITDA, Income from operations before goodwill
amortization and Net income before goodwill amortization are provided
because they are measures that management believes may be useful to
analysts and investors. EBITDA, Income from operations before goodwill
amortization and Net income before goodwill amortization are not measures
of performance under GAAP and should not be considered as alternatives to
Net income or Income from operations or as measures of operating
performance or cash flow data prepared in accordance with GAAP. EBITDA,
Income from operations before goodwill amortization and Net income before
goodwill amortization, as calculated by Centerprise, are not necessarily
comparable with similarly titled measures of other companies.
5
<PAGE>
RISK FACTORS
You should consider the following risk factors in evaluating whether to
approve and adopt the merger agreement applicable to you and thereby become a
holder of Centerprise common stock. You should consider these factors together
with the other information contained in this joint information
statement/prospectus.
Centerprise has no operating history and cannot assure you that its future
operating results will match the historical combined results of the founding
companies
Centerprise was recently formed and has conducted no operations and
generated no revenues. Unless the financial benefits resulting from the
combination of the founding companies exceed the incremental corporate
overhead, Centerprise's results will fall short of the combined operating
results of the founding companies and the market value of Centerprise's common
stock will likely decline. Centerprise cannot guarantee that its operating
results as a combined company will equal or exceed the combined historical
operating results of the founding companies prior to the offering.
Historical operating results of the professional services firms include
revenues from attest services which will not be provided by Centerprise
following the closing. Estimated combined revenues from attest services were
approximately $66.0 million for the year ended December 31, 1998 and $27.3
million for the three months ended March 31, 1999. These estimated revenues are
based on estimates of historical attest services as defined from state to state
and historical average realization rates. Centerprise will enter into services
agreements with separate attest firms to be owned by the CPA owners of each
professional services firm, under which Centerprise will provide professional
staffing and other services, and revenues and income from these agreements are
reflected in the unaudited pro forma combined financial statements. Centerprise
believes that had the services agreements been in place throughout the periods
shown in the pro forma financial statements, revenues and income derived by
Centerprise under the services agreements would have materially approximated
historical revenues and income from attest services provided by the
professional services firms. See Notes 4 and 6 to the unaudited pro forma
combined financial statements. However, because the services agreements are
non-exclusive, the amounts reflected in the pro forma financial statements as
"services agreement" fees may not be representative of future ongoing
operations.
The pro forma financial results presented in this prospectus do not
necessarily indicate actual results which might have occurred if the operations
and management teams of the founding companies had been combined during the
periods presented. In addition, these pro forma results are not representative
of future results that will be reported on a consolidated basis. See
"Centerprise Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of historical operating results and
currently identified matters that could cause future results to differ.
Regulation of the accounting profession will constrain Centerprise's operations
and impact its structure and numerous issues arising out of that regulation,
its interpretation or its evolution could impair Centerprise's ability to
provide services to some clients, including the attest firms, reduce its
revenues and cause the market value of the common stock to decline
Background. Each state has adopted accountancy laws, regulations and codes
of ethics that provide for the licensure of CPAs, grant licensed CPAs and
accounting firms that are wholly-owned by CPAs the exclusive right to practice
accountancy and place restrictions upon the activities of licensed CPAs.
Centerprise will not render any services that may be performed only by persons
and firms that are licensed to practice accountancy. Most states define such
attest services to include reports on historical and prospective financial
statements, including audits, compilations and reviews; certain other reports
intended to be relied upon by third parties; advice and opinions regarding
accounting principles and auditing standards; and other services such as
reports on compliance with laws and contractual obligations and the adequacy of
internal accounting controls. The laws and regulations of some states define
more broadly these attest services that can be provided only by a licensed CPA
or firm. Following the mergers, the CPAs who currently own the founding
companies that provide professional services will continue to provide attest
services through separate attest firms which will be licensed to practice
accountancy and in which Centerprise will have no ownership interest. Pursuant
to services
6
<PAGE>
agreements, Centerprise will provide, for a fee, professional and other
personnel, equipment, office space and business and administration services
necessary for the operation of these attest firms. For more detailed
information concerning Centerprise's regulatory environment and the services
agreements, see "Business of Centerprise after the Mergers--Regulation--
Accounting Profession" and "Certain Transactions--The Mergers--Ancillary
Agreements with Professional Services Firms and their Affiliates--Services
Agreements."
Current laws, regulations and codes of ethics related to the practice of
accountancy pose the following principal risks to Centerprise:
.Because of regulatory restrictions, Centerprise cannot assure revenues
under the non-exclusive services agreements. The services agreements are non-
exclusive, and one or more attest firms could choose to contract with entities
other than Centerprise for some or all of these services. Failure by one or
more attest firms to use Centerprise's services could reduce Centerprise's
future revenues.
.A successful challenge to Centerprise's separate practice structure by
accountancy boards in one or more states in which Centerprise operates could
result in, among other things, a reduction in the operations of or services
provided by Centerprise or the divestiture by Centerprise of certain assets,
and a corresponding reduction in its revenues, or termination of or
modifications to one or more of the services agreements in a manner adverse to
Centerprise's economic interests. Moreover, if Centerprise's operations are
challenged as constituting the illegal practice of accountancy, provisions in
the services agreements could limit Centerprise's flexibility to modify its
operations in response to regulatory issues.
.State accountancy boards may bar CPAs in Centerprise's employ from
providing attest services. Should state regulators deem activities undertaken
by CPAs as employees of Centerprise to be in violation of the laws, regulations
or codes of ethics under which the CPAs practice, they could lose their right
to practice accountancy and their ability to provide attest services to the
clients which the attest firms share with Centerprise. This could reduce both
the revenues that Centerprise would otherwise receive under the services
agreements and impair Centerprise's ability to render non-attest services to
these clients.
.Under numerous states' regulatory regimes, the CPAs employed by Centerprise
will not be able, while performing non-attest services on behalf of
Centerprise, to proclaim expertise in accounting principles or auditing
standards or use their "CPA" designation on letters, business cards or
promotional literature. These limitations could impair Centerprise's marketing
efforts and reduce its revenues.
.Restrictions imposed by independence requirements and conflict of interest
rules could limit the clients to whom Centerprise and the attest firms may
provide services. These restrictions could cause a decline in Centerprise's
revenues by forcing Centerprise or the attest firms to discontinue their
services on behalf of some existing clients of the Centerprise companies or to
forego providing services to potential future clients as a result of these
restrictions.
With respect to attest firm clients that are public reporting companies,
i.e., clients that may be required to file audited financial statements with
the SEC, Centerprise and the attest firms must comply with independence rules
as applied by the SEC staff. To date, revenues derived from services performed
for SEC reporting clients have not been material to Centerprise or any of its
professional services firms. In applying its independence rules, the SEC staff
will view Centerprise and all attest firms as a single entity, and as a result,
Centerprise must abide by all of the independence rules that the attest firms
must follow in order for the attest firms to be independent of an SEC reporting
attest client. Any business relationship of Centerprise or its officers,
directors or affiliates with an attest firm client will be regarded as a
business relationship between the attest firm and the client for purposes of
applying the SEC's independence rules.
The SEC staff takes the view that an attest firm would not be independent
from entities involved in the IPO or in making a market for or otherwise
facilitating the trading of Centerprise's common stock in the
7
<PAGE>
secondary market. Accordingly, an attest firm's independence would be impaired
with respect to all members of the syndicate underwriting the IPO and to
broker-dealer firms that exercise discretionary buy and sell authority over
customer accounts holding significant positions in Centerprise or that employ
securities analysts who follow Centerprise.
Because Centerprise, its officers, directors and affiliates and the attest
firms are viewed as one entity for purposes of the SEC's independence rules,
Centerprise and its officers, directors or affiliates would impair the
independence of an attest firm if they held any financial interest in, entered
into any business relationship with or sold any services to an SEC reporting
client of an attest firm that the attest firm itself would be precluded from
under the SEC's independence rules. For example, neither Centerprise nor any
attest firm may provide bookkeeping services or other prohibited services to an
SEC reporting client of an attest firm. In addition, Centerprise, its
directors, officers and affiliates, its professional employees and members of
their respective households will be prohibited from owning stock in an SEC
reporting client of an attest firm. SEC reporting clients of attest firms will
be prohibited from owning stock in Centerprise.
Centerprise and the attest firms have agreed to implement policies and
procedures to ensure that independence is maintained. These procedures will
include independence screening in connection with the selection of attest
clients as well as periodic confirmations of independence by officers,
directors and professionals at Centerprise, the attest firms and their clients.
To effect these policies and procedures, Centerprise has developed a web-based
central database for existing and prospective attest firm clients.
.State laws limiting Centerprise's flexibility in using incentive fees could
impair its marketing efforts and reduce its revenues. State accountancy laws
prohibiting CPAs from paying or receiving referral fees or using contingent fee
arrangements could impair Centerprise's marketing efforts and reduce its
revenues by placing significant restrictions upon the use of incentive fee
arrangements that Centerprise could otherwise employ in its operations.
.State regulators could preclude Centerprise's employees from providing one
or more types of services to clients, which could reduce Centerprise's
revenues. Few states have provided guidance as to what activities are
encompassed by their prohibitions against CPAs engaging in "incompatible"
occupations. There can be no assurance that one or more states may not invoke
these prohibitions to preclude Centerprise's employees from engaging in one or
more types of services which Centerprise will be offering to its clients, which
preclusion could reduce Centerprise's revenues.
.Applicable laws, regulations and codes of ethics could change in a manner
that restricts Centerprise's operations. Centerprise cannot ensure that the
laws, regulations or codes of ethics of any state, their interpretations, state
enforcement policies and practices or other elements of the regulatory
environment will not change so as to materially restrict Centerprise's
operations. Accordingly, Centerprise's ability to continue to operate in, or
expand its operations in or to, some states may depend on its flexibility to
modify its operational structure in response to these changes. Provisions of
the services agreements between Centerprise and the attest firms may constrain
this flexibility. Limitations on Centerprise's ability to use the separate
practice structure in order to comply with applicable laws could impair its
relationship with the attest firms or their clients, harm Centerprise's
business or reduce its revenues or earnings.
Failure to integrate the founding companies quickly and effectively, or client
concerns about the impact of the mergers, could materially increase expenses or
decrease revenues
Centerprise's success will depend, in part, on its ability to integrate
successfully the operations of the founding companies. Failure to accomplish
the integration quickly and effectively, or client concerns regarding the
impact of the mergers, could increase Centerprise's expenses or decrease its
revenues, or both. Each founding company has operated, and until the mergers
will operate, independently. In addition, a number of the founding companies
offer different services, use different internal accounting policies and
procedures, employ
8
<PAGE>
different technologies and computer operating systems and target different
geographic markets and client segments. At the time of the offering,
Centerprise will not have a fully integrated financial reporting system.
Integration of the founding companies will require significant management
resources, and may distract certain members of management of the these
companies from normal operations. Centerprise cannot guarantee that its
recently assembled corporate management team will effectively oversee the
combined entity and implement its business or growth strategies.
Absent proper controls, Centerprise's integrated management strategy could
result in inconsistent operating and financial practices at the various
business units, harm Centerprise's financial condition or operating results and
cause the market value of the common stock to decline
Centerprise intends to operate its business units through an integrated
management structure, with local management retaining responsibility for the
profitability and growth of their respective businesses. If Centerprise does
not implement proper controls, its management strategy could result in
inconsistent operating and financial practices at the various business units,
harm Centerprise's financial condition or results of operations and cause the
market value of the common stock to decline.
Material contingent liabilities could survive the rescission offer
It is not certain that Centerprise's conduct of the rescission offer will
have the effect of barring claims relating to its alleged non-compliance with
federal securities laws. The rights remaining to recipients of a rescission
offer are not delineated under the Securities Act. The staff of the SEC has
taken the position that a person's federal right of rescission, which may
survive for one year following the date of sale, may survive a rescission
offer. If a person accepts the rescission offer, Centerprise takes the position
that its potential liability to that person based upon the alleged offers and
sales will be eliminated. Should the rescission offer be rejected by any or all
offerees, Centerprise may continue to be contingently liable for rescission or
damages in an indeterminate amount, which liability could be material.
Centerprise, at this point, cannot quantify the number or the magnitude of the
possible claims related to offerees who will accept or reject the rescission
offer. Thus, it cannot quantify the potential continuing exposure upon
completion of the rescission offer.
Eligible offerees who do not accept the rescission offer may assert claims
against Centerprise relating to its possible non-compliance with federal
securities laws. Should any or all of such claims prevail, Centerprise's
business, financial condition and results of operation could all be materially
adversely affected. Even if Centerprise is successful in defending any claims
under applicable securities laws, their mere assertion could result in costly
litigation and significant diversions of effort by Centerprise's management.
Centerprise's failure to successfully complete acquisitions would limit its
growth prospects, and Centerprise expects competition for suitable acquisitions
to increase
As part of its growth strategy, Centerprise intends to pursue acquisitions
that will add to or complement its existing businesses, and its failure to
identify and consummate suitable acquisitions would limit its growth prospects.
Centerprise will be competing to acquire attractive companies with other firms,
many of which have greater financial and other resources. Centerprise believes
this competition will increase, making it more difficult to acquire suitable
companies on acceptable terms.
Future completed acquisitions pose numerous risks to Centerprise that could
limit its growth prospects
Future completed acquisitions pose numerous risks that could limit
Centerprise's growth prospects. For example:
. Centerprise may incur additional debt and amortization expense related to
goodwill and other intangible assets purchased in future acquisitions.
. Centerprise may be unable to integrate acquired businesses successfully
and realize anticipated economic, operational and other benefits in a
timely manner, particularly if it acquires a business in a market in
which it has limited or no expertise, or with a corporate culture
different from its own. If Centerprise is unable to integrate acquired
businesses successfully, it may incur substantial costs and delays or
other operational, technical or financial problems.
9
<PAGE>
. The integration of acquisitions may disrupt Centerprise's ongoing
business, distract management and other resources, and make it difficult
to maintain Centerprise's standards, controls and procedures.
. Centerprise cannot ensure that the acquired businesses will achieve
anticipated revenues, earnings or cash flow.
Completion of future acquisitions may cause further dilution to stockholders
Centerprise currently intends to finance future acquisitions by using common
stock for some or all of the purchase price. This could further dilute the
ownership interests of Centerprise's stockholders.
The loss of key management personnel could harm Centerprise's business and
prospects
The loss of the services of one or more of Centerprise's key management
personnel could harm Centerprise's business or prospects, and there can be no
assurance that such individuals will continue in their present capacities for
any particular period of time. Centerprise's success depends largely on the
efforts of its senior management team including Robert C. Basten, president and
chief executive officer, Thomas W. Corbett, president and chief operating
officer of the business and financial services group, DeAnn L. Brunts, chief
financial officer, Rondol E. Eagle, chief integration officer, and Dennis W.
Bikun, chief accounting officer. In addition, Centerprise's success will depend
significantly on the senior management of the founding companies as a result of
their experience in managing these companies and their strong relationships
with their clients.
Competition for qualified accounting professionals could impair Centerprise's
ability to execute its business strategies
Centerprise competes for qualified accounting professionals, both
experienced professionals and recent college graduates, and believes that state
laws increasing the number of college credits required for licensing may
further reduce an already limited supply of accounting professionals and lead
to increased compensation levels. In the future, Centerprise may have
difficulty recruiting and retaining sufficient numbers of qualified accounting
personnel, which could impair its ability to execute its business strategies.
In addition, increased compensation levels could cause a material increase in
Centerprise's expenses.
Centerprise may not be able to obtain adequate financing to implement its
strategies and lack of financing could constrain its operations and limit its
growth
Successful implementation of Centerprise's strategies will require continued
access to capital. If Centerprise does not have sufficient cash resources, its
ability to implement its business and growth strategies could be limited unless
it is able to obtain capital through additional financings. Centerprise
currently intends to finance future acquisitions by using common stock for some
or all of the purchase price. If the common stock does not maintain sufficient
value, or potential acquisition candidates do not accept common stock as
consideration for the sale of their businesses, Centerprise may be required to
use more of its cash resources or obtain other financing. Centerprise cannot
ensure that equity or debt financings will be available as required for
acquisitions or other needs. Even if financing is available, it may not be on
terms that are favorable to Centerprise or sufficient for its needs.
Centerprise's insurance services revenues depend on premiums set by other
companies; premiums have been cyclical and depend on market conditions
A portion of Centerprise's business consists of insurance agency and
brokerage activities which derive revenues from commissions paid by insurance
companies. These commissions are a percentage of premiums charged, which
premiums are determined by insurers, not Centerprise. Centerprise cannot
predict the timing or extent of future changes in commission rates or premiums
and, therefore, cannot predict the effect, if any, that
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such changes would have on its operations. Historically, property and casualty
premiums have been cyclical in nature and have varied widely based on market
conditions. Since the mid-1980s, general premium levels have been depressed as
a result of the expanded underwriting capacity of insurance companies and
increased competition. In addition, as traditional insurance companies continue
to outsource the production of premium revenue to non-affiliated agents such as
Centerprise, these insurance companies may seek to further reduce their
expenses by reducing the commission rates payable to such insurance agents.
Centerprise may expand its insurance business to include activities that
involve bearing the risk of loss
Centerprise may in the future expand its insurance business to include
activities where it bears the risk of loss by the insured. While it is likely
that Centerprise would focus on products in which it has particular expertise
through its brokerage business, as a risk-bearing entity Centerprise would be
subject to significant additional risks that it does not currently encounter in
its brokerage business. Centerprise cannot guarantee that it will be able to
successfully manage any risk of loss its assumes. Failure by Centerprise to
successfully manage such risk could harm its business and financial condition
or reduce its earnings.
Claims for errors and malpractice could subject Centerprise to liability or
increased insurance premiums and harm its reputation and client relationships
Centerprise offers some services, including accounting, valuation and
financial planning, that involve a risk of professional malpractice and other
similar claims. Tax services and administrative services for employee benefits
insurance plans are subject to various risks relating to errors and omissions
in processing and filing plan forms and tax returns in accordance with the
plans and government regulations. Centerprise processes data received from
employees and employers and may be subject to liability for any late or
misfiled plan forms or tax returns. In addition, the failure of Centerprise's
employees to properly file plan forms or tax returns could harm Centerprise's
reputation or its relationships with existing clients and impair its ability to
attract new clients. In addition, as to attest services provided by the attest
firms, while the primary risk of professional liability lies with the attest
firm, this does not preclude the possibility that Centerprise could be drawn
into disputes concerning attest work where Centerprise employees were involved
pursuant to services agreements.
Centerprise maintains professional liability and errors and omissions
insurance coverage that it believes is adequate both as to risks and amounts.
However, Centerprise cannot ensure that actual future claims will not exceed
the coverage amounts. If Centerprise experiences a large claim or claims, the
rates for such insurance may increase. Centerprise's ability to incorporate
such increases into fees paid by clients could be constrained by contractual
arrangements with clients or competitive factors. As a result, such increases
could reduce Centerprise's earnings. In addition, a determination adverse to
Centerprise in connection with one or more significant claims, whether or not
insured, could harm Centerprise's reputation and client relationships.
Client contracts do not ensure revenues
Centerprise and the attest firms enter into agreements with most of their
clients. While these contracts typically define fee arrangements, the scope of
services and termination provisions, they generally do not obligate the client
to use the services of Centerprise or the attest firm and do not, therefore,
ensure revenues. While Centerprise believes that its relationships with its
current clients, and the attest firms' relationships with their current
clients, are good, it cannot guarantee that such clients will renew their
existing agreements or engage Centerprise or the attest firms. The failure of
attest firm clients to engage the attest firms could reduce Centerprise's
revenues under the services agreements.
Centerprise's quarterly operating results will fluctuate due to seasonality and
other factors, and unexpected variations in quarterly results could cause the
price of Centerprise's stock to decline
Centerprise expects its revenues, expenses and operating results to vary
materially from quarter to quarter. Unexpected variations in quarterly results
could cause the price of Centerprise common stock to decline, which
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in turn could limit Centerprise's ability to pursue acquisitions. Centerprise
anticipates higher revenues and operating income in the first quarter of its
fiscal year because of the seasonal demand for accounting and tax services. In
addition to this seasonality, quarterly results may vary as a result of many
factors, including:
. client engagements commenced and completed during a quarter;
. the timing and structure of acquisitions and their related costs;
. the addition or loss of material clients; and
. the timing of material projects.
Centerprise has significant intangible assets; the amortization of these assets
will, and impairment of these assets would, reduce net income
Approximately $247.2 million, or 78.9%, of Centerprise's pro forma as
adjusted total assets as of March 31, 1999 represents goodwill recorded in
connection with the mergers. Goodwill is an intangible asset that represents
the difference between the aggregate purchase price for the assets acquired and
the amount of such purchase price allocated to such assets for purposes of
Centerprise's pro forma balance sheet. Centerprise will amortize the goodwill
from the mergers over 15 years at $16.5 million per year with the amount
amortized in a particular period constituting an expense that reduces net
income for that period. The amount amortized is not deductible for tax
purposes. Therefore, the non-cash charge reflecting the amortization of
goodwill substantially reduces Centerprise's net income in total and on a per
share basis. In addition, Centerprise will be required to amortize the
goodwill, if any, from any future acquisitions. Under accounting rules,
Centerprise is required to periodically evaluate if goodwill has been impaired
by reviewing the cash flows for acquired companies and comparing such amounts
with the carrying value of the associated goodwill. If goodwill is impaired,
Centerprise would be required to write down goodwill and incur a related non-
cash charge to income. A reduction in net income resulting from the write down
could cause a decline in the market price of the common stock.
Centerprise's industry experiences slower collections than many other
industries; this may affect Centerprise's liquidity
In general, professional services firms experience higher average accounts
receivable days outstanding than businesses in many other industries. This may
affect Centerprise's liquidity.
Failure to be year 2000 compliant could interrupt Centerprise's operations,
hurt its business or expose it to material claims
Centerprise believes that it has satisfactorily assessed its internal risks
with respect to its information technology systems, but it has not fully
completed tests to assure that its information technology systems will function
properly in the year 2000. Based on Centerprise's ongoing survey of the
assessment made by each founding company, Centerprise estimates that the total
cost of year 2000 compliance activities will be approximately $400,000 to
$500,000, of which approximately $380,000 had been incurred as of March 31,
1999. However, Centerprise cannot guarantee that:
. actual compliance costs will fall within the range of this estimate,
. any business acquired in the future will not require substantial year
2000 compliance expenditures; or
. precautions that the Centerprise Companies have taken to protect their
businesses from or minimize the impact of the year 2000 issue will be
adequate.
Any damage to Centerprise's information processing system, failure of
telecommunications lines or breach of the security of its computer systems
could result in an interruption of its operations or other loss which may not
be covered by insurance.
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Centerprise is in the process of surveying the year 2000 readiness of
significant customers, business partners and vendors. If Centerprise's efforts
to address year 2000 risks are not successful, or if significant third parties
with whom Centerprise conducts business do not successfully address such risks,
it could interrupt Centerprise's operations and harm its business. None of the
founding companies have engaged in any independent verification or validation
processes in assessing their year 2000 risks. See "Centerprise Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance" for detailed information on Centerprise's state of readiness,
potential risks and contingency plans regarding the year 2000 issue.
Several of the founding companies periodically provide year 2000 consulting
services. Although Centerprise believes, based on the services it has provided
to date, that it has limited exposure to claims that may be asserted by clients
whose systems might be compromised as a result of a year 2000 related
malfunction, there can be no assurance that material claims will not be made.
Centerprise's current stockholders will be able to exercise substantial control
and may make decisions that you do not consider to be in your best interest
After the IPO, Centerprise's management, its initial investors and the
owners and employees of the founding companies will own approximately 61.0% of
the outstanding shares of common stock, or 57.7% if the underwriters' over-
allotment option is exercised in full. As a result, if these persons act
together, they will have the ability to exercise substantial control over
Centerprise's affairs and to elect a sufficient number of directors to control
the board of directors. The ownership position of these stockholders and the
terms of the stockholders' agreement to which they are parties may have the
effect of delaying, deterring or preventing a change in control of Centerprise
or a change in the composition of the board of directors. See "Security
Ownership of Management and Principal Stockholders of Centerprise" and
"Description of Capital Stock" for information concerning the beneficial
ownership of Centerprise's stockholders and the terms of the stockholders'
agreement.
Anti-takeover provisions in Centerprise's charter documents and Delaware law
could make an acquisition of Centerprise difficult
Centerprise's certificate of incorporation and Delaware law contain
provisions that may delay, deter or inhibit a future acquisition of Centerprise
if the board of directors does not approve of such acquisition. This could
occur even if Centerprise's stockholders are offered a premium over the market
price for their shares or if a substantial number or even a majority of the
stockholders believe the takeover is in their best interest. See "Description
of Centerprise Capital Stock" for a description of these provisions.
Centerprise's common stock has never been publicly traded and its liquidity is
uncertain
There has been no public market for Centerprise's common stock. Centerprise
has applied to list the common stock for trading on The New York Stock
Exchange. Centerprise does not know whether investor interest will lead to the
development of a trading market or, if a trading market develops, how liquid
that market will be. Centerprise will determine the initial offering price for
the shares through negotiations with the underwriters. You may not be able to
sell your shares at or above the initial offering price.
Centerprise's stock price may be volatile
The price at which Centerprise's shares will trade following the offering
may be volatile and will depend upon a number of factors, including
. Centerprise's historical and anticipated operating results;
. announcements by Centerprise or its competitors;
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. changes in financial estimates by securities analysts regarding
Centerprise, its industry, its competitors or its clients;
. conditions and trends in the industries in which Centerprise or its
competitors compete; and
. general market and economic conditions.
In addition, the stock market has from time to time experienced extreme price
and volume fluctuations. These broad market fluctuations may cause the market
price of the shares to decline.
You will be restricted in transferring the shares of Centerprise common stock
you receive in the mergers
The merger agreement applicable to you will prohibit the sale or other
transfer of any of the shares you receive in the merger for a period of 18
months following Centerprise's IPO. After 18 months have elapsed, 20% of your
shares will be released from this restriction. An additional 20% of your shares
will be released from this restriction after each succeeding six-month period.
Consequently, after 3 1/2 years have elapsed, none of your shares will be
subject to these contractual restrictions on transfer. However, if you are an
employee of Centerprise or a Centerprise company, your shares are subject to
additional restrictions. If your employment is terminated within 30 months of
the offering, other than through death, disability, retirement or circumstances
approved by management of the Centerprise company and by Centerprise's chief
executive officer, restricted shares then held by you will remain restricted
until the fifth anniversary of the IPO. This extended lockup will not apply:
. to the former owners of IDA if their employment is terminated without
cause as defined in their employment agreements; and
. to former owners of Driver and Reppond entering into employment
agreements with Centerprise, if their employment is terminated without
cause or within 60 days of a constructive termination, in each case as
defined in the employment agreements.
In addition, Centerprise and the owners and employees of the Centerprise
companies have agreed with certain exceptions, not to offer, pledge, sell,
contract to sell or otherwise dispose of any shares of common stock, or any
securities convertible into or exchangeable for common stock, for a period of
180 days following the date of the prospectus related to the IPO without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Accordingly, your shares of Centerprise common stock will not be freely
transferable when the mergers are finalized and you will bear the risk of an
investment in those shares for at least the periods during which you are
prohibited or restricted from selling them.
You will not know the value of the Centerprise shares before you vote on the
mergers
The value of the shares of Centerprise common stock you will receive in the
merger that applies to you depends on the initial public offering price of the
Centerprise common stock. For this reason you will not know precisely the value
of the Centerprise shares you will receive at the time you are asked to vote on
the merger transaction that applies to you.
The security holders of the Centerprise companies may fail to approve the
mergers
If the security holders of the Centerprise companies fail to approve the
mergers, the Centerprise companies will not realize the benefits of the mergers
identified by their governing boards.
Future directors and officers of Centerprise and its subsidiaries have
interests in the mergers that may differ from yours
Several individuals have interests in the mergers which are different than
the interests of the Centerprise companies' security holders. The following
individuals will become directors of Centerprise upon closing of
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the mergers: David Reznick of Reznick; Richard H. Stein of Mann Frankfort;
Anthony P. Frabotta of Follmer; Charles H. Roscoe of Berry Dunn; Steven N.
Fischer of Urbach; Robert F. Gallo of IDA; Wayne J. Grace of Grace; Philip J.
Holthouse of Holthouse; and Anthony P. Scillia of Simione. Thomas W. Corbett of
Driver will become a director and an officer of Centerprise. In addition,
Thomas W. Corbett, P. Gregory Zimmer, Jerold D. Hall, Robert F. Gallo, Russell
Minetti, Benjamin Reppond, Scott D. Perry and Louis R. Baransky will enter into
employment agreements with Centerprise.
Due to the benefits to be received by these individuals in connection with
the mergers the interests of these individuals may be different from the
interests of security holders of the Centerprise companies generally. You
should consider such persons' interests in the applicable merger in connection
with any such person's recommendation of such merger.
FORWARD-LOOKING STATEMENTS
This joint information statement/prospectus includes forward-looking
statements. You can identify these statements by forward-looking words such as
"may," "will," "expect," "anticipate," "intend," "believe," "estimate" and
"continue" or similar words. You should read statements that contain these
words carefully because they:
.discuss Centerprise's future expectations;
.contain projections of Centerprise's future results of operations or
financial condition; or
.state other "forward-looking" information.
These forward-looking statements are subject to risks, uncertainties and
assumptions. The "Risk Factors" as well as other cautionary language in this
joint information statement/prospectus provide examples of risks, uncertainties
and events that may cause Centerprise's actual results to differ materially
from the expectations described in these forward-looking statements.
Centerprise is not obligated to publicly update or revise any forward-looking
statements to reflect new information, future events or other circumstances.
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THE MEETINGS
Centerprise and each of the founding companies provides this joint
information statement/prospectus in connection with the meetings of the owners
of each founding company called to consider the applicable merger.
Berry Dunn Meeting
Time, Place and Date
Berry Dunn will hold their meeting on 1999 at , Portland, Maine 04104,
commencing at a.m. local time.
Purpose of the Berry Dunn Meeting
The Berry Dunn board is asking the holders of Berry Dunn common shares to
approve and adopt the merger agreement and the merger with a wholly-owned
subsidiary of Centerprise and to transact such other business as may properly
come before the meeting.
Record Date; Shares Entitled to Vote
Record holders of Berry Dunn common shares at the close of business on ,
1999 are entitled to receive notice of and to vote at the meeting. On the
record date, record holders held an aggregate of common shares.
Vote Required
Approval and adoption of the Berry Dunn merger agreement and merger requires
the affirmative vote of the holders of more than two-thirds of the outstanding
common shares. The Berry Dunn board will count the votes.
Each record holder on the record date may cast one vote per share,
exercisable in person, on each matter properly submitted at the meeting.
The holders of a majority of the outstanding common shares on the record
date must be present to constitute a quorum at the meeting.
Follmer Meeting
Time, Place and Date
Follmer will hold their meeting on , 1999 at 26200 American Drive, Suite
400, Southfield, Michigan 48034, commencing at a.m. local time.
Purpose of the Follmer Meeting
The Follmer board is asking the holders of Follmer common shares to approve
and adopt the merger agreement and the merger with a wholly-owned subsidiary of
Centerprise and to transact such other business as may properly come before the
meeting.
Record Date; Shares Entitled to Vote
Record holders of Follmer common shares at the close of business on ,
1999 are entitled to receive notice of and to vote at the meeting. On the
record date, 12 record holders held an aggregate of 10,150 common shares.
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Vote Required
Approval and adoption of the Follmer merger agreement and merger requires
the affirmative vote of the holders of a majority of the outstanding common
shares. The Follmer board will count the votes.
Each record holder on the record date may to cast one vote per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted at the meeting.
The holders of a majority of the outstanding common shares on the record
date must be present to constitute a quorum at the meeting. Follmer intends to
include abstentions as present or represented for purposes of establishing a
quorum.
Grace Capital Meeting
Time, Place and Date
Grace Capital will hold their meeting on , 1999 at 3117 South Big Bend
Boulevard, Suite 100, St. Louis, Missouri 63143, commencing at a.m. local
time.
Purpose of the Grace Capital Meeting
The managers will be asking the partners of Grace Capital to cause Grace to
approve and adopt the merger agreement and the merger with a wholly-owned
subsidiary of Centerprise and to transact such other business as may properly
come before the meeting.
Record Date; Interests Entitled to Vote
Record holders of Grace Capital partnership interests at the close of
business on , 1999 are entitled to receive notice of and to vote at the
meeting. On the record date, record holders held an aggregate of Grace
Capital partnership interests.
Vote Required
An action to cause the approval and adoption by Grace of the Grace merger
agreement and merger requires the affirmative vote of the holders of a majority
of the partnership interests of Grace Capital, which is the sole stockholder of
Grace.
The holders of a majority of the partnership interests of Grace Capital must
be present to constitute a quorum at the meeting.
Holthouse Meeting
Time, Place and Date
Holthouse will hold their meeting on , 1999 at 11845 West Olympic
Boulevard, Suite 1177, Los Angeles, California 90064, commencing at a.m.
local time.
Purpose of the Holthouse Meeting
The Holthouse board is asking the Holthouse partners to approve and adopt
the merger agreement and the merger with wholly owned subsidiaries of
Centerprise and to transact such other business as may properly come before the
meeting.
Record Date; Shares Entitled to Vote
Record holders of Holthouse partnership interests at the close of business
on , 1999 are entitled to receive notice of and to vote at the meeting. On
the record date, there were eight partners of record.
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Vote Required
Approval and adoption of the Holthouse merger agreement and merger requires
the affirmative vote of the holders of a majority of the partnership interests.
The Holthouse board will count the votes.
The holders of a majority of the partnership interests of Holthouse must be
present to constitute a quorum at the meeting.
IDA Meeting
Time, Place and Date
IDA will hold their meeting on , 1999 at 169 Ramapo Valley Road, Oakland,
New Jersey 07436, commencing at a.m. local time.
Purpose of the IDA Meeting
The IDA board is asking the holders of IDA voting common shares to approve
and adopt the merger agreement and the merger with a wholly-owned subsidiary of
Centerprise and to transact such other business as may properly come before the
meeting.
Record Date; Shares Entitled to Vote
Record holders of IDA voting common shares at the close of business on ,
1999 are entitled to receive notice of and to vote at the meeting. On the
record date, two record holders of voting common stock held all 149 outstanding
IDA voting shares.
Vote Required
Approval and adoption of the IDA merger agreement and merger requires the
affirmative vote of the holders of a majority of the voting common shares. The
IDA board will count the votes.
Each record holder on the record date may cast one vote per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted at the meeting.
The holders of a majority of the outstanding voting common shares on the
record date must be present to constitute a quorum at the meeting.
Mann Frankfort Meeting
Time, Place and Date
Mann Frankfort will hold their meeting on , 1999 at 12 Greenway Plaza,
8th Floor, Houston, Texas 77046, commencing at a.m. local time.
Purpose of the Mann Frankfort Meeting
The Mann Frankfort board is asking the holders of Mann Frankfort common
shares to approve and adopt the merger agreement and the merger with a wholly-
owned subsidiary of Centerprise and to transact such other business as may
properly come before the meeting.
Record Date; Shares Entitled to Vote
Record holders of Mann Frankfort common shares at the close of business on
, 1999 are entitled to receive notice of and to vote at the meeting. On the
record date, record holders held an aggregate of common shares.
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Vote Required
Approval and adoption of the Mann Frankfort merger agreement and merger
requires the affirmative vote of the holders of 80% of the outstanding common
shares and the approval of a majority of shareholders. The Mann Frankfort board
will count the votes.
Each record holder on the record date may cast one vote per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted at the meeting.
The holders of a majority of the outstanding common shares on the record
date must be present to constitute a quorum at the meeting. Mann Frankfort
intends to include abstentions as present or represented for purposes of
establishing a quorum.
Reppond Meeting
Time, Place and Date
Reppond Administrators, Reppond Company and VeraSource will hold their
meeting on , 1999 at 10900 Northeast 4th Street, Suite 1200,
Bellevue, Washington 98004, commencing at a.m. local time.
Purpose of the Reppond Meeting
The Reppond board will ask the holders of Reppond Company common shares,
Reppond Administrators membership interests and VeraSource common shares to
approve and adopt the Reppond merger agreement and the merger with wholly-owned
subsidiaries of Centerprise and to transact such other business as may properly
come before the meeting.
Record Date; Shares Entitled to Vote
Record holders of Reppond Company common shares, Reppond Administrators
membership interests and VeraSource shares at the close of business on
, 1999 are entitled to receive notice of and to vote at the meeting. On the
record date, two record holders of Reppond Company common stock held all 500
outstanding common shares, three record holders of Reppond Administrators held
all outstanding membership interests and two record holders of VeraSource
common stock held all 250 outstanding common shares.
Vote Required
Approval and adoption of the Reppond merger agreements and mergers requires
the affirmative vote of the holders of a majority of the common shares or
membership interests, as the case may be. The Reppond board will count the
votes.
Each record holder of Reppond Company common shares, Reppond Administrators
membership interests and VeraSource common shares on the record date may cast
one vote per share or interest, as the case may be, exercisable in person or by
properly executed proxy, on each matter properly submitted at the meeting.
The holders of a majority of the outstanding shares of Reppond Company
common stock, a majority of the outstanding membership interests of Reppond
Administrators and a majority of the outstanding shares of VeraSource common
stock on the record date must be present to constitute a quorum at the meeting.
Reznick Meeting
Time, Place and Date
Reznick will hold their meeting on , 1999 at 4520 East West Highway,
Suite 300, Bethesda, Maryland 20814, commencing at a.m. local time.
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Purpose of the Reznick Meeting
The board will be asking the holders of Reznick LLC membership interests to
cause Reznick to approve and adopt the merger agreement and the merger with a
wholly-owned subsidiary of Centerprise and to transact such other business as
may properly come before the meeting. Reznick LLC is the sole stockholder of
Reznick.
Record Date; Shares Entitled to Vote
Record holders of Reznick LLC membership interests at the close of business
on , 1999 are entitled to receive notice of and to vote at the meeting. On
the record date, record holders of Reznick LLC membership interests held an
aggregate of membership interests.
Vote Required
An action to cause the approval and adoption by Reznick of the Reznick
merger agreement and merger requires the affirmative vote of the holders of 75%
of its membership interests. The Reznick board will count the votes.
The holders of a majority of the membership interests of Reznick LLC must be
present to constitute a quorum at the meeting. Reznick intends to include
abstentions as present or represented for purposes of establishing a quorum.
Driver Meeting
Time, Place and Date
Driver will hold their meeting on , 1999 at 1620 5th Avenue, San Diego,
California 92101, commencing at a.m. local time.
Purpose of the Driver Meeting
The Driver board will be asking the holders of Driver Class A common shares
to approve and adopt the merger agreement and the merger with a wholly-owned
subsidiary of Centerprise and to transact such other business as may properly
come before the meeting.
Record Date; Shares Entitled to Vote
Record holders of Driver Class A common shares at the close of business on
, 1999 are entitled to receive notice of and to vote at the Driver meeting.
On the record date, record holders held an aggregate of shares.
Vote Required
Approval and adoption of the Driver merger agreement and merger requires the
affirmative vote of the holders of a majority of the outstanding Class A common
shares. The Driver board will count the votes.
Each record holder on the record date may cast one vote per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted at the meeting.
The holders of a majority of the outstanding Class A common shares of Driver
must be present to constitute a quorum at the meeting. Driver intends to
include abstentions as present or represented for purposes of establishing a
quorum.
Simione Meeting
Time, Place and Date
Simione will hold their meeting on , 1999 at 555 Long Wharf Drive, New
Haven, Connecticut 06511, commencing at a.m. local time.
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Purpose of the Simione Meeting
The Simione managers will be asking the holders of Simione membership
interests to approve and adopt the merger agreement and the merger with a
wholly-owned subsidiary of Centerprise and to transact such other business as
may properly come before the meeting.
Record Date; Shares Entitled to Vote
Record holders of Simione membership interests at the close of business on
, 1999 are entitled to receive notice of and to vote at the Simione meeting.
On the Simione record date, record holders held an aggregate of
interests.
Vote Required
Approval and adoption of the Simione merger agreement and merger requires
the approval of all of the managers of Simione and the affirmative vote of the
holders of a majority of the membership interests. The Simione board will count
the votes.
Each record holder on the record date may cast one vote per membership
interest, exercisable in person or by properly executed proxy, on each matter
properly submitted at the meeting.
Urbach Meeting
Time, Place and Date
Urbach and UKW Management will hold their joint meeting on , 1999 at 66
State Street, Albany, New York 12207, commencing at a.m. local time.
Purpose of the Joint Urbach/Management Meeting
At this joint meeting, the board and operating committee will be asking the
holders of Urbach common shares and UKW Management membership interests to
approve and adopt the merger agreement and the merger with a wholly-owned
subsidiary of Centerprise and to transact such other business as may properly
come before the meeting.
Record Date; Shares and Interests Entitled to Vote
Each record holder of Urbach common shares at the close of business on ,
1999 is entitled to receive notice of and to vote at this joint meeting. On the
record date, 25 record holders of Urbach common stock held 18,830 shares, and
record holders of UKW Management membership interests held membership
interests.
Vote Required
Approval and adoption of the Urbach merger agreement and merger requires the
affirmative vote of the holders of two-thirds of the outstanding common shares
and a majority of the UKW Management membership interests. The Urbach board and
UKW Management operating committee will count the votes.
Each record holder of Urbach common shares and UKW Management membership
interests on the record date may cast one vote per share or interest, as the
case may be, exercisable in person or by properly executed proxy, on each
matter properly submitted at the meeting.
The holders of a majority of the outstanding Urbach common shares and UKW
Management membership interests outstanding on the record date must be present
to constitute a quorum at the meeting. Urbach and Management intend to include
abstentions as present or represented for purposes of establishing a quorum for
the transaction of business.
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APPROVAL OF THE MERGERS AND RELATED TRANSACTIONS
Background of the Transaction
Centerprise was created to acquire the eleven Centerprise companies in order
to become a leading provider of professional, business and financial services
and products to middle-market clients.
During the period May through August 1998, Centerprise and BGL Capital
Partners, L.L.C. developed a list of companies throughout the United States to
approach regarding possible affiliation with Centerprise. During this period,
Robert C. Basten and representatives of BGL Capital commenced discussions with
representatives of the firms on its target list and, by the end of August 1998,
entered into confidentiality agreements with Reznick, Mann Frankfort, IDA,
Grace and Driver and began negotiating letters of intent.
During August and September 1998, Centerprise continued its affiliation
development efforts and entered into confidentiality agreements with Berry
Dunn, Urbach and Simione; Centerprise also began to negotiate letters of intent
with these firms. On October 5, 1998, Centerprise met with representatives of
Urbach, Simione, Mann Frankfort, Reznick and Berry Dunn, for preliminary
discussions regarding the mergers and Centerprise's strategy. On November 15,
16 and 17, 1998, Centerprise held a meeting at which representatives of the
following companies were present: Reznick, Mann Frankfort, IDA, Grace, Driver,
Berry Dunn, Urbach and Simione. During those meetings, Centerprise management
along with representatives of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, PricewaterhouseCoopers LLP, Centerprise's auditors, and Katten
Muchin & Zavis, Centerprise's legal counsel, gave presentations regarding the
acquisitions of the Centerprise companies and the initial public offering of
Centerprise's common stock. During November 1998, Centerprise executed letters
of intent with Reznick, Mann Frankfort, IDA, Grace, Driver, Berry Dunn, Urbach
and Simione, and commenced its legal and financial due diligence of these
companies.
During November 1998, Messrs. Basten and Lang met with representatives of
Follmer and Holthouse and negotiated and entered into letters of intent with
these firms. Centerprise, PricewaterhouseCoopers LLP and Katten Muchin & Zavis
also began legal and financial due diligence of Follmer and Holthouse during
November 1998. In December 1998, Centerprise agreed to acquire Reppond which
had already been in discussions with Driver for an acquisition by Driver.
At the end of November 1998, Centerprise distributed the first draft of an
acquisition agreement for review and comment to each of Reznick, Mann
Frankfort, IDA, Grace, Driver, Berry Dunn, Urbach and Simione. Centerprise
distributed the first draft of an acquisition agreement for each of Follmer and
Holthouse in December 1998.
During December 1998 and January 1999, PricewaterhouseCoopers LLP began
financial audits of the Centerprise companies on behalf of Centerprise.
Centerprise, PricewaterhouseCoopers and Katten Muchin & Zavis also continued
legal and financial due diligence of the Centerprise companies throughout this
period. Centerprise also began negotiations and discussions with the
Centerprise companies regarding their respective merger agreements. Beginning
in late November 1998, representatives of Centerprise, BGL Capital,
PricewaterhouseCoopers LLP, Katten Muchin & Zavis and all of the Centerprise
companies began to conference by telephone on a weekly basis for further
discussions and negotiations regarding the mergers, the most recent one of
which was held on March 30, 1999. Effective March 31, 1999, the parties
executed the merger agreements.
Centerprise's Reasons for the Mergers
Centerprise was formed on November 9, 1998 for the purpose of acquiring the
eleven Centerprise companies. Centerprise was created to respond to the complex
needs of middle-market clients by providing comprehensive and effective
solutions through an integrated network of expert advisors. Centerprise
believes that industry trends have created a significant opportunity for a
company that provides high quality professional, business and financial
services and products to middle-market clients.
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The Centerprise Companies' Reasons for the Mergers and Recommendations of the
Management of the Centerprise Companies
The management of each of the Centerprise companies has identified a number
of potential benefits of the mergers to security holders of the Centerprise
companies. The potential benefits include the following:
. Centerprise's management will offer the Centerprise companies management
resources and expertise in areas such as strategic planning, marketing,
business development and integration and coordination of the various
business units. In addition, through access to the collective knowledge
and information of all of the Centerprise companies, each Centerprise
company will be in a position to benefit from best practices and
operating efficiencies that will be used for training, continuing
education and practice development throughout Centerprise.
. As part of Centerprise's growth strategy, the Centerprise companies will
serve as platforms for future acquisitions and alliances with
professional, business and financial services firms in regions in which
the Centerprise companies are located. Through these acquisitions and
alliances, the Centerprise companies will be positioned to enhance their
local or regional presence in their markets, and add new business and
financial services and products.
. The mergers offer the Centerprise companies the opportunity to be a part
of a larger and more diversified company with greater financial resources
and visibility as a public company. This, in turn, will assist the
Centerprise companies in attracting, hiring and retaining high quality
professionals.
. The consideration the security holders are receiving in the mergers will
enable them to liquidate a portion of the equity they have in their
respective Centerprise companies. In addition, a substantial portion of
the consideration to be received by security holders of the Centerprise
companies is in the form of an equity interest in a larger and more
diversified professional, business and financial services company that is
expected to benefit strategically, competitively and operationally from
the mergers.
The respective boards of directors or operating boards of the Centerprise
companies also identified a number of potential adverse effects of the mergers
on the security holders of each Centerprise company, including:
. Initial decrease in compensation for certain security holders.
. Dependence on the operating results of the other Centerprise companies.
. The lack of operating history as a combined company.
These and other risk factors may interfere with or undermine the realization
of the potential benefits described above. See "Risk Factors."
In reaching their decisions to approve the respective merger proposals, the
potential benefits described above influenced the boards of each of the
Centerprise companies. The importance of each benefit varied to some extent for
each board; however, each of the benefits positively influenced each board to
some degree.
Interested Persons in the Mergers
In considering the recommendations of the boards of directors or other
governing bodies of the Centerprise companies, the security holders of the
Centerprise companies should be aware that members of the boards or governing
bodies of the Centerprise companies who will be directors or officers of
Centerprise or its subsidiaries have interests in the mergers that may be
considered different from, or in addition to, the interests of the security
holders of the Centerprise companies. The boards of the Centerprise companies
were aware of such interests and considered them in approving the merger
agreements and the mergers.
Directors. Certain members of the boards of Centerprise companies will
become directors of Centerprise upon closing of the mergers. See "Centerprise
Management."
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Driver Employment Agreements. Upon the closing of the Driver merger, Driver
and Centerprise will enter into a five-year employment agreement with P.
Gregory Zimmer pursuant to which he will serve as Senior Vice President and
Chief Financial Officer of Driver. Mr. Zimmer's annual base salary under this
agreement will be $200,000. Mr. Zimmer is also eligible to earn an annual bonus
of up to $200,000. Unless terminated or not renewed by Driver or Mr. Zimmer,
the term of the employment agreement will continue after the initial term on a
year-to-year basis on the same terms and conditions existing at the time of
renewal. If Driver terminates Mr. Zimmer's employment without cause, or if he
voluntarily terminates his employment within 90 days after a "constructive
termination," he will be entitled to severance benefits equal to the product of
three times the sum of the amount of his annual base salary and bonus, if any,
for the calendar year immediately preceding the year in which he is terminated.
Constructive termination under Mr. Zimmer's employment agreement includes:
. Driver assigning duties to Mr. Zimmer that are materially inconsistent
with his position as either Senior Vice President or Chief Financial
Officer of Driver;
. a reduction in salary or bonus opportunity; and
. a change in control of Driver other than pursuant to a change in control
of Centerprise.
In addition, the employment agreements of Mr. Zimmer, Jerold D. Hall and
Thomas W. Corbett contain reciprocal provisions under which the triggering of
Driver's obligations to pay severance to any of such individuals will
constitute a constructive termination of the other two employees.
Messrs. Zimmer, Corbett and Hall also have a limited right of first refusal
with respect to a sale of Centerprise's insurance business. Should Centerprise
decide to accept an offer for the sale of its insurance business to a
"competitor," Messrs. Zimmer, Corbett and Hall will be entitled to lead an
investment group which will have the right, for 45 days after notice, to
purchase Centerprise's insurance business on the same terms. This agreement
defines competitor as commercial property/casualty insurance and insurance
brokerage companies. The agreement will contain a covenant not to compete
whereby, until the second anniversary of the date of termination of employment,
Mr. Zimmer is prohibited from:
. engaging in any business in direct competition with Driver or
Centerprise's business and financial services group in any territory
where Driver or Centerprise conducts such business;
. soliciting for employment a Centerprise employee;
. soliciting or selling any competitive products or services to any person
or entity which is, or has been within one year prior to the date of
termination, a customer of Driver or of Centerprise's business and
financial services group, or that was known by Mr. Zimmer to have been
actively solicited by Centerprise during such period;
. calling upon a prospective acquisition candidate which was approached or
analyzed by Centerprise within one year prior to the termination date,
for the purpose of acquiring the entity; or
. disclosing the identity of any agents or brokers that produce or finance
insurance through Centerprise or any current or prospective policyholder
or premium finance customer for any reason or purpose.
Upon the closing of the IPO, Driver and Centerprise will enter into a five-
year employment agreement with Jerold D. Hall pursuant to which he will serve
as Executive Vice President and Chief Operating Officer of Driver. Mr. Hall's
annual base salary under this agreement will be $230,000. Mr. Hall is also
eligible to earn an annual bonus of up to $250,000. Unless terminated or not
renewed by Driver or Mr. Hall, the term of the employment agreement will
continue after the initial term on a year-to-year basis on the same terms and
conditions existing at the time of renewal. If Driver terminates Mr. Hall's
employment without cause, or if he voluntarily terminates his employment within
90 days after a "constructive termination," he will be entitled to severance
benefits equal to the product of three times the sum of the amount of his
annual base salary, minimum base allowance and bonus, if any, for the calendar
year immediately preceding the year in which he is terminated. Provisions
related to constructive termination under Mr. Hall's employment agreement, as
well as the terms of the covenant not to compete, are substantially the same
provisions as described above for Mr. Zimmer.
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IDA Employment Agreements. Upon the closing of the offering, IDA will enter
into a four-year employment agreement with Russell P. Minetti, pursuant to
which he will serve as IDA's President. Mr. Minetti's annual base salary under
this agreement will be $200,000. Mr. Minetti is also eligible to earn an annual
bonus of up to 50% of base salary for 1999 and up to 100% of base salary
thereafter. Unless terminated or not renewed by IDA or Mr. Minetti, the
agreement will continue after the initial term on a year-to-year basis on the
same terms and conditions existing at the time of renewal. If IDA terminates
Mr. Minetti's employment without cause or Mr. Minetti voluntarily terminates
his employment within 60 days after a "constructive termination," he will be
entitled to severance compensation which includes his base salary and prorated
bonus for the greater of the remainder of his employment term or two years.
Constructive termination under Mr. Minetti's agreement includes:
. demotion to a position substantially below that of IDA's President or the
assignment of duties and responsibilities that are not commensurate with
such position;
. substantial reduction in base salary;
. relocation of the place of employment outside the New Jersey area; or
. a change in control of IDA other than pursuant to a change in control of
Centerprise.
This employment agreement will contain a covenant not to compete whereby,
until the second anniversary of the date of termination of employment, Mr.
Minetti is prohibited from:
. engaging in any business in direct competition with IDA within any
business market where IDA conducts business;
. soliciting or selling any competitive products or services to any person
or entity which is, or has been within one year prior to the date of
termination, a customer of IDA or that was known by Mr. Minetti to have
been actively solicited by IDA during such period;
. soliciting for employment an employee of IDA; or
. calling upon a prospective acquisition candidate which was approached or
analyzed by Centerprise within one year prior to the termination date,
for the purpose of acquiring the entity.
IDA will also enter into an employment agreement with Robert F. Gallo. See
"Centerprise Management--Employment Agreements; Covenants-Not-To-Compete" for a
detailed description of this agreement.
Reppond Employment Agreements. Upon the closing of the offering, Reppond
Company will enter into a five-year employment agreement with Ben Reppond,
pursuant to which he will serve as Reppond Company's Chief Executive Officer
and Senior Vice President and Director of Driver's Employee Benefits division.
Mr. Reppond's annual base salary under this agreement will be $400,000. Mr.
Reppond may be eligible for bonus compensation at the discretion of Driver's
board of directors. If Reppond Company terminates Mr. Reppond's employment
without cause or Mr. Reppond voluntarily terminates his employment within 60
days after a "constructive termination," he will be entitled to severance
compensation consisting of his base salary for the remainder of his employment
term. Constructive termination under Mr. Reppond's agreement includes:
. demotion to a position substantially below that of Reppond Company's
Chief Executive Officer or the assignment of duties and responsibilities
that are not commensurate with such position;
. substantial reduction in base salary; or
. relocation of the place of employment outside the greater Seattle,
Washington metropolitan area.
This employment agreement will contain a covenant not to compete whereby,
until the third anniversary of the date of termination of employment, Mr.
Reppond is prohibited from:
. engaging in any business in direct competition with Centerprise or its
subsidiaries within any business market where Centerprise or any of its
subsidiaries conduct business;
. soliciting or selling any competitive services to any person or entity
which is, or has been within one year prior to the date of termination, a
customer of Centerprise or any of its subsidiaries or that was known by
Mr. Reppond to have been actively solicited by Centerprise or any of its
subsidiaries during such period;
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. soliciting for employment an employee of Centerprise or its subsidiaries;
or
. calling upon a prospective acquisition candidate which was approached or
analyzed by Centerprise or any of its subsidiaries within one year prior
to the termination date, for the purpose of acquiring the entity.
Upon the closing of the offering, Reppond Company will enter into a three-
year employment agreement with Louis R. Baransky, pursuant to which he will
serve as Vice President of Reppond Company and broker. Mr. Baransky will
receive compensation based on his "commission base income" on the following
basis: 20% of the first $1,000,000 in commission base income, 25% of the next
$300,000 in commission base income and 30% of any amount above $1,300,000 in
commission base income. Additionally, if Mr. Baransky is assigned the
administration of business developed by other employees of Reppond Company, Mr.
Baransky will receive a flat 20% commission on such business. If Reppond
Company terminates Mr. Baransky's employment without cause or Mr. Baransky
voluntarily terminates his employment within 60 days after a "constructive
termination," he will be entitled to severance compensation equal to the
average of his monthly compensation for the six months prior to such
termination for the remainder of his employment term. Provisions related to
constructive termination under Mr. Baransky's employment agreement, as well as
the terms of the covenant not to compete, are substantially the same provisions
as described above for Mr. Reppond.
Upon the closing of the offering, VeraSource will enter into a three-year
employment agreement with Scott D. Perry, pursuant to which he will serve as
VeraSource's Vice President. Mr. Perry's annual base salary under this
agreement will be $92,000. Mr. Perry is entitled to bonus compensation in an
amount equal to 5% of the amount, if any, by which the actual revenue of
VeraSource for the applicable 12 month period exceeds $360,000. In the event
VeraSource terminates Mr. Perry's employment without cause or Mr. Perry
voluntarily terminates his employment within 60 days after a "constructive
termination," he will be entitled to severance compensation equal to the amount
of his base salary for the remainder of his employment term. Provisions related
to constructive termination under Mr. Perry's employment agreement, as well as
the terms of the covenant not to compete, are substantially the same provisions
as described above for Mr. Reppond.
Centerprise will also enter into an employment agreement with Thomas W.
Corbett and incentive compensation agreements with each professional services
firm and its former owners. See "Centerprise Management--Employment Agreements;
Covenants-Not-To-Compete" for a detailed description of these agreements.
Certain U.S. Federal Income Tax Consequences
The following is a summary of the material anticipated federal income tax
consequences of the mergers. It does not address any tax consequences to
persons who exercise dissenters' rights. This discussion may not apply to
certain classes of persons subject to special tax treatment, such as foreign
persons, tax-exempt organizations, persons who acquire Centerprise common stock
as compensation, or persons who hold their interests in the Centerprise
companies other than as a capital asset. This discussion is based upon existing
laws, regulations, rulings and decisions, all of which are subject to change,
possibly with retroactive effect. No ruling has been or will be requested from
the Internal Revenue Service on the tax consequences of these mergers.
It is the opinion of Katten Muchin & Zavis that for Federal income tax
purposes, each merger will qualify for treatment under Section 351 of the
Internal Revenue Code. Accordingly:
1. Centerprise company security holders will not recognize gain or loss
with respect to shares of Centerprise common stock received in exchange
for their founding company stock.
2. Each security holder of a Centerprise company who receives cash in
exchange for their company stock will recognize taxable income in an
amount equal to the lesser of:
(1) the amount of cash received in the merger, or
(2) an amount equal to the difference between:
(a)the amount of the cash and the fair market value of the shares of
the Centerprise common stock received, and
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(b)the security holder's adjusted tax basis in the property exchanged
therefor. Such gain will be long-term capital gain if their holding
period in their company stock is more than twelve months.
3. A security holder's holding period for the Centerprise common stock
received in the merger will include the period during which such
security holder held the transferred property.
4. The tax basis of the Centerprise common stock received in the merger
will be equal to the adjusted tax basis that such exchanging security
holder has in their company stock which it transfers in the merger,
determined immediately before the merger, decreased by the amount of
cash received in the merger, and increased by the amount of gain
recognized by such security holder in the merger.
This analysis does not address any state, local or foreign tax consequences
of the mergers, and is not intended as a substitute for careful tax planning,
particularly since certain of the tax consequences of the mergers will not be
the same for all taxpayers. Consequently, you should consult your own tax
advisor as to the specific tax consequences of the mergers as they pertain to
you.
Accounting Treatment
Centerprise will record the mergers under the purchase method of accounting.
Certain Federal Securities Law Consequences
The 12,569,367 shares of Centerprise common stock offered by this prospectus
have been registered under the Securities Act, thereby allowing such shares to
be freely traded without restriction under the Securities Act; provided,
however, that shares held by stockholders who are affiliates of Centerprise
will not be freely tradeable under the Securities Act. Affiliates may not sell
their shares of Centerprise common stock acquired in the mergers except
pursuant to:
(1) an effective registration statement under the Securities Act covering
such shares;
(2) the resale provisions of Rule 145 promulgated under the Securities Act;
or
(3) another applicable exemption from the registration requirements of the
Securities Act.
In general, Rule 145, as currently in effect, imposes restrictions on the
manner in which affiliates may make resales of Centerprise common stock and
also on the number of shares of Centerprise common stock that affiliates, and
others, including persons with whom the affiliates act in concert, may sell
within any three-month period. These restrictions will generally apply for at
least a period of one year after the mergers or longer if the person is an
affiliate of Centerprise.
In addition to securities law restrictions, the merger agreements impose
restrictions on the transferability of shares of common stock issued in the
mergers, including the shares offered by this prospectus. All of the owners of
the Centerprise founding companies have agreed not to sell, transfer or
otherwise dispose of any of the shares of Centerprise common stock acquired in
the mergers for a period of 18 months following the IPO. Effective 18 months
after the IPO, 20% of each stockholder's shares will be released from such
restrictions, and an additional 20% of the original number of restricted shares
will be released on the expiration of each six-month period thereafter.
Shares held by stockholders who are employees of Centerprise or a
Centerprise founding company are subject to additional restrictions. If a
stockholder's employment with a Centerprise company is terminated within 30
months of the IPO, other than through death, disability, retirement or
circumstances approved by management of the Centerprise company and by
Centerprise's chief executive officer, restricted shares then held by such
stockholder will remain restricted until the fifth anniversary of the IPO. The
owners and employees of the Centerprise companies have certain piggyback
registration rights beginning on the second anniversary of the IPO with respect
to shares that have been released from transfer restrictions. The certificates
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representing the shares issued in the mergers and shares issued to initial
investors and management will bear a legend describing the applicable transfer
restrictions. In addition, Centerprise and the owners and employees of the
Centerprise companies have agreed with certain exceptions, not to offer,
pledge, sell, contract to sell or otherwise dispose of any shares of common
stock, or any securities convertible into or exchangeable for common stock, for
a period of 180 days following the date of the prospectus related to the IPO
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
New York Stock Exchange Listing
Centerprise has applied to list the shares of Centerprise common stock to be
issued in the merger, including the shares of Centerprise common stock issuable
pursuant to the bonus plans, on The New York Stock Exchange.
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THE MERGER AGREEMENTS
Following is a summary that describes the structure and provides you with
the material provisions of the merger agreements. The merger agreements have
been filed as exhibits to Centerprise's registration statement on Form S-4. See
"Where You Can Find More Information."
Structure of the Mergers
The following is a summary of the merger structure for each of the
Centerprise companies:
.Berry Dunn
Prior to the Berry Dunn merger, stockholders of Berry Dunn will
contribute their shares to a newly formed Maine limited liability
company. Berry Dunn will convert from a professional service corporation
to a business corporation. A wholly-owned subsidiary of Centerprise will
then merge with and into Berry Dunn, leaving Berry Dunn as the surviving
company and a wholly-owned subsidiary of Centerprise.
.Driver
Pursuant to the Driver merger, a wholly-owned subsidiary of Centerprise
will merge with and into Driver, leaving Driver as the surviving company
and a wholly-owned subsidiary of Centerprise.
.Follmer
Prior to the Follmer merger, the stockholders of Follmer will transfer
their shares to a newly formed Michigan limited liability company.
Follmer will convert from a professional corporation to a business
corporation. A wholly-owned subsidiary of Centerprise will then merge
with and into Follmer, leaving Follmer as the surviving company and a
wholly-owned subsidiary of Centerprise.
.Grace
The stockholders of Grace have transferred their shares to a newly formed
Missouri limited liability partnership. Grace will convert from a
professional corporation to a business corporation. A wholly-owned
subsidiary of Centerprise will then merge with and into Grace, leaving
Grace as the surviving company and a wholly-owned subsidiary of
Centerprise.
.Holthouse
Holthouse is a limited liability partnership owned by seven professional
corporations and one individual partner. Holthouse will transfer all of
its assets to a newly formed Delaware limited liability company. The
partners will dissolve Holthouse and, in exchange for each of their
partnership interests in Holthouse, will receive membership interests in
the newly formed limited liability company. Prior to the closing, the
individual partner will transfer her interest in the limited liability
company to a newly formed Delaware limited liability company. Each
professional corporation will convert into a business corporation.
Wholly-owned subsidiaries of Centerprise will merge with and into each
entity owned by a Holthouse partner, and each such entity will survive
the merger and be a wholly-owned subsidiary of Centerprise.
.IDA
Pursuant to the IDA merger, a wholly-owned subsidiary of Centerprise will
merge with and into IDA, leaving IDA as the surviving company and a
wholly-owned subsidiary of Centerprise.
.Mann Frankfort
Prior to the Mann Frankfort merger, Mann Frankfort will convert from a
professional corporation to a business corporation. A wholly-owned
subsidiary of Centerprise will merge with and into Mann Frankfort,
leaving Mann Frankfort as the surviving company and a wholly-owned
subsidiary of Centerprise.
.Reppond
Pursuant to the Reppond merger, wholly-owned subsidiaries of Centerprise
will merge with and into each of Reppond Company, Reppond Administrators
and VeraSource, leaving Reppond Company, Reppond Administrators and
VeraSource as the surviving entities and wholly-owned subsidiaries of
Centerprise.
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.Reznick
The stockholders of Reznick have transferred their shares to a newly
formed Maryland limited liability company. Reznick will convert from a
professional corporation to a business corporation. A wholly-owned
subsidiary of Centerprise will then merge with and into Reznick, leaving
Reznick as the surviving company and a wholly-owned subsidiary of
Centerprise.
.Simione
Simione will transfer to a wholly-owned Delaware limited liability
company substantially all of Simione's assets and liabilities other than
certain current assets and liabilities and the assets and liabilities
relating to the provision of attest services. This new limited liability
company will then merge with and into a wholly-owned subsidiary of
Centerprise, leaving such Centerprise subsidiary as the surviving entity
and a wholly-owned subsidiary of Centerprise.
.Urbach
Urbach will merge with and into a newly formed Massachusetts professional
corporation and convert to a business corporation. Following this merger
and conversion, the stockholders of Urbach will transfer their shares to
a newly formed Delaware limited liability company. A wholly-owned
subsidiary of Centerprise will merge with and into Urbach, leaving Urbach
as the surviving company and a wholly-owned subsidiary of Centerprise.
Conditions to Each Party's Obligations to Effect the Mergers
Completion of the mergers is subject to the satisfaction of the following
conditions:
. Underwriting Agreement. Centerprise and the underwriters shall have
executed the underwriting agreement related to the IPO and the closing of
the sale of Centerprise common stock to the underwriters pursuant thereto
shall have occurred simultaneously with the closing of the mergers.
. Closings of the Mergers. Centerprise and each of the eleven founding
companies shall have closed all the mergers simultaneously, unless
terminated in accordance with the respective merger agreements.
. Securities Approvals. This registration statement and the registration
statement on Form S-1 registering the Centerprise shares to be offered in
the IPO shall have become effective under the Securities Act, and no stop
order suspending the effectiveness of such registration statements shall
have been issued and remain in effect, and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any state
regulatory authorities.
. Injunctions. No preliminary or permanent injunction or other order or
decree shall be pending before or issued by any federal or state court,
which seeks to prevent or prevents the consummation of the IPO or any of
the mergers and remains in effect.
. Minimum Price. The initial public offering price of the Centerprise
common stock shall not be less than $11.90 per share.
. No Government Action. No state or federal government or government agency
in the United States shall have taken any action, and no statute, rule or
regulation shall have been enacted, which would prevent the completion of
any of the mergers or make the completion of the mergers illegal.
. Consents. All material governmental and third party waivers, consents and
members' approvals required for the completion of the mergers and the
transactions contemplated by the merger agreements shall have been
obtained and be in effect.
. No Legal Proceedings. No third party shall have filed or threatened an
action, suit or proceeding with respect to the mergers that remains
threatened or pending before any court, governmental authority or
regulatory person.
. Authorization. The requisite number of security holders of each
respective Centerprise company shall have approved and adopted the merger
agreements, the mergers and the transactions contemplated thereby in the
manner required by any applicable law and the respective organizational
documents.
. Credit Facility. Centerprise shall have entered into one or more credit
facilities providing for aggregate commitments of not less than $75
million.
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Conditions to Obligations of each Centerprise Company and its Security Holders
to Effect the Mergers
In addition, unless waived by the applicable Centerprise founding company,
the obligation of each Centerprise founding company and its security holders to
consummate each respective merger is subject to additional conditions,
including:
. Representations and Warranties. The representations and warranties of
Centerprise contained in each merger agreement shall be accurate in all
material respects.
. Covenants. Centerprise and each merger subsidiary shall have performed in
all material respects the covenants required by each merger agreement.
. Legal Opinion. Each Centerprise company shall have received a legal
opinion from counsel to Centerprise.
. Incentive Compensation Agreement. Each of the security holders of each of
the Centerprise founding companies, other than Driver, IDA and Reppond,
shall have been afforded the opportunity to enter into an incentive
compensation agreement with Centerprise.
. Employment Agreements. Certain officers of Driver, IDA and Reppond shall
have been afforded the opportunity to enter into employment agreements
with Centerprise.
. Stockholders' Agreement. The security holders of each Centerprise Company
and the other stockholders of Centerprise, other than those acquiring
stock in the IPO, shall have entered into a stockholders' agreement.
. Other Mergers. The parties to the other mergers shall have satisfied all
conditions to their mergers.
Conditions to Obligations of Centerprise to Effect the Mergers
In addition, unless waived by Centerprise, the obligation of Centerprise to
complete each merger is subject to conditions, including:
. Representations and Warranties. The representations and warranties of
each Centerprise company and its security holders contained in the
applicable merger agreement shall be accurate in all material respects.
. Covenants. Each Centerprise company and its security holders shall have
performed in all material respects the covenants required by the
applicable merger agreement.
. Legal Opinion. Centerprise shall have received a legal opinion from
counsel to each Centerprise company.
. Comfort Letters. Centerprise and the underwriters shall have received
comfort letters in customary form from each of the Centerprise company's
independent public accountants, dated the effective date of the Form S-1
and the closing date, or such other date reasonably acceptable to
Centerprise, with respect to certain financial statements and other
financial information included in the Form S-1 and any subsequent changes
in specified balance sheet and income statement items, including total
assets, working capital, total security holders' equity, total revenue
and the total per share amounts of net income.
. Stockholders' Agreement. The security holders of each Centerprise
founding company shall have executed the stockholders' agreement.
In addition, with respect to the mergers with the Centerprise companies
other than Driver, IDA and Reppond, it shall be a further condition to
Centerprise's obligation to close that these firms divest all attest services
to the Attest Firms and execute a separate practice agreement, services
agreement and incentive compensation agreement. See "Business of Centerprise
After the Mergers--Employee Incentives" and "Certain Transactions--The
Mergers."
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<PAGE>
Closing of the Mergers and Effective Time of the Mergers
The closing of the transactions provided for in each merger agreement will
occur on the date on which the IPO is completed. Each merger will occur at the
time specified in the applicable certificate of merger is filed with the
Secretary of State of the applicable state.
Conduct of the Centerprise Companies' Businesses Prior to the Mergers
Under each merger agreement, during the period from the date of the merger
agreement and continuing until the earlier of the termination of merger
agreement and the closing date, each Centerprise company agreed to conduct its
business in the ordinary and usual course and consistent with past practices,
to use commercially reasonable efforts to preserve intact its business
organization and goodwill, to keep available the services of its present
officers and key employees, to preserve the goodwill and business relationships
with clients and others having business relationships with it and not to engage
in any action, directly or indirectly, with the intent adversely to impact the
transactions contemplated by the applicable merger agreement. Each merger
agreement places restrictions on the ability of the applicable Centerprise
company to amend its organizational documents, issue or sell securities or
grant options therefor, alter its capital structure, pay dividends or
distributions, make material acquisitions, make material dispositions of
assets, incur indebtedness or increase employee compensation or severance
benefits.
No Solicitation
Prior to the closing date or earlier termination of the applicable merger
agreement, each Centerprise company and its security holders will not, and the
Centerprise company will use its diligent efforts to cause its subsidiaries,
directors, officers, agents and advisers not to, initiate, solicit, negotiate,
encourage or provide non-public or confidential information to facilitate any
proposal or offer to acquire all or any substantial part of the business and
properties of the Centerprise company or any equity interest therein, and
promptly advise Centerprise of the terms of any communications the Centerprise
company or its security holders may receive or become aware of relating to any
of the foregoing.
Termination of Each Merger Agreement
Each merger agreement may be terminated and the merger transactions may be
abandoned:
(a) at any time prior to the closing date by mutual agreement of all
parties;
(b) in the event that:
. a Centerprise company seeks to amend or supplement certain
schedules of the applicable merger agreement;
. such amendment or supplement constitutes or reflects a material
adverse effect on the operations, assets, condition, operating
results, client relations or prospects of the Centerprise company;
and
. Centerprise and a majority of the Centerprise companies do not
consent to such amendment or supplement;
(c) at any time prior to the closing date by Centerprise:
. if the merger is not completed by August 31, 1999 other than on
account of delay or default on the part of Centerprise or any of
its stockholders or any of their affiliates or associates;
. if the merger is enjoined by a final, unappealable court order not
entered at the request or with the support of Centerprise or any
of its stockholders or any of their affiliates or associates;
. if the applicable founding company fails to perform in any
material respect any of its material covenants in the respective
merger agreement and does not cure such default in all material
respects within 30 days after written notice of such default is
given to the applicable founding company by Centerprise; or
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<PAGE>
. if the security holders of the applicable founding company fail to
perform in any material respect any of their material covenants in
the respective merger agreement and do not cure such default in
all material respects within 30 days after written notice of such
default is given to the security holder representative by
Centerprise;
(d) by mutual consent of the managers, general partners or boards of
directors of the founding company, as applicable, and the board of
directors of Centerprise;
(e) at any time prior to the closing date by the applicable founding
company:
. if the related merger is not completed by August 31, 1999 other
than on account of delay or default on the part of the applicable
founding company or its security holders, or any of their
affiliates or associates;
. if the related merger is enjoined by a final, unappealable court
order not entered at the request or with the support of the
applicable founding company or its security holders, or any of
their affiliates or associates; or
. if Centerprise fails to perform in any material respect any of its
material covenants in the related merger agreement and does not
cure such default in all material respects within 30 days after
written notice of such default is given to Centerprise.
Expenses; Fees
Each party will pay the fees and expenses it incurs in connection with the
merger agreements, whether or not the merger is completed. Centerprise will pay
the fees and expenses associated with its IPO and this joint information
statement/prospectus, whether or not the IPO is completed.
Exchange/Issuance of Stock Certificates in the Mergers
After each merger, each security holder in a founding company, other than
those security holders who take required actions to properly assert their
dissenters' rights under the applicable state law, will be entitled to receive
certificates evidencing the number of shares of Centerprise common stock into
which such securities are converted in each merger. Shares of Centerprise
common stock into which such securities are to be converted in each merger are
deemed to have been issued at the effective time of each merger.
Dissenters' Rights Regarding the Mergers
State law entitles the record holders of shares of founding companies who
follow the procedures specified by law to have their shares appraised and to
receive the "fair value" of such shares in place of the consideration paid in
the merger. The following discussion summarizes the applicable procedures that
a record holder of a founding company must follow to demand and perfect their
rights under state law. Because of the structure and mechanics of the various
merger transactions, the holders of Berry Dunn, Follmer, Grace, Holthouse, IDA,
Reznick and Simione are not entitled to dissenters' rights.
Driver
Although Driver is incorporated in Delaware, as a corporation conducting
substantial business in California with more than half of its record holders
having addresses in California, it is also subject to provisions of the
California Corporations Code. Record holders of Driver common stock who do not
desire to have their shares converted into shares of Centerprise common stock
pursuant to the merger may choose to follow the procedures specified by either
California law or Delaware law or both.
California Law
The following is a summary of Sections 1300 through 1304 of the California
Corporations Code, the provisions of which are reproduced as Appendix A to this
joint information statement/prospectus. Driver stockholders should carefully
review California law as well as the information discussed below to determine
their dissenters' rights.
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<PAGE>
If a Driver stockholder elects to exercise its dissenters rights under
California law, such stockholder must do ALL of the following:
(1) not vote in favor of the merger;
(2) within 30 days after Driver mails a notice of approval of the merger
mail or deliver to Driver a written demand stating:
. such dissenting stockholder's demand to have its shares purchased
. the number of shares held by such dissenting stockholder that the
stockholder demands that Driver purchase and
. such dissenting stockholder's claim of the fair market value of
the shares as of March 30, 1999, the day before the announcement
of the Driver merger. Such statement of fair market value
constitutes an offer by the dissenting stockholder to sell the
shares at such price; and
(3) within 30 days after Driver mails a notice of approval of the
merger, submit to Driver the dissenting stockholder's share certificates
stamped or endorsed with a statement that the shares are dissenting shares.
All written demands or submission of share certificates should be addressed
to: President, Robert F. Driver Co., Inc., 1620 Fifth Avenue, San Diego,
California 92101-2797.
Within 10 days after approval of the merger by Driver's security holders,
Driver will mail an approval notice to each dissenting security holder who has
not voted in favor of the merger, together with a statement of the price
determined by Driver to represent the fair market value of the shares held by
such dissenting security holder, a brief description of the procedures to be
followed in order for such dissenting security holder to pursue dissenters'
rights, and a copy of Sections 1300 through 1304 of the California code. The
statement of price by Driver constitutes an offer by Driver to purchase all
shares held by a dissenting security holder at the stated amount.
If Driver and the dissenting security holder agree that such dissenting
security holder is entitled to receive payment for the shares of Driver held by
such dissenting security holder and agree upon the price of such shares, Driver
must pay the dissenting security holder such agreed upon price plus interest
thereon within 30 days from the later of the date upon which such price was
agreed or the date all contractual conditions to the applicable merger are
satisfied.
If Driver denies that such dissenting security holder is entitled to receive
payment for the shares of Driver held by such dissenting security holder or if
Driver and the dissenting security holder fail to agree upon the fair market
value of shares of Driver common stock, then within six months after the date
that the approval notice was mailed to the dissenting security holders, any
dissenting security holder who has made a valid written purchase demand and who
has not voted in favor of the Driver merger may file a complaint in California
superior court requesting a determination as to whether such dissenting
security holder is entitled to receive payment for the shares of Driver held by
such dissenting security holder or as to the fair market value of such
dissenting security holder's shares of Driver common stock.
Delaware law
The following is a summary of Section 262 of the Delaware General
Corporations Law, the provisions of which are reproduced as Appendix B to this
joint information statement/prospectus. Driver stockholders should carefully
review Delaware law as well as the information discussed below to determine
their dissenters' rights.
If a Driver stockholder elects to exercise its dissenters rights under
Section 262 of Delaware law, such stockholder must do ALL of the following:
(1) before the vote is taken at the Driver meeting, file with Driver a
written demand for appraisal identifying the stockholder and expressly
requesting an appraisal; this written demand for appraisal must be in
addition to and separate from any vote against the merger agreement;
neither voting against,
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<PAGE>
abstaining from voting nor failing to vote on the merger agreement will
constitute a demand for appraisal within the meaning of Section 262 of
Delaware law;
(2) not vote in favor of the merger agreement; and
(3) continuously hold such shares through the effective time of the
merger.
All written demands for appraisal should be addressed to: President, Robert
F. Driver Co., Inc., 1620 Fifth Avenue, San Diego, California 92101-2797.
Within 10 days after the effective date of such merger, Driver will notify
each stockholder who has satisfied the requirements of Section 262 of Delaware
law and not voted for the merger that the merger became effective. Within 120
days after the effective date of the merger, Driver or any stockholder
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the Driver stock held by all
dissenting stockholders.
If a petition for appraisal is timely filed, the court will determine which
stockholders are entitled to appraisal rights and thereafter will determine
the fair value of the Driver shares held by dissenting stockholders, excluding
any element of value arising from the accomplishment or expectation of the
merger, but together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. In determining such fair value, the
court shall take into account all relevant factors. If a petition for
appraisal is not timely filed, then the right to appraisal shall cease.
The costs of the proceeding may be determined by the court and taxed upon
the parties as the court deems equitable in the circumstances. Upon
application of a stockholder, the court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
From and after the effective date of the merger, no dissenting stockholder
shall have any rights of a Driver stockholder with respect to such holder's
shares for any purpose, except to receive payment of its fair value and to
receive dividends or other distributions payable to Driver stockholders of
record at a date which is prior to the effective date of the merger. If a
dissenting stockholder delivers to Driver a written withdrawal of the demand
for an appraisal within 60 days after the effective date of the merger or
thereafter with the written approval of Driver, then the right of such
stockholder to an appraisal shall cease and such dissenting stockholder will
be entitled to receive only the merger consideration.
Urbach
The following is a summary of Sections 623 and 910 of the New York Business
Corporations Law, which sets forth the procedures that a dissenting Urbach
security holder must follow in order to perfect dissenters' rights under New
York law. Urbach shareholders should carefully review New York law as well as
the information discussed below to determine their dissenters' rights.
If an Urbach shareholder elects to exercise its dissenters' rights under
New York law, such shareholder must do ALL of the following:
(1) before the vote is taken at the Urbach meeting, file with Urbach a
written objection that includes:
. a notice of election to dissent from the merger
. such shareholder's name and residence address
. the number and class of shares as to which such shareholder is
asserting dissenters' rights, and
. a demand for payment of the fair value of such shares if the
merger is approved;
(2) not vote in favor of the merger agreement; and
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<PAGE>
(3) within one month after filing with Urbach a written objection,
submit to Urbach all share certificates representing Urbach stock for which
such shareholder is asserting dissenters' rights.
All written objections and submissions should be addressed to: President,
Urbach Kahn & Werlin, 66 State Street, Albany, New York 12207.
Within 10 days after approval of the merger, Urbach will give written
notice of such approval to each dissenting security holder who filed a written
objection and who did not vote in favor of the merger. Within 15 days after
the effective time of the merger, Urbach will offer to pay each dissenting
security holder a price that Urbach believes to be a "fair value" for the
Urbach shares held by such dissenting holder. Urbach will offer the same price
per share to all dissenting shareholders. At the time such offer is made,
Urbach will provide to each dissenting security holder
(1) who has submitted the certificates evidencing the applicable shares
of Urbach an advanced payment equal to 80% of the offer price, and
(2) who has not yet submitted the requisite certificates, a statement
that it will make an advanced payment equal to 80% of the offer price
promptly upon the submission of such certificates.
Within 30 days after the date of such offer, a dissenting holder may accept
the offer or agree with Urbach upon an alternate value for the dissenting
security holder's shares. If Urbach fails to make an offer within the required
15-day period discussed above or a dissenting security holder rejects the
offer and does not otherwise agree with Urbach within such 30 day period upon
a value for the Urbach shares held by such holder, then Urbach will institute
a special proceeding in the New York Supreme Court within 20 days after the
expiration of the 15 or 30-day period discussed above, as the case may be, to
determine the rights of the dissenting security holder and to fix the fair
value of such holder's shares.
The court will determine whether the holders are entitled to dissenters'
rights and the fair value for such shares. In determining such fair value, the
court will consider the nature of the transaction giving rise to the
dissenting holder's right to receive payment, the effects of the transaction
on Urbach and the security holders, the concepts and methods customarily used
in the relevant securities and financial markets to determine the value of the
share of a corporation engaging in a similar transaction under comparable
circumstances, and all other relevant factors. Each party to the proceeding
must bear its own costs and expenses, including attorneys' and experts' fees,
unless the court, in its discretion, assesses all or part of such costs and
expenses against either the dissenting holder or Urbach, as applicable.
Mann Frankfort
The following is a summary of Articles 5.11 and 5.12 of the Texas Business
Corporation Act, which sets forth the procedures that a dissenting Mann
Frankfort security holder must follow in order to perfect dissenters' rights
under Texas law.
If a Mann Frankfort shareholder elects to exercise its dissenters' rights
under Texas law, such shareholder must do ALL of the following:
(1) prior to the Mann Frankfort meeting, file with Mann Frankfort a
written objection that includes:
. a statement to the effect that such shareholder intends to
exercise dissenters' rights if the merger is approved, and
. such shareholder's address;
(2) not vote in favor of the merger; and
(3) within 10 days from the date of a notice from Mann Frankfort that
the merger has been approved, which notice is required to be given within
10 days of the approval, make a written demand to Mann Frankfort for
payment of the fair value of the Mann Frankfort shares held by such
shareholder. This
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<PAGE>
demand must state the number and class of shares owned by such shareholder
and the estimated fair value of such shares determined by such shareholder.
All written objections and demands should be addressed to: President, Mann
Frankfort Stein & Lipp, 12 East Greenway Plaza, Suite 800, Houston, Texas
77046.
Mann Frankfort will deliver notice that the merger was approved to each
shareholder who timely filed a written objection and who did not vote in favor
of the merger within 20 days after Mann Frankfort receives a demand for payment
of the fair value of Mann Frankfort shares held by such dissenting holder, Mann
Frankfort will send such holder a written notice to the effect that Mann
Frankfort will pay either the amount claimed or some other amount as the fair
value. If Mann Frankfort and the dissenting holder cannot agree upon the fair
value, either party may file a petition in Texas court asking for a finding and
determination of the fair value of such shares. Texas law defines "fair value"
to mean the value of the shares as of the day immediately preceding the
meeting, excluding any appreciation or depreciation in anticipation of the
proposed merger. The parties shall allocate court costs between themselves in
such manner as the court shall determine to be fair and equitable.
Reppond
The following is a summary of Sections 23B.13.020 through 23B.13.310 of the
Washington Business Corporations Act, which sets forth the procedures that a
dissenting Reppond Company or VeraSource shareholder must follow in order to
perfect dissenters' rights under Washington law. Reppond Company and VeraSource
shareholders should carefully review Washington law, which is included as
Appendix C, as well as the information discussed below to determine their
dissenters' rights.
If a Reppond Company or VeraSource shareholder elects to exercise its
dissenters' rights, such stockholder must do ALL of the following:
(1) prior to the Reppond meeting, deliver to Reppond Company or
VeraSource a written notice demanding payment for its shares if the merger
is approved; and
(2) not vote in favor of the merger agreement.
All written objections and demands for payment should be addressed to:
President, The Reppond Company, 10900 N.E. 4th Street, Suite 1200, Bellevue,
Washington 98004.
Within 10 days of the effective date of the merger, Reppond will give
written notice to each dissenting shareholder stating where the demand for
payment must be sent, informing holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is received,
supplying a form for the demand of such payment and setting a date by which
Reppond must receive the payment demand.
By the date set forth in Reppond's notice, a dissenting shareholder must
demand payment, certify that it acquired beneficial ownership of the shares
before the date set forth in Reppond's notice and deposit with Reppond the
shareholder's certificates. Reppond will pay each dissenting shareholder who
timely complied with these requirements the amount Reppond estimates to be the
fair value of the dissenting security holder's shares, plus accrued interest.
Under Washington law, a dissenting shareholder may notify Reppond in writing
of its own estimate of the fair value of its shares and amount of interest due
if:
. it believes the amount paid is less than the fair value of its shares, or
the interest due was incorrectly calculated;
. Reppond fails to make payment within 60 days after the date set for
demanding payment; or
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<PAGE>
. Reppond does not effect the proposed merger and does not return the
deposited certificates or release the transfer restrictions imposed on
uncertificated shares within 60 days after the date set for demanding
payment.
If a demand for payment remains unsettled, within 60 days after receiving
the payment demand Reppond must petition the Washington court to determine the
fair value of the shares plus accrued interest. If Reppond does not timely
commence the proceeding, it must pay each dissenting shareholder whose demand
remains unsettled the amount demanded.
The following is a summary of Sections 25.15.425 through 25.15.480 of the
Washington Limited Liability Company Act which sets forth the procedures that a
dissenting Reppond Administrators member must follow in order to perfect
dissenters' rights under Washington law. Reppond Administrators members should
carefully review Washington law, which is included as Appendix C, as well as
the information discussed below to determine their dissenters' rights.
If a Reppond Administrators member elects to exercise its dissenters' rights
under Washington law, such member must do ALL of the following:
(1) prior to the Reppond Administrators meeting, deliver to Reppond
Administrators a written objection to the proposed merger; and
(2) not vote in favor of the merger agreement.
All written objections and demands for payment should be addressed to:
President, The Reppond Company, 10900 N.E. 4th Street, Suite 1200, Bellevue,
Washington 98004.
Within 10 days of approval of the merger, Reppond Administrators will give
written notice to each dissenting member stating that the plan of merger was
approved, where the payment demand must be sent, the extent transfer of the
member's interest will be restricted after the payment demand is received. Such
notice will include a form for demanding payment and set a date by which
Reppond Administrators must receive the demand.
Within 30 days of the later of the date that the merger becomes effective or
the date payment demand is received, Reppond Administrators shall pay to the
dissenting member the amount it estimates to be the fair market value of the
dissenting member's interest, plus accrued interest.
Within 30 days of such payment, a dissenting member may notify Reppond
Administrators in writing of its own estimate of the fair value of its interest
and amount of interest due and demand payment of its estimate less payment
already made to it by Reppond Administrators if:
. it believes the amount paid is less than the fair value of its interest,
or the interest due was incorrectly calculated;
. Reppond Administrators fails to make payment within 60 days after the
date set for demanding payment; or
. Reppond Administrators, having failed to complete the merger, does not
release the transfer restrictions imposed on its interests within 60 days
after the date set for demanding payment.
If a demand for payment remains unsettled, Reppond Administrators must
commence a proceeding in superior court within 60 days after receiving the
payment demand and petition the court to determine the fair value of the
dissenting member's interest in Reppond Administrators plus accrued interest.
If Reppond Administrators does not timely commence the proceeding, it must pay
each dissenting member whose demand remains unsettled the amount demanded.
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Government and Regulatory Approvals
It is a condition to the consummation of the transactions contemplated by
each merger agreement that each of the Centerprise companies must have received
necessary government and regulatory approvals prior to the merger. At any time
before or after the effective time of the mergers the Federal Trade Commission
or the Antitrust Division of the United States Department of Justice or any
state could take action pursuant to the federal or state antitrust laws to seek
to enjoin the consummation of a particular merger. Private parties may also
seek to take legal action under the antitrust laws. Based on information
available to them, each of the Centerprise companies believes that the merger
applicable to each such Centerprise company can be effected in compliance with
federal and state antitrust laws. None of the Centerprise companies is aware of
any governmental or regulatory approvals required for the completion of the
applicable merger, other than compliance with federal and applicable state
securities and corporate laws.
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CENTERPRISE SELECTED FINANCIAL DATA
(in thousands, except share and per share data)
Centerprise will acquire eleven companies simultaneously with the completion
of the IPO. For financial statement presentation purposes, Centerprise has been
identified as the "accounting acquiror." The table below presents unaudited pro
forma combined financial data for Centerprise giving effect to the completion
of the mergers and pro forma adjustments to the historical financial
statements. The statement of operations data and the "as adjusted" balance
sheet data also reflect the closing of, and the application of the estimated
net proceeds from, the offering, at an assumed initial public offering price of
$12.50 per share.
The pro forma combined statement of operations data assume that the mergers
and the IPO were completed on January 1, 1998. The pro forma combined balance
sheet data assume that the mergers were completed on March 31, 1999. These data
do not necessarily indicate the operating results or financial position that
would have been achieved had the events described been completed on the dates
assumed. You should not view the results as representative of the future
operating results or financial position of Centerprise. See the unaudited pro
forma combined financial statements and related notes and the historical
financial statements of the Centerprise Companies and related notes included
elsewhere in this prospectus. Selected financial data related to the historical
balance sheet and statement of operations for Centerprise have been omitted as
they are immaterial and do not provide meaningful information.
<TABLE>
<CAPTION>
Pro Forma Combined
-----------------------------------
Three Months Ended
Year Ended March 31,
December 31, ----------------------
1998 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Professional services (1)................ $ 150,096 $ 50,300 $ 59,056
Business and financial services.......... 53,128 12,814 16,328
---------- ---------- ----------
Total revenues......................... 203,224 63,114 75,386
Expenses:
Professional services compensation and
related costs (2)....................... 95,367 29,923 38,218
Business and financial services
compensation and related costs (2)...... 35,358 7,606 9,613
Other operating expenses................. 36,940 9,182 10,711
Non-cash stock compensation (3).......... 18,375 -- 3,442
Amortization of goodwill (4)............. 16,478 4,119 4,119
Depreciation expense..................... 4,927 978 1,182
---------- ---------- ----------
Income (loss) from operations.............. (4,221) 11,306 8,099
Other income (loss), net (5)............... 126 (228) 228
---------- ---------- ----------
Income (loss) before income taxes.......... (4,095) 11,078 8,327
Provision for income taxes (6)............. 4,953 6,079 4,979
---------- ---------- ----------
Net income (loss).......................... $ (9,048) $ 4,999 $ 3,348
========== ========== ==========
Net income (loss) per share................ $ (0.34) $ 0.19 $ 0.13
========== ========== ==========
Shares used in computing net income per
share (7)................................. 26,343,290 26,343,290 26,343,290
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
------------------
Pro Forma As
Combined Adjusted
--------- --------
<S> <C> <C>
Balance Sheet Data:
Working capital deficit................................... $ 96,787 $ 2,208
Total assets.............................................. 310,808 313,459
Total long-term debt, net of current portion.............. 24,937 8,980
Stockholders' equity...................................... 132,107 246,643
</TABLE>
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<PAGE>
- --------
(1) Includes pro forma revenues associated with services agreements of $63,785,
$23,912 and $26,469 for the year ended December 31, 1998 and the three
months ended March 31, 1998 and 1999, respectively. The services agreements
are non-exclusive and, with twelve months notice, the attest firms may
change their staffing requirements. Accordingly, the pro forma service
agreement revenues reflected above are not necessarily representative of
Centerprise's results of operations for any future period. However,
Centerprise believes that were the agreements in place for the entire
period, the profits recognized by Centerprise would have materially
approximated the profits derived from attest services.
(2) Reflects pro forma reductions in compensation and benefits to certain
owners and employees of the founding companies. Such amounts include an
aggregate of approximately $21,980, $9,186 and $7,457 for the year ended
December 31, 1998 and the three months ended March 31, 1998 and 1999,
respectively. These individuals have agreed to these reductions in
employment and incentive compensation agreements which will take effect
upon completion of the offering.
(3) Reflects non-cash, non-recurring stock compensation charges resulting from
the issuance of stock to Centerprise employees of $18,375 and $2,657 in the
year ended December 31, 1998 and the three months ended March 31, 1999,
respectively, and the issuance of stock to Driver employees of $785 in the
three months ended March 31, 1999. Centerprise anticipates no such stock
compensation charges for issuances of stock in the future.
(4) Reflects a non-cash amortization charge over a 15-year period related to
$247,163 of goodwill to be recorded as a result of the mergers and computed
on the basis described in the notes to the unaudited pro forma combined
financial statements.
(5) Reflects a reduction of net interest expense associated with long-term debt
of Driver to be repaid from the proceeds of the offering of $939, $11 and
$425 for the year ended December 31, 1998 and the three months ended March
31, 1998 and 1999, respectively.
(6) Assumes all income is subject to a corporate income tax rate of 40% and
assumes all goodwill is non-deductible.
(7) Includes:
(a) 12,569,367 shares to be issued to the owners and employees of the
founding companies in the mergers;
(b) 3,870,633 shares held by initial investors and management of
Centerprise; and
(c) 9,903,290 of the 10,500,000 shares of common stock sold in the IPO,
net of underwriting discounts, necessary to pay the cash portion of
the merger consideration, to repay indebtedness and fund other
obligations of the founding companies and to pay estimated expenses
of the IPO.
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<PAGE>
CENTERPRISE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following in conjunction with "Centerprise Selected
Financial Data," the pro forma combined financial statements and related notes
and the historical financial statements of the founding companies and related
notes appearing elsewhere in this prospectus.
Introduction
General
Centerprise was created to become a leading provider of diversified
professional, business and financial services and products to a broad spectrum
of middle-market clients. Centerprise has conducted no operations and generated
no revenues to date and has entered into agreements to acquire the founding
companies simultaneously with the closing of the IPO. Centerprise's revenues
are derived primarily from professional services and business and financial
services and products. Centerprise's pro forma combined revenues for the year
ended December 31, 1998 totaled $205.5 million, of which approximately 74% was
derived from professional services and approximately 26% from business and
financial services and products.
Overview--Professional Services--Historical Results of Operations
Centerprise's professional services firms provide a full range of
consulting, accounting and tax services to middle-market clients. The following
table presents the combined historical revenues of Centerprise's professional
services firms for the periods shown:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998
----------- -----------
(Dollars in thousands)
<S> <C>
$124,844 $149,280
</TABLE>
Professional services revenues are primarily affected by the number of
billable hours and the realized rates per hour. Professional services expenses
consist of member compensation and related costs, employee compensation and
related costs and other operating expenses. Member compensation and related
costs include all compensation and compensation-related expenses for senior
professionals who share in each firm's profits. Employee compensation and
related costs include all compensation and compensation-related expenses for
non-member professionals and administrative staff. Other operating expenses
consist of occupancy, information technology systems maintenance, practice
development, training, recruiting, office supplies and other such costs.
Member compensation is primarily affected by the overall profitability of
the firm which is affected by billable hours, realized rates per hour, employee
compensation and related costs and other operating expenses. Employee
compensation and related costs are primarily affected by the demand for
qualified professionals within the professional services industry, a firm's
leverage ratio and engagement efficiencies. Other operating expenses are
primarily affected by the number and experience level of professional and
administrative staff, prevailing rates of compensation, the amount and cost of
leased office space, the firm's investments in information technology, the
frequency of training and the extent to which a firm promotes its practice or
develops new product lines.
Overview--Business and Financial Services--Historical Results of Operations
Centerprise's business and financial services firms provide insurance
brokerage, employee benefits design and administration and related business and
financial services and products to middle-market clients. The following table
presents the combined historical revenues of Centerprise's business and
financial services firms for the periods shown:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998
----------- -----------
(Dollars in thousands)
<S> <C>
$44,916 $51,711
</TABLE>
42
<PAGE>
Insurance brokerage commissions and related revenues are primarily affected
by prevailing insurance premium levels, brokerage commission rates, the number
of policies sold or renewed and the number of clients served. Revenues from
employee benefits design and administration are primarily affected by the
number of insured lives administered, the management fee per life and the
prevailing rates for other services provided. Business and financial services
expenses consist of producer compensation, employee compensation and related
costs and other operating expenses. Producer compensation represents
compensation paid to insurance brokerage producers. Employee compensation and
related costs include all compensation and compensation-related expenses for
management personnel and administrative staff. Other operating expenses consist
of occupancy, information technology systems maintenance, promotional,
training, office supplies and other such costs.
Insurance brokerage producer compensation depends primarily upon the number
of policies sold or renewed as such compensation is typically calculated as a
percentage of commission revenues. Employee compensation and related costs are
primarily affected by the size of the firm's staff, demand for qualified
personnel in the industry and the firm's administrative efficiency. Other
operating expenses are primarily affected by the size of the firm, the amount
and cost of leased office space, the frequency of training and the extent to
which a firm advertises or develops new lines of business.
Overview--Centerprise--Unaudited Pro Forma Combined Results of Operations
The following table sets forth the unaudited pro forma combined operating
results of Centerprise for the year ended December 31, 1998 and the three
months ended March 31, 1998 and 1999. For a discussion of the pro forma
adjustments, see the unaudited pro forma combined financial statements and the
notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended March
Year Ended 31,
December 31, ----------------------------
1998 1998 1999
--------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Professional services........ $150,096 73.9 % $50,300 79.7% $59,056 78.3%
Business and financial
services.................... 53,128 26.1 12,814 20.3 16,328 21.7
-------- ----- ------- ----- ------- -----
203,224 100.0 63,114 100.0 75,384 100.0
Expenses:
Compensation and related
costs....................... 130,725 64.3 37,529 59.5 47,831 63.4
Other operating expenses..... 36,940 18.2 9,182 14.6 10,711 14.2
Non-cash stock compensation.. 18,375 9.1 -- -- 3,442 4.6
Amortization of goodwill..... 16,478 8.1 4,119 6.5 4,119 5.5
Depreciation................. 4,927 2.4 978 1.5 1,182 1.6
-------- ----- ------- ----- ------- -----
Income (loss) from operations.. $ (4,221) (2.1)% $11,306 17.9% $ 8,099 10.7%
======== ===== ======= ===== ======= =====
</TABLE>
Centerprise's expenses consist of payroll and related costs of professional
and administrative personnel, occupancy costs, practice development expenses,
other operating expenses and depreciation and amortization expenses. Payroll
and related costs include base and incentive compensation, related payroll
taxes, group insurance and other employee benefit costs. Occupancy costs
include rent related to office space, parking and repair and maintenance
expenses. Practice development expenses include promotional expenses such as
marketing and advertising and the cost of developing new clients. Other
operating expenses include all other operating costs such as bad debt expense,
travel, computer-operating expenses and other such costs.
Depreciation and amortization expense relates primarily to the depreciation of
computer hardware and software and office furnishings and equipment as well as
the amortization of goodwill associated with the mergers.
Amortization of goodwill reflects the non-cash charge related to the
amortization over 15 years of the excess of purchase price over the fair value
of assets acquired. Because goodwill amortization is a non-cash
43
<PAGE>
charge and is not deductible for tax purposes, it has a direct (dollar for
dollar) effect in reducing income from operations and net income. In the
unaudited pro forma combined results of operations, the loss from operations
and the net loss were approximately $4.2 million and $9.0 million,
respectively, for the year ended December 31, 1998, and income from operations
and net income were approximately $11.3 million and $5.0 million, respectively,
for the three months ended March 31, 1998 and approximately $8.1 million and
$3.3 million, respectively, for the three months ended March 31, 1999. Were it
not for the amortization of goodwill, income from operations and net income in
the unaudited pro forma combined results of operations would have been
approximately $12.3 million and $7.4 million, respectively, for the year ended
December 31, 1998, approximately $15.4 million and $9.1 million, respectively,
for the three months ended March 31, 1998 and approximately $12.2 million and
$7.5 million, respectively, for the three months ended March 31, 1999.
Centerprise has created a unique compensation program for its professional
services firms. Senior professionals' compensation is subject to contractual
agreements regarding the amount and timing of payments made thereunder. These
incentive compensation agreements provide for the retention by Centerprise of a
specified fixed dollar amount ("Centerprise Base Earnings") of each firm's
annual operating earnings before any compensation is paid to the firm's senior
professionals. Such compensation program is designed to provide Centerprise
with a baseline level of earnings before corporate expenses. Operating earnings
in excess of a threshold amount will be subject to a split, with 40% of any
such earnings retained by Centerprise and 60% allocated to the senior
professionals. For more information concerning the compensation agreements,
including the definitions of certain terms, see "Business of Centerprise after
the Mergers--Employee Incentives--Professional Services." See also the
unaudited pro forma combined financial statements and related notes included in
this prospectus.
On a pro forma combined basis, Operating Earnings, as defined below,
Centerprise Base Earnings and senior professionals' compensation would have
been as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1998 March 31, 1999
----------------- ------------------
(Dollars in thousands)
<S> <C> <C>
Operating Earnings................. $56,794 $30,825
Centerprise Base Earnings.......... 29,871 14,178
------- -------
Senior professionals'
compensation...................... $26,923 $16,647
Senior professionals' compensation
as a percentage of Operating
Earnings.......................... 47.4% 54.0%
</TABLE>
As shown in this table, "Operating Earnings" means the combined operating
income of the professional services firms plus related depreciation,
amortization and senior professionals' compensation.
Centerprise expects to realize certain savings following the mergers as a
result of the integration of services, products and offices; operating
efficiencies and purchasing economies of scale in areas such as systems
components and development, telecommunications and other operating expenses;
and the consolidation of insurance, employee benefits and other administrative
expenses. Centerprise has not and cannot quantify these savings until
completion of the mergers and the integration of the founding companies.
Centerprise also expects to incur additional costs associated with public
ownership, corporate management and administration and the initial creation of
its technology infrastructure. However, these costs, except for prospective
compensation payable pursuant to employment agreements with management, cannot
be quantified accurately at this time. Accordingly, except for such prospective
compensation, neither the expected savings nor the expected costs have been
included in the unaudited pro forma combined financial statements of
Centerprise. These various future costs and possible future cost savings may
make useful comparisons of future operating results with historical operating
results difficult.
Centerprise's professional services firms recognize revenues as the related
services are provided and bill clients based upon actual hours incurred on
client projects at expected net realizable rates per hour, plus any out-of-
pocket expenses. The cumulative impact of any subsequent revision in the
estimated realizable value of unbilled fees for a particular client project is
reflected in the period in which the change becomes known. Any
44
<PAGE>
anticipated losses expected to be incurred in connection with the completion of
a project are recognized when known taking into account any fixed price
agreements that may be in process. Outstanding fees receivable are evaluated
each period to assess the adequacy of the allowance for doubtful accounts.
Centerprise's insurance brokerage businesses principally recognize
commission income on the later of the effective date of the policy or the
billing date. Commissions on premiums billed and collected directly by the
insurance company are principally recognized as income when received by
Centerprise. Contingent commissions are recorded when received. Service fee
income is recognized as earned, which is ordinarily over the period in which
the services are provided. Centerprise's third party administration business
recognizes revenues as the related services are provided. Centerprise bills
administration fees for administering its customers' self-insured health plans.
Administration fees are based on a fixed amount per eligible life per month and
Centerprise receives reinsurance commissions from the various reinsurance
carriers utilized. The reinsurance commissions are determined by the terms of
the reinsurance carrier agreements. Outstanding fees receivable are evaluated
each period to assess the adequacy of the allowance for doubtful accounts.
Seasonality
Centerprise's professional services firms regularly experience higher
revenues in the first and second calendar quarters due to a number of factors,
including the seasonality of accounting, tax processing, tax planning and
related professional services. On a pro forma combined basis for the year ended
December 31, 1998, Centerprise generated approximately 31% of its revenues in
the first quarter, 24% in the second quarter, 23% in the third quarter, and 22%
in the fourth quarter. Centerprise believes that quarter-to-quarter comparisons
of results of operations are not necessarily meaningful or indicative of the
results that Centerprise may achieve for any subsequent quarter or fiscal year.
On a prospective basis, Centerprise's baseline earnings from its
professional services firms will be recognized as earned on a basis consistent
with the seasonality of the underlying Subsidiary Operating Earnings.
Centerprise's earnings from professional services firms in excess of baseline
earnings will also be recognized as earned on a seasonal basis.
Historical Attest Revenues
Estimated combined revenues from attest services were approximately $66.0
million, $24.7 million and $27.3 million in the year ended December 31, 1998
and the three months ended March 31, 1998 and 1999, respectively. These
estimated revenues are based on estimates of historical attest services as
defined from state to state and historical average realization rates.
Management believes that the proportion of attest revenues as a percentage of
total revenues in these periods was not materially different from the
proportion in 1996 and 1997. However, detailed records are not available to
support amounts of estimated attest revenues in 1996 and 1997.
While Centerprise will not be providing attest services, substantial
revenues are expected to be earned pursuant to non-exclusive services
agreements with the attest firms. Such services agreement revenues have been
reflected in the unaudited pro forma combined financial statements. Centerprise
believes that were the services agreements in place for the entire period, the
profits recognized by Centerprise would have materially approximated the
profits derived from attest services. However, because the services agreements
are non-exclusive, the amounts reflected in the pro forma financial statements
as "services agreement" fees may not be representative of future ongoing
operations. See "Risk Factors--Regulation of the accounting profession will
constrain Centerprise's operations and impact its structure and numerous issues
arising out of that regulation, its interpretation or its evolution could
impair Centerprise's ability to provide services to some clients, including the
attest firms, reduce its revenues and cause the market value of the common
stock to decline."
Estimated historical attest revenues for each professional services firm are
set forth below. Except as noted, the following table represents estimated
attest revenues for the fiscal year ended December 31, 1998 and the three
months ended March 31, 1999.
45
<PAGE>
<TABLE>
<CAPTION>
Estimated Historical
Attest Revenues
----------------------------
Year ended Three months
December 31, ended March 31,
1998 1999
------------ ---------------
(In thousands)
<S> <C> <C>
Reznick............................................ $24,999 $12,722
Mann Frankfort..................................... 5,439 1,837
Follmer............................................ 7,973 3,672
Berry Dunn......................................... 9,925 3,801
Urbach (a)......................................... 10,706 2,723
Grace.............................................. 2,623 944
Holthouse.......................................... 1,281 547
Simione............................................ 3,094 1,100
------- -------
$66,040 $27,346
======= =======
</TABLE>
- --------
(a) For the year ended January 31, 1999 and the three months ended January 31,
1999.
Pro forma combined results for the three months ended March 31, 1999 compared
to the three months ended March 31, 1998
Revenues. Professional services revenues increased $8.8 million, or 17.4%,
from $50.3 million in the three months ended March 31, 1998 to $59.1 million
in the three months ended March 31, 1999, primarily due to the expansion of
the professional services firms' practices, increases in billing rates,
billable hours, the addition of clients and an increase in revenues derived
from special projects. Business and financial services revenues increased $3.5
million, or 27.4%, from $12.8 million in the three months ended March 31, 1998
to $16.3 million in the three months ended March 31, 1999 due to the
acquisition of insurance brokerage firms, an increase in the insurance
premiums upon which the revenues are based and the addition of new customers.
Compensation and Related Costs. Compensation and related costs increased
$10.3 million, or 27.5%, from $37.5 million in the three months ended March
31, 1998 to $47.8 million in the three months ended March 31, 1999, primarily
due to salary increases, and staff additions. As a percentage of revenues,
these expenses increased from 59.5% in the three months ended March 31, 1998
to 63.4% in the three months ended March 31, 1999.
Other Operating Expenses. Other operating expenses increased $1.5 million,
or 16.7%, from $9.2 million in the three months ended March 31, 1998 to $10.7
million in the three months ended March 31, 1999, primarily due to non-
recurring stock compensation to management of Centerprise as well as an
increase in occupancy costs, selling, general and administrative expenses and
legal fees related to the mergers. As a percentage of revenues, these expenses
decreased from 14.6% in the three months ended March 31, 1998 to 14.2% in the
three months ended March 31, 1999.
Non-cash Stock Compensation. Non-cash, non-recurring stock compensation in
the three months ended March 31, 1999 totaled $3.4 million, or 4.6% of
revenues. This reflects charges resulting from the issuance of stock to
employees of $2.7 million at Centerprise and $785,000 at Driver. Centerprise
anticipates no such stock compensation charges for issuances of stock in the
future.
Depreciation. Depreciation expense increased $204,000 or 20.9% from
$978,000 in the three months ended March 31, 1998 to $1.2 million in the three
months ended March 31, 1999, primarily due to an increase in depreciation
expense resulting from additional equipment and leasehold improvement
purchases. As a percentage of revenues, these expenses increased from 1.5% in
the three months ended March 31, 1998 to 1.6% in the three months ended March
31, 1999.
Pro Forma Combined Liquidity and Capital Resources
The principal sources of liquidity for the founding companies have
historically been cash flows from operating activities. After the completion
of the mergers and the IPO, Centerprise will have a working capital deficit of
approximately $2.2 million. Centerprise expects to repay approximately $18.0
million of short-term and long-term debt of Driver, from the net proceeds of
the IPO. Driver incurred the debt in connection with a recapitalization.
46
<PAGE>
Centerprise is seeking to obtain a revolving credit facility of up to $100
million. Although the facility is expected to be available upon the completion
of the IPO, Centerprise has not obtained any commitment nor can there be any
assurance that Centerprise will be able to obtain this facility or other
financing it may need on terms it deems acceptable. It is expected that the
facility, if obtained, will require Centerprise to comply with various loan
covenants, including maintenance of certain financial ratios, including minimum
tangible net worth, restrictions on additional indebtedness and restrictions on
liens, guarantees, advances and dividends. The facility is intended to be used
for acquisitions, capital expenditures, working capital and other general
corporate purposes. Obtaining a credit facility in an amount not less than $75
million is a condition to closing of the mergers.
Capital expenditures for the founding companies were $5.2 million for the
year ended December 31, 1998, primarily for purchases of equipment. Centerprise
believes that cash flow from operations, borrowings under the proposed
revolving credit facility and the unallocated net proceeds of the IPO, if any,
will be sufficient to fund Centerprise's expected working capital needs, debt
service requirements and planned capital expenditures for at least the next 12
months. Centerprise anticipates borrowing approximately $27.9 million under the
facility during the six months following the closing of the IPO to fund a
portion of its working capital needs. These working capital needs arise
primarily because most of the existing working capital of the founding
companies is being distributed in connection with the mergers. The working
capital borrowings will be repaid as Centerprise begins to generate cash flow
from operations, which is anticipated to occur between 90 and 120 days
following the closing of the IPO.
Centerprise will incur contingent payment obligations in connection with the
mergers. See "Certain Transactions--The Mergers" for detailed information
concerning these payments. Centerprise intends to fund any required payments
from operating cash flow, borrowings under the proposed revolving credit
facility, unallocated offering proceeds or a combination of these sources.
Centerprise intends to pursue selected acquisition opportunities but cannot
predict the timing or success of any acquisition efforts. Accordingly,
Centerprise is unable to estimate its expected capital commitments. Funding for
future acquisitions will likely come from a combination of the unallocated net
proceeds of the offering, internally generated cash flow from operations,
borrowings under the anticipated revolving credit facility or other debt
financings and the issuance of additional equity. See "Risk Factors--
Centerprise may not be able to obtain adequate financing to implement its
strategies."
SAB 97
SEC Staff Accounting Bulletin No. 97 ("SAB 97") requires the application of
purchase accounting when three or more substantive operating entities combine
in a single business combination effected by the issuance of stock just prior
to or simultaneously with an initial public offering and the combination does
not meet the pooling-of-interest criteria of Accounting Principles Board
Opinion No. 16. Centerprise has been identified as the accounting acquiror in
accordance with the provisions of SAB 97, which states that the recipient of
the largest portion of voting rights in the combined corporation is presumed to
be the accounting acquiror for financial statement presentation purposes.
Accordingly, the excess purchase price over the fair value of the net assets
acquired from the founding companies of approximately $231.5 million will be
amortized over a period of 40 years as a non-cash charge to Centerprise's
income. This amortization will be approximately $5.8 million per year.
Amortization of Intangible Assets
The $247.2 million of goodwill resulting from the mergers represents
approximately 78.9% of Centerprise's pro forma total assets as of March 31,
1999. The non-cash amortization of this intangible asset over 15 years at $16.5
million per year will have a significant impact on the income from operations
and net income of Centerprise. Further, Centerprise plans to evaluate
continually whether events or circumstances have
47
<PAGE>
occurred that indicate that the remaining useful life of goodwill may warrant
revision. Additionally, in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," Centerprise
will evaluate any potential goodwill impairments by reviewing the future cash
flows of respective acquired entities' operations and comparing these amounts
with the carrying value of the associated goodwill.
Recently Issued Accounting Standards
Segment Reporting. In June 1997, the FASB issued SFAS No. 131, "Disclosures
About Segments of An Enterprise and Related Information." SFAS No. 131
establishes standards for reporting information about operating segments in
annual financial statements and in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. In general, such
information must be reported externally in the same manner used for internal
management purposes. SFAS No. 131 is effective for financial statements issued
for periods beginning after December 15, 1997. In the initial year of
adoption, comparative information for earlier years must be restated. Since
SFAS No. 131 only requires disclosure of certain information, its adoption
will not affect Centerprise's financial position or results of operations.
Accounting for Derivative Instruments and Hedging Activities. In June 1998,
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes a new model for accounting for
derivatives and hedging activities, supersedes and amends a number of existing
standards. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000, but earlier adoption is permitted. Upon initial application, all
derivatives are required to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value.
Recognition of changes in fair value depends on whether
the derivative is designated and qualifies as a hedge, and the type of hedging
relationship that exists. Centerprise does not currently hold any derivative
instruments or participate in any hedging activities.
Inflation
Substantially all of Centerprise's client services agreements and insurance
policies allow, at the time of renewal, for adjustments in the fees payable
thereunder and thus may enable Centerprise to seek increases in the amounts
charged. Such increases have historically allowed the founding companies to
respond to increases in their costs, the most significant component of which
is compensation expense. The substantial majority of these agreements and
policies are for one year or less and the remaining agreements and policies
are for terms of up to two years. The short-term nature of these agreements
and contracts generally reduce the risk to Centerprise of the adverse effect
of inflation.
Year 2000 Compliance
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have time-sensitive hardware and software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, bill and collect
fees, or engage in similar normal business activities.
Each founding company has undertaken the following five-phase approach to
assessing its year 2000 risks:
1. appoint internal teams and assess systems;
2. evaluate assessment results and perform project planning;
3. execute system upgrades and replacements based on plan;
4. test systems; and
5. develop contingency planning.
48
<PAGE>
Each founding company has completed phases 1 and 2 for all critical hardware
and software systems. Because of the founding companies' reliance on third
party industry specific software products and mainstream hardware components,
they have focused their preparation for year 2000 almost exclusively on
upgrading software and hardware products to vendor-certified year 2000
compliant versions. In cases where vendors did not provide upgrade solutions,
or where business needs indicated that a change in software and/or hardware
solutions was appropriate, new solutions were identified for implementation.
Centerprise believes that it has satisfactorily assessed its internal risks
with respect to its information technology systems and is in the process of
identifying its non-information technology systems to assess their year 2000
readiness. Critical information technology systems include time and billing,
accounts receivable and cash collections, accounts payable and general ledger,
human resources and payroll, cash management, fixed assets and all information
technology hardware, such as desktop/laptop computers and data networking
equipment. Critical non-information technology systems include telephone
systems, fax machines, copy machines and building security systems. To date,
Centerprise has not identified any material year 2000 problems with information
technology or non-information technology systems.
At this time, Centerprise assesses its year 2000 status for its significant
systems as follows:
. Laptop/desktop/servers. Each founding company reports substantial
completion of equipment upgrades or replacements.
. General accounting systems. All of the founding companies have
completed the upgrades and replacements, with the exception of
Grace which expects to purchase and install new software by
September 1, 1999.
. Time and billing/practice management. All of the professional
services firms utilize vendor-certified year 2000 compliant
versions of their practice management systems.
. Tax processing software. All of the professional services firms
report successful migration to year 2000 compliant versions of
their tax processing software.
. Agency management. All of the business and financial services
firms report that their core business record keeping and billing
systems are on vendor-certified year 2000 compliant versions of
software.
. Non-information technology systems. Berry Dunn has a non-year 2000
compliant voicemail system that must be replaced, and Reppond has
a non-compliant phone system. Each of these systems is scheduled
for replacement by September 1, 1999.
Based on an ongoing survey of year 2000 project progress, Centerprise
currently estimates that the total cost of its year 2000 compliance and
remediation activities will be approximately $400,000 to $500,000, of which
approximately $380,000 had been incurred as of March 31, 1999. Of the estimated
total year 2000 costs, approximately $50,000 represents costs associated with
repair of software problems and approximately $400,000 represents the purchase
of replacements or upgrades of software or hardware. However, Centerprise
cannot guarantee that actual compliance costs will fall within the range of
this estimate, that any future acquisition of a business will not require
substantial year 2000 compliance expenditures or that precautions that
Centerprise has taken to protect its business from or minimize the impact of
year 2000 issues will be adequate. Any damage to Centerprise's information
processing system, failure of telecommunications lines or breach of the
security of its computer systems could result in an interruption of operations
or other loss which may not be covered by insurance and could harm
Centerprise's business, financial condition or results of operations.
Each of the founding companies is assessing the year 2000 readiness of its
significant customers, business partners and vendors to determine the extent to
which Centerprise's interface systems are vulnerable to the failure of those
third parties to remediate their own year 2000 issues. To date, Centerprise is
not aware of any significant customers, business partners or vendors with a
year 2000 issue that would materially affect Centerprise or a founding company.
However, Centerprise cannot guarantee that the systems of other companies, on
which Centerprise's operations rely, will be timely converted or that failure
to timely convert would not harm Centerprise's business, financial condition or
results of operations.
49
<PAGE>
Centerprise believes that each founding company has a program in place to
resolve the year 2000 issue in a timely manner. In assessing their year 2000
risks, none of the founding companies have engaged in any independent
verification or validation processes.
Centerprise has commenced its contingency planning for critical operational
areas that might be affected by the year 2000 issue if compliance by
Centerprise is delayed. Elements of Centerprise's contingency plans include
switching vendors and third party suppliers and using manual processes that do
not rely on computers. Centerprise expects to complete its contingency planning
by September 30, 1999. Aside from catastrophic failure of banks, utilities or
governmental agencies, Centerprise believes that it could continue its normal
business operations. Unless such catastrophic failure occurs, Centerprise does
not believe that the year 2000 issue will impair its results of operations,
liquidity or capital resources.
Several of the Centerprise companies have information technology consulting
practices that have periodically been asked by clients to provide certain year
2000 consulting services. Although Centerprise believes, based on the services
the founding companies have provided to date, that it has limited exposure to
claims that may be asserted by clients whose systems might be compromised as a
result of a year 2000 related malfunction, there can be no assurance that
material claims will not be made.
50
<PAGE>
INDUSTRY OVERVIEW
The Competitive Environment
According to the U.S. Department of Commerce, firms providing traditional
accounting services--accounting, auditing and bookkeeping--generated
approximately $59.3 billion in revenues in 1997. Such revenues were projected
to grow to $65.8 billion for 1998, with further growth expected at an annual
rate of 9% to 10% from 1999 through 2002, assuming moderate U.S. economic
growth.
According to a report published by the American Institute of Certified
Public Accountants in 1996, the distribution of AICPA members employed by
accounting firms was as shown below. The italicized headings reflect
Centerprise's categorizations.
<TABLE>
<CAPTION>
Total
Number of AICPA Average
Number of Members in Number of AICPA
Firm Size Firms Firms Members per Firm
------------------------------ --------- --------------- ----------------
<S> <C> <C> <C>
The Big Five
Big Five.................... 5 20,928 4,185
Regional Firms
Next six largest firms...... 6 3,516 586
Firms with more than 100
members.................... 16 2,237 139
Firms with 50 to 99
members.................... 50 3,265 65
Firms with 25 to 49
members.................... 215 6,948 32
Local Firms
Firms with 10 to 24
members.................... 1,218 17,003 13
Firms with 5 to 9 members... 2,937 18,767 6
Tax and Bookkeeping Firms
Firms with 2 to 4 members... 11,586 29,547 2
1 member.................... 30,406 30,406 1
------ -------
46,439 132,617
====== =======
</TABLE>
Based on the pro forma combined revenues of Centerprise's eight professional
services firms for the fiscal year ended December 31, 1998, Centerprise would
have been ranked No. 13 in Accounting Today's 1999 Top 100 Accounting Firms had
the firms been combined throughout such period.
Centerprise categorizes the competitive environment in the following manner:
. The Big Five. This segment consists of Arthur Andersen, Deloitte &
Touche, Ernst & Young, KPMG and PricewaterhouseCoopers. These
multinational firms provide diversified professional, business and
financial services and products primarily to publicly-held corporations
and large privately-held companies, focusing mainly on Fortune 1000
companies.
. Regional Firms. These firms provide services primarily to privately-held,
middle-market clients. Firms in this segment continue to expand service
and product offerings beyond traditional accounting.
. Local Firms. This segment is comprised of firms whose clients are
primarily small, local businesses. Many of these firms have also begun to
offer non-traditional services and products, typically on a niche basis.
. Tax and Bookkeeping Firms. These businesses generally provide basic
bookkeeping, tax return preparation and traditional accounting services
to small businesses and individuals. This segment is extremely
fragmented, consisting of approximately 42,000 firms and/or sole
practitioners. This category also includes storefront operations of
franchisors.
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Centerprise believes that its primary competitors in the accounting industry
are the regional firms, although it also competes for certain clients and in
certain markets with the Big Five, other national firms and larger local firms.
Although a trend toward consolidation among accounting firms is emerging, the
regional and local segments are still highly fragmented, with no single firm
accounting for more than 1% of the industry's total revenues. Centerprise
believes that the fragmented nature of these segments presents opportunities
for future acquisitions.
Industry Opportunities
Centerprise believes that certain industry trends have created a significant
opportunity for a company that provides high quality professional, business and
financial services and products to middle-market clients. Centerprise intends
to capitalize on this opportunity by using its professional services firms as
focal points for delivering its high quality services and products. Industry
trends include the following:
Client-Driven Expansion of Services Provided by Trusted Advisors
Centerprise believes that client demands are redefining the lines that once
separated the delivery of traditional accounting services from other
professional, business and financial services and products. Management believes
that this has occurred primarily because clients are willing to use outside
service providers to meet their increasingly complex needs.
According to U.S. Department of Commerce analysts, the accounting profession
is facing greater demand for consulting services. Revenues of the Accounting
Top 100 increased 24% to $31.6 billion in 1998 from $25.5 billion in 1997.
Consulting services represented the biggest factor in this growth, outpacing
growth in revenues from tax services and from accounting and auditing services.
Clients whose engagements have traditionally been limited to accounting and tax
services are increasingly looking to their accounting professionals to
provide--or refer them to--additional services such as management consulting,
insurance brokerage, employee benefits design and administration and
information technology consulting. Centerprise believes that clients are
increasingly seeking a single provider of multiple outsourced services and that
accounting professionals are uniquely situated to respond to these demands
because of their existing position as trusted advisors to these clients.
Centerprise believes that it is able to capitalize on this trend through its
network of trusted advisors and its expertise in business and financial
services and products, including insurance brokerage and employee benefits
design and administration services.
Increasingly Complex Needs of Middle-Market Clients
Centerprise believes that the Big Five are increasingly focused on the needs
of their largest, publicly-held corporate clients. A 1998 survey by Public
Accounting Report stated that of the approximately 14,000 publicly-held clients
served by the top 100 accounting firms in that survey, approximately 90% were
being served by the Big Five. The Big Five have developed globally diversified
business, financial and consulting services in response to the complex needs of
these large clients. Centerprise believes that the needs of middle-market
clients are increasingly complex, creating opportunities for large, regional
accounting firms to expand their service and product offerings beyond
traditional accounting. Revenues of the Top 100 other than the Big Five grew to
$4.9 billion in 1998, an increase of 23% from 1997. Consulting revenues were
the most significant contributor to this growth.
Changing Regulatory Environment
As demand for non-traditional services from accounting firms has increased,
state regulations are evolving to keep pace with this new industry dynamic.
Accordingly, as more states allow CPAs to diversify into new business lines,
there is increasing opportunity for and competitive pressure on accounting
firms to enter into these businesses. Centerprise believes that many local and
regional accounting firms do not have access to capital, possess the expertise
necessary or offer the diversified services required to compete effectively in
this evolving market environment.
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BUSINESS OF CENTERPRISE AFTER THE MERGERS
Introduction
Centerprise is a leading provider of professional, business and financial
services and products to middle-market clients. Centerprise offers a full range
of consulting, accounting, tax and related professional services, as well as
complementary business and financial services and products such as insurance
brokerage and employee benefits design and administration. More than 2,000
employees provide these services and products to clients located throughout the
United States. Centerprise principally focuses on middle-market clients that
are privately-held companies in a variety of industries, governmental and not-
for-profit entities and affluent individuals and families.
Centerprise has assembled a group of founding companies with expert
capabilities, reputations for quality, effective leadership and strong "trusted
advisor" relationships with clients. These companies have been in business an
average of 27 years. On a combined historical basis, revenues of these
companies increased from $169.8 million in fiscal 1997 to $201.0 million in
fiscal 1998, representing an annual growth rate of 18.4%.
Business Strategy
Centerprise's goal is to provide middle-market clients with personalized,
local service backed by the resources and capabilities of a national firm. To
implement its business strategy, Centerprise will:
. Develop and Deliver High Quality Services and Products. Centerprise
currently offers a broad range of high quality professional, business and
financial services and products. Centerprise intends to improve and
develop its service and product offerings through innovation and selected
acquisitions and alliances.
. Create National Practices by Capitalizing on Existing Expertise. Several
of Centerprise's founding companies have developed strong national or
regional reputations relating to a particular industry, service or
product. For example, Centerprise has significant advisory expertise in
the real estate, manufacturing, health care and construction industries.
It provides specialized services including litigation consulting and
information technology consulting. Centerprise also has expertise in
insurance brokerage and employee benefits administration services.
Centerprise intends to use its national practices as:
. Clearinghouses of knowledge that provide industry, service or product
expertise to all Centerprise business units.
. Resources for the development of "best practices" that will be used
for training, continuing education and practice development
throughout Centerprise.
. Platforms for identifying, integrating and managing future
acquisitions and alliances.
. Expand Presence in Key Geographic Markets. Capitalizing on the strong
reputations of its founding companies, Centerprise intends to build upon
its local presence through selected acquisitions in its current markets.
At the same time, Centerprise intends to take advantage of its geographic
diversity by adopting a marketing strategy that promotes the Centerprise
brand nationally and highlights Centerprise's expanded functional
capabilities and market presence.
. Integrate its Management and its Information Systems. Centerprise
recognizes the importance of integrating and coordinating its business
units and systems and has hired a chief integration officer to lead this
process. Centerprise's executive management team will work closely with
the business units to implement and integrate Centerprise's business and
growth strategies.
Internal Growth Strategy
To execute its growth strategy, Centerprise will:
. Build Upon Trusted Advisor Relationships. Centerprise believes that its
trusted advisor relationships present an opportunity to provide
additional services and products to clients. Centerprise intends to build
upon these relationships by using its professional services firms as the
focal points for delivering
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Centerprise's diversified services and products. By capitalizing on its
client relationships as well as its reputation for quality, each
Centerprise business unit can help direct its clients to the expertise,
services and products that provide the best solutions to their business
and personal needs.
. Institute Incentives for Client and Knowledge Sharing. Centerprise
intends to implement incentives to motivate the sharing of client
relationships and expertise throughout Centerprise. In addition,
Centerprise uses stock ownership to align the objectives of its business
units.
. Capture Benefits of Scale. Centerprise believes that it can achieve
certain benefits as a result of its size. Its combined client base,
number of professionals and industry and product specialties provide
opportunities to create national practices. Centerprise's broad
geographic coverage will enable it to serve clients as they expand into
new markets. In addition, Centerprise believes that it can reduce costs
through greater purchasing power in key expense areas and by eliminating
or consolidating certain duplicative administrative functions.
Acquisitions and Alliances
Centerprise believes that the emergence of a diversified professional,
business and financial services industry will create acquisition opportunities.
Centerprise believes that many regional and local firms will need to join
larger enterprises that provide the resources and breadth of service and
product offerings necessary to fulfill client needs and to compete successfully
in this evolving market. As a result, Centerprise expects that numerous firms
will explore alternatives to independent ownership.
Centerprise intends generally to focus on acquisition targets that have a
strong financial history, offer effective management and entrepreneurial
leadership and have strong client relationships. In particular, Centerprise
intends to seek acquisition and alliance candidates that:
. provide a professional services practice with a national or regional
reputation;
. expand Centerprise's offerings and expertise to build and enhance
national practices;
. function as a distribution point by providing a local presence in new
geographic markets; or
. expand the presence of Centerprise's existing platforms in their
geographic markets.
Centerprise believes that the opportunity to be acquired by Centerprise will
be attractive to many local and regional firms. Centerprise will offer owners
of such firms the benefits of its business strategy, including:
. the opportunity to better serve their clients' needs;
. opportunity to enhance current and future profitability;
. access to new technology and operational processes; and
. enhanced financial resources and visibility as a public company.
As a result of discussions with many companies during its formation process,
Centerprise has developed a significant list of potential acquisition
candidates. In addition, each founding company has memberships in industry
associations and relationships with other firms that will be used to further
expand the list of potential acquisition candidates. These candidates include
accounting firms, information technology consulting firms, financial service
firms, business consulting firms, insurance brokerage firms, third party
administrators and professional staffing firms.
As consideration for future acquisitions, Centerprise intends to use various
combinations of cash, debt and common stock. Other than in connection with the
mergers, Centerprise is not currently a party to any agreements regarding any
acquisitions.
In addition to acquisitions, Centerprise will pursue alliances with other
providers who offer quality services and products that are not directly offered
by Centerprise. For example:
. Centerprise is the only U.S. member of Urbach Hacker Young International
Limited, an international strategic alliance of 42 international firms
from 36 countries. Through this alliance, Centerprise can assist clients
in achieving their business and financial objectives in the international
marketplace.
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. Centerprise has an alliance with Omnitech Corporate Solutions, Inc., an
information technology consulting firm located in the Northeast. Through
this non-exclusive arrangement, Omnitech has been identified as one of
Centerprise's preferred providers of network services, internet design
and implementation, software development, sales force automation and
other information technology services to Centerprise's clients.
Services and Products
Professional Services
Consulting Services. Centerprise offers a broad array of consulting and
other advisory services including:
. management, profit improvement and mergers and acquisitions consulting;
. international business advisory services;
. succession and estate planning;
. business valuations; and
. personal financial planning.
The number and variety of these services reflect the breadth of the expertise
of Centerprise's professionals as well as the diversity of its clients.
Centerprise has designed many of these services for clients in particular
industries.
Accounting Services. Centerprise provided accounting services such as:
. budgets;
. business plan preparation and related cash flow projections;
. internal control and operational review;
. insolvency services;
. receivables and cash flow management;
. due diligence review; and
. controllership activities.
These services are often tailored and packaged to serve clients' particular
needs. Under non-exclusive services agreements, Centerprise provides
professional personnel to perform field work and other accounting services for
the Attest Firms.
Tax Services. Centerprise provides clients with a complete range of tax
services. Centerprise assists its clients in planning their overall business
structures and operations to minimize federal, state, local and foreign taxes.
Centerprise provides tax return preparation, tax compliance services and
business, individual and estate planning services. A significant portion of
these tax services are nondiscretionary and compliance driven.
Specialized Services. Centerprise has developed significant practices in
certain specialized services offered to clients across industry lines.
Centerprise intends to build national practices based on these specialized
services, which include:
. Litigation Consulting Services. Centerprise provides litigation
consulting services, which include analyzing and providing expert
opinions and testimony on complex financial disputes.
. Information Technology Consulting Services. Centerprise's information
technology consultants advise clients as to strategic systems planning,
application systems selection and procurement, network design and
installation, software implementation management and systems security.
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Industry Expertise. Centerprise has considerable expertise with respect to
certain industries and can tailor its consulting, accounting and tax services
to specific business, regulatory or competitive environments. Centerprise
intends to build national practices based on these areas of expertise, which
include:
. Real Estate. Centerprise has a nationally recognized practice serving the
unique needs of the real estate industry. It advises clients as to
structuring real estate investments, financings and transactions,
investment analysis, tax compliance and planning, due diligence, real
estate syndication and operational real estate projections.
. Manufacturing. Centerprise advises its manufacturing clients as to
implementing inventory management systems, cost and pricing systems and
quality management systems required for industry recognized
certifications such as ISO and QS 9000 registration.
. Health Care. Centerprise advises hospitals, nursing homes and other
health care industry clients as to physician practice valuation, billing
code and rate audits, medicare and medicaid reporting and auditing,
medical records management and patient billing systems.
. Construction. Centerprise advises construction contractors and related
clients as to estimating and job cost management systems, contract
auditing, bonding capacity analysis, capital equipment financing options
and other special projects.
Business and Financial Services
Insurance Brokerage Services. Centerprise offers its clients access to a
variety of insurance products, including property and casualty insurance,
workers compensation coverage, surety bonds and health and life insurance
programs. Centerprise brokers property and casualty insurance to companies with
diverse insurance requirements, ranging from comprehensive business packages
for small, local businesses to large portfolios for international corporations.
Centerprise also brokers life and health insurance products, administers
benefits and provides other services for its clients' employee benefits
programs. In addition, Centerprise has established relations with most major
bonding companies, that allow it to provide a variety of surety bond products.
Centerprise also counsels business owners and executives as to 401(k) products,
comprehensive risk management planning and analysis of retirement, executive
benefits and financial and estate plans.
Centerprise's insurance services businesses do not currently engage in
activities that involve bearing the risk of an insured's loss. Centerprise may
in the future enter this segment of the industry, through acquisition or
otherwise, by underwriting certain products in which Centerprise has particular
expertise through its brokerage activities. Centerprise has no current plans to
engage in risk-bearing activities. Expansion into this area would involve
risks. See "Risk Factors--Centerprise may expand its insurance business to
include activities that involve bearing the risk of loss."
Employee Benefits Design and Administration. Centerprise offers
comprehensive employee benefits design and third party administration services
to businesses and governmental units. Centerprise designs self-funded employee
benefits plans that allow an employer to structure a traditional indemnity plan
or to take advantage of preferred provider or managed care options. Centerprise
procures quotes for insurance from stop loss carriers and provides claims
processing, plan performance and other administrative services. Centerprise
administers a wide variety of plans, including medical, dental, group life,
group disability, COBRA and Section 125 plans. Revenues from these services
primarily consist of per employee fees for administrative services and
commissions from stop loss carriers. Centerprise believes that the systems,
programming and data processing infrastructure in place for these services has
the capacity to handle significantly greater number of plans and covered
employees without significant incremental investment.
Employee Incentives
The performance of Centerprise's employees is critically important to its
success. Senior employees, many of whom were the owners or principals of the
founding companies before the Mergers, must continue to
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generate and maintain business as they have historically. In addition, because
of their prominence and client relationships, Centerprise anticipated that
these employees will play an important role in generating cross-selling
opportunities and attracting acquisition candidates.
The principal objectives of Centerprise's compensation program include:
. motivating employees to increase Centerprise's overall profitability
through new business, cross-selling and the integration of services,
products and offices;
. creating incentives that motivate each business unit to increase its
profitability; and
. retaining and motivating top performing employees and attracting
additional employees and acquisition candidates by providing competitive
compensation.
Professional Services
Centerprise's senior professionals are taking significant cuts in cash
compensation--in some cases more than 50%--in order to join Centerprise.
However, Centerprise believes that these individuals will continue to be highly
motivated to perform through their significant equity interests in Centerprise
as a result of the mergers and the issuance of stock options and their
opportunity to share in the growth of their firm's earnings as discussed below.
Other professionals who are on the "partner track" will be eligible to receive
Centerprise stock options and upon "making partner" will be able to share in
potential increases in their firm's earnings. The mergers will not directly
affect the current compensation of such employees.
Compensation Program. The senior professionals of each Centerprise
professional services firm will enter into firm-specific incentive compensation
agreements with Centerprise. These agreements allocate significant portions of
the Subsidiary Operating Earnings of each professional services firm to its
senior professionals (the "participants") as compensation.
On an annual basis, Centerprise will retain a specified fixed dollar amount
of earnings before any compensation is paid to a firm's participants. The
amount retained by Centerprise is referred to as "Centerprise Base Earnings."
The amount of Centerprise Base Earnings has been negotiated with each
professional services firm and varies from firm to firm. Agreed-upon
Centerprise Base Earnings range from 34.9% to 60.4% of the adjusted earnings of
the respective professional services firms in the four calendar quarters ending
March 31, 1999 ("Initial Operating Earnings"). The amount allocated to each
professional services firm for compensation of participants is referred to as
"Subsidiary Base Compensation." Subsidiary Base Compensation equals Initial
Operating Earnings less Centerprise Base Earnings.
In addition to Subsidiary Base Compensation, each professional services firm
has agreed to a 40%/60% split of any amount by which future Subsidiary
Operating Earnings exceed Initial Operating Earnings, with 40% to be retained
by Centerprise and 60% to be allocated to participants (the "Bonus"). For
purposes of the incentive compensation agreements, "Subsidiary Operating
Earnings" generally means a firm's earnings before taxes, interest expense not
related to capital leases, certain depreciation expense, amortization of merger
transaction costs, extraordinary items, allocations of corporate overhead,
expenses incurred in connection with acquisitions completed prior to the
mergers and the base salary, bonus and indirect costs of any participant.
Indirect costs are all costs paid by the professional services firm with
respect to a participant's employment, such as social security and medicare
taxes, medical, life and disability insurance, costs associated with employee
benefit plans and fringe and personal benefits. Centerprise believes that this
Bonus provides participants with a powerful, direct incentive to continue the
growth of their Subsidiary Operating Earnings. If Subsidiary Operating Earnings
for any year are less than Initial Operating Earnings, Subsidiary Base
Compensation will be reduced by the amount of the shortfall.
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The following summarizes the mechanics of the incentive compensation
agreements:
[ORGANIZATION CHART APPEARS HERE]
This compensation program is designed to provide Centerprise with a baseline
level of earnings, before corporate expenses, equal to the Centerprise Base
Earnings. Participants can only enjoy increased compensation if they improve
their firm's profitability, which in turn will result in additional profits,
before corporate expenses, for Centerprise.
Administration. Each professional services firm will administer the
incentive compensation agreement for its participants including the allocation
among the participants of Subsidiary Base Compensation and Bonus. In addition,
for corporate cash flow management reasons, participants will only be paid a
portion of their compensation throughout the year--in an amount equal to a
specified percentage of their total compensation in the prior year. The
applicable percentage is 85% in 1999 and 2000 and 75% thereafter. The balance
of the Subsidiary Base Compensation plus Bonus, if any, will be paid on or
about April 1 of the next fiscal year. If the amount paid to a firm's
participants during the year exceeds the Subsidiary Base Compensation and
Bonus, if any, to be paid for such year, Centerprise will reduce future
compensation to recover the deficiency.
A single incentive compensation agreement may be amended with the agreement
of Centerprise, the professional services firm and a specified percentage of
such firm's participants which may vary among the firms. "Blanket" amendments
to all of the incentive compensation agreements will require, for three years
following the offering, the approval of Centerprise and representatives of all
of the original professional services firms. Thereafter, any such amendments
will require the approval of Centerprise and representatives of 75% of the
original professional services firms.
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The incentive compensation agreements have been designed to accommodate and
support Centerprise's growth and acquisition strategies. They provide
mechanisms for adding new participants by allowing the firms to continue to
"make partners" of their successful professionals. The incentive compensation
agreements can also be modified to accommodate the acquisitions of additional
professional services practices, as well as individual lateral hires. With the
approval of Centerprise, a promoted professional, the former owners of an
acquired firm or a lateral hire may be added as participants, and the incentive
compensation agreements will appropriately adjust the definitions of Subsidiary
Base Compensation and other relevant terms to appropriately reflect their
promotion/addition to the firm's revenues and expenses.
Other Incentives. The incentive compensation agreements contain additional
provisions that are designed to foster Centerprise's profit growth objectives.
For example, Centerprise intends to establish incentives for cross-selling and
cross-servicing of clients and integration of services among all of
Centerprise's operating units. These incentives will generally be included in
the Subsidiary Operating Earnings and flow through the compensation mechanisms
established under the incentive compensation agreements. Moreover,
participants' benefits and perquisites are included in the determination of the
Subsidiary Operating Earnings, subjecting these expenses to the self-
disciplining features of the incentive compensation agreement structure.
Business and Financial Services
At the closing of the mergers, Centerprise will enter into employment
agreements with key employees in its business and financial services group.
Generally, such agreements will provide for competitive base salaries and
performance bonuses based upon such factors as the financial performance of
Centerprise and the particular business unit, the achievement of certain
operating objectives and the achievement of personal performance goals. These
key employees are receiving Centerprise common stock in the mergers, and
Centerprise may also grant stock options to these and other key employees.
Centerprise intends to create incentive programs to motivate its business and
financial services group employees to expand their businesses, use the
distribution platforms provided by the professional services firms and pursue
and integrate acquisitions. See "Centerprise Management--Employment Agreements;
Covenants--Not-to-Compete" and "Approval of the Mergers and Related
Transactions--Interests of Certain Persons in the Mergers."
Technology and Infrastructure
Each of the founding companies maintains its information systems on a local
area or wide area network architecture that supports both local and remote
processing. The software portfolio used by the professional services firms
includes leading programs for electronic workpapers, tax preparation, time
reporting and billing and financial control and management reporting, as well
as CD-based software for tax and accounting research. In its insurance
brokerage business, Centerprise maintains a wide area network using 14 servers
located at the six offices that house the insurance operations. In providing
employee benefit administration services, Centerprise uses a fully automated,
high volume claims adjudication system that allows it to integrate claims
administration, group billing and administration, and accounting.
Centerprise recognizes the importance of technology in facilitating the
management of its geographically diverse operations and the sharing of
knowledge and professional resources. Accordingly, over time Centerprise
intends to implement an integrated communications and management control
system. During the initial phase of the implementation, Centerprise will focus
on developing a communications network using virtual private network facilities
to establish enterprise wide communications capability. This network will serve
as a "bridge," carrying financial and operating data from the individual
company systems into a corporate data warehouse. This system will also
standardize the different data elements into a form that can be used to manage,
analyze, and report information on a consistent basis. Centerprise also intends
to deploy workgroup technology that facilitates communication and collaboration
across its workforce. In the next phase, Centerprise plans to design and
implement centralized financial control systems. During the final phase,
Centerprise intends to design and implement centralized operational control
systems.
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Centerprise believes that its middle-market clients will increasingly use
technology to access the diverse expertise that they are seeking from their
outside advisors. Consistent with its client-focused strategy, Centerprise has
created a web site that will link clients to each of its companies, and it
intends to develop and provide additional on-line connections to a network of
technical expertise and consulting capabilities.
The technology Centerprise utilizes in providing its services and products
is rapidly changing. Centerpoint's continued success will depend on its ability
to keep pace with technological developments.
Competition
Competitors in the accounting industry range from the Big Five to storefront
tax firms or sole proprietors. Centerprise competes in this industry primarily
with regional firms that also provide services to middle-market clients,
although it also competes for some clients and in some markets with the Big
Five and larger local firms. Centerprise's insurance brokerage business
competes with numerous firms, primarily regional and local insurance brokers,
for customers and insurance carriers. Centerprise's employee benefit plan
business competes with fully insured plan providers and, to a lesser extent,
other third party administrators. Centerprise also competes with in-house
operations of some existing and prospective clients. New competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Many of Centerpoint's competitors have significantly greater financial
technical, marketing and other resources.
The markets in which Centerprise competes are fragmented and competitive.
This has resulted in the consolidation of many companies in the professional,
business and financial services industries and strategic alliances across
industry lines. As a result, consolidators have emerged. These firms, like
Centerprise, offer professional services and business and financial services.
Centerprise believes that the principal competitive factors in its markets are
the strength of client relationships, quality and breadth of service and
product offerings and professional reputation. Centerprise believes that it
will be able to compete effectively based on its:
. range of high quality services and products;
. expertise and reputation for quality;
. broad geographic coverage;
. operational economies of scale; and
. integrated operating structure.
Regulation
Accounting Profession. Each state has adopted an accountancy law that
establishes procedures for licensing CPAs and grants the exclusive right to
practice accountancy to licensed CPAs and accounting firms that are wholly-
owned by CPAs. The term "attest services" means services that can be provided
only by a licensed CPA or firm under applicable state laws and regulations. The
definition of attest services varies from state to state as described under
"Risk Factors--Regulation of the accounting profession will constrain
Centerprise's operations and impact its structure and numerous issues arising
out of that regulation, its interpretation or its evolution could impair
Centerprise's ability to provide services to some clients, including the attest
firms, reduce its revenues and cause the market value of the common stock to
decline." The state accountancy laws also contain rules and regulations
covering a variety of issues including:
. the permissible forms and ownership of accounting firms;
. the use of the CPA designation;
. the payment and receipt of referral fees;
. the use of contingent fee arrangements;
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. engaging in incompatible occupations; and
. the maintenance of independence.
These rules and regulations differ from state to state. Many state laws
restricting the practice of accountancy to licensed CPAs and firms incorporate
the "holding out" concept under which a person could be deemed to be practicing
accountancy simply by proclaiming expertise in accounting principles or
auditing standards or by using the "CPA" designation on business cards,
letterhead or promotional materials while providing non-attest services.
Working with special regulatory counsel, Centerprise has developed protocols
designed to ensure compliance with states' "holding out" restrictions. Under
these protocols, CPA owners of attest firms in all jurisdictions will be asked
to carry separate business cards, maintain separate mailing addresses and
signage, separate phone and fax numbers, and separate letterhead and marketing
materials so as to clearly communicate to clients and prospects the
organization they are representing and the services they are providing on any
given issue or interaction. Centerprise expects the attest firms to conduct due
diligence to confirm that employees leased from Centerprise under the services
agreements have been trained in, and are current with respect to, the
principles and practices of accounting and auditing. Further, Centerprise's
employees are encouraged and expected to pursue their CPA certifications to
further demonstrate their competency in these areas. At the same time, due to
state regulations, Centerprise will not be communicating their expertise in
these areas to clients or client prospects, as that is the defined role and
responsibility of the CPAs who own the attest firms.
Under the "holding out" concept, many state regulators have taken the
position that the rendering of other financial services by CPAs while holding
themselves out as CPAs constitutes the practice of accountancy and therefore is
subject to their regulations. Accordingly, CPAs who will be employed by
Centerprise may be subject to regulation not only with respect to attest
services, but also with respect to other activities which they may undertake as
employees of Centerprise. Although Centerprise believes that its separate
practice structure is not likely to result in a successful challenge to the
activities of its CPA employees in the states in which Centerprise currently
has material operations, should state regulators deem activities undertaken by
CPAs as employees of Centerprise to be in violation of applicable laws,
regulations or codes of ethics, the CPAs could lose their licenses and their
ability to provide attest services to the clients which the attest firms share
with Centerprise.
In recent years, accounting firms have sought to expand the scope of their
services, often placing them in competition with investment advisors,
management consultants, actuaries, business brokers and others who are not
required to operate under the constraints imposed upon CPAs. This expansion of
services has also prompted many accounting firms to employ non-CPA
professionals to assist them in providing these new services. As a result, the
accounting profession and its regulators have been engaged in discussions over
the past ten years as to ways in which the accountancy laws might be changed so
that accounting firms can effectively compete in providing these additional
services without compromising the objectivity and integrity of CPAs. These
discussions have resulted in the Uniform Accountancy Act, which was proposed in
1997 by the AICPA and the National Association of State Boards of Accountancy.
Certain provisions of the Uniform Accountancy Act have been proposed in various
state legislatures. If and where the Uniform Accountancy Act is adopted as
proposed, state accountancy laws would become more hospitable to an expanded
scope of services and more uniform. Among the principal changes that the
Uniform Accountancy Act, as proposed, would effect are the following:
. permitting non-CPA employees to own up to 49% of the equity interests in
an accounting firm;
. employing a more narrow definition of services that can only be provided
by licensed CPAs than is currently included in many state statutes;
. permitting CPA firms to accept commissions and contingent fees with
respect to clients for whom they do not render reports on financial
statements; and
. facilitating CPAs licensed in one state to practice in other states.
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Centerprise believes that its separate practice structure makes a successful
challenge to its operations unlikely under existing regulatory regimes in the
states in which it currently has material operations and that this structure
would comply with the proposed provisions of the Uniform Accountancy Act.
However, only six states have published interpretations that specifically
address alternative practice structures. Connecticut has issued a ruling
recognizing Centerprise's proposed structure as being in compliance with its
laws, and New York, Texas, Ohio, Kansas and Idaho have issued rulings
recognizing separate practice formats similar to Centerprise's as being in
compliance with their laws. Each of these rulings contains conditions to the
findings that such format complies with the applicable state's laws, including
conditions related to the maintenance of the separate attest entity's economic
independence, management autonomy and separate public identity. Some of these
conditions vary among the states.
State laws prohibit CPAs from paying or receiving referral fees with respect
to their clients or using fee arrangements that are contingent upon the outcome
of their engagements or the results imparted to their clients. Certain of these
restrictions would be relaxed with the passage of the Uniform Accounting Act,
as currently proposed. Centerprise will comply with these restrictions in
implementing its compensation arrangements.
The accounting profession and accounting regulators require that CPAs
maintain objectivity and independence while performing attest services. These
independence standards prohibit CPAs, employees of accounting firms and members
of the immediate families of such CPAs and employees from having certain
ownership and other financial relationships with attest clients and
participating in the management, operations or accounting functions of such
clients. Independence can also be impaired as a result of litigation or other
disputes with the client, common investments with the client or indemnity
agreements relating to attest services. Under recent interpretations, as
applied to Centerprise's proposed operations, these standards will extend to
Centerprise's executives, board members and controlling stockholders as well as
CPA employees who own the attest firms. With respect to attest firm clients
that are public reporting companies, Centerprise must comply with independence
rules as applied by the SEC staff. For a discussion of these rules as they
apply to Centerprise and the attest firms, see "Risk Factors--Regulation of the
accounting profession will constrain Centerprise's operations and impact its
structure and numerous issues arising out of that regulation, its
interpretation or its evolution could impair Centerprise's ability to provide
services to some clients, including the attest firms, reduce its revenues and
cause the market value of the common stock to decline." In addition to the
independence standards, CPAs who provide litigation consulting services on
behalf of Centerprise or an attest firm will be subject to rules designed to
avoid conflicts of interest, e.g., simultaneous representation of, or other
relationships with, adverse parties. Centerprise intends to comply with
applicable requirements related to independence and avoidance of conflicts of
interest.
Many state accountancy laws and regulations prohibit CPAs from engaging in
"incompatible" occupations. Few states have provided guidance as to what
activities are encompassed by these prohibitions.
Existing state laws and regulations are subject to evolving interpretations
and enforcement policies and practices and present numerous risks to
Centerprise's operations, primarily those described under "Risk Factors--
Regulation of the accounting profession will constrain Centerprise's operations
and impact its structure and numerous issues arising out of that regulation,
its interpretation or its evolution could impair Centerprise's ability to
provide services to some clients, including the attest firms, reduce its
revenues and cause the market value of the common stock to decline."
Insurance Business. Centerprise or its insurance employees must be licensed
to act as agents by state regulatory authorities in the states in which it
provides insurance services. Regulations and licensing laws vary in individual
states and are often complex. The applicable licensing laws and regulations in
all states are subject to amendment or reinterpretation by state regulatory
authorities, and such authorities are vested in most cases with broad
discretion as to the granting, revocation, suspension and renewal of licenses.
State insurance departments and the National Association of Insurance
Commissioners continually re-examine existing laws and regulations. Centerprise
cannot predict the future impact of potential state and federal regulations on
its insurance operations, and there can be no assurance that those changes in
insurance-related laws and regulations, or their interpretation or enforcement,
will not harm Centerprise's insurance brokerage business.
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Employee Welfare Plans. Federal law regulates many aspects of Centerprise's
services relating to employee welfare plans, including the duties and
responsibilities of persons who provide services or sell products to such
plans, and such persons may be held to a fiduciary standard when providing
these services or selling these products. The states also regulate many aspects
of employee benefit plans, principally through the regulation of insurance
products, including stop-loss insurance products sold to self-insured plans.
States also directly regulate third party administrators by requiring licensing
and compliance with state regulations in each state in which they do business.
Federal and state regulations are susceptible to statutory and regulatory
changes that could reduce or eliminate the need for Centerprise's services with
respect to employee benefit plans.
Sales and Marketing
Centerprise's marketing efforts are primarily relationship based.
Historically, the founding companies have acquired new clients and marketed
their services by pursuing client referrals, responding to requests for
engagement proposals, attending trade and industry conferences and using
targeted direct marketing efforts. Many of the professional services firms
generate business through their employees' membership in trade organizations
and civic and community organizations, while other professional services firms
partner with smaller accounting firms that do not have the technological
expertise or resources to take on certain engagements. Generally, the
professional services firms obtain a significant portion of client referrals by
focusing their marketing efforts on existing clients. In addition, some of the
professional services firms have dedicated sales and marketing personnel.
Centerprise sells its insurance services and products through approximately
105 producers who are full-time employees. These producers are assigned to, and
become experts with respect to, a variety of specialty risk groups for which
Centerprise designs specific programs.
In its employee benefits design and administration, Centerprise's sales and
marketing occurs primarily through referrals and its reputation. In addition,
Centerprise employs two full time salespeople who market its services and
products.
As a key component of its marketing strategy, Centerprise will introduce its
various services and products to its existing client base and to cross-service
its existing clients through multiple Centerprise operating units with
complementary service or product expertise. To encourage cross-selling and
servicing of clients, Centerprise intends to establish incentives among its
operating units. In addition, management intends to pursue marketing,
advertising and training programs to establish national identification for the
Centerprise name, while preserving and enhancing the value of the established
regional and local names of its various business units.
Employees
As of May 31, 1999, Centerprise had a total of 2,046 employees, of which
1,511 were employed by Centerprise's professional services firms, 531 were
employed by Centerprise's business and financial services firms and three were
members of Centerprise's corporate management. Of the 1,511 people employed in
connection with professional services, more than 600 are licensed CPAs. Of the
402 people employed in connection with insurance brokerage services, 105 are
producers. Of the 129 people employed in connection with third party
administrative services, two are in sales and 94 are in claims administration.
None of these employees is represented by a labor union. Centerprise believes
that the founding companies' relations with their employees are good.
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Facilities
Centerprise currently operates 38 leased facilities. The chart below sets
forth information regarding such facilities.
<TABLE>
<CAPTION>
Approximate
Location of Facility Company and Operations Conducted Square Feet
---------------------- --------------------------------------- -----------
<S> <C> <C>
Albany, NY............ Urbach--Professional Services 42,000
Atlanta, GA........... Reznick--Professional Services 20,000
Baltimore, MD......... Reznick--Professional Services 33,200
Bangor, ME............ Berry Dunn--Professional Services 26,000
Bellevue, WA.......... Reppond--Insurance Brokerage 25,300
Bethesda, MD.......... Reznick--Professional Services 68,500
Boston, MA............ Reznick--Professional Services 11,000
Brooklyn Park, MN..... Reppond--Insurance Brokerage 350
Charlotte, NC......... Reznick--Professional Services 6,700
Escondido, CA......... Driver--Insurance Brokerage 8,700
Florissant, MO........ Grace--Professional Services 3,000
Fresno, CA............ Driver--Insurance Brokerage 2,600
Glens Falls, NY....... Urbach--Professional Services 4,000
Hamden, CT............ Simione--Professional Services 800
Hartford, CT.......... Simione--Professional Services 225
Houston, TX........... Mann Frankfort--Professional Services 41,600
Lebanon, NH........... Berry Dunn--Professional Services 5,000
Long Beach, CA........ Holthouse--Professional Services 3,200
Los Angeles, CA....... Urbach--Professional Services 5,200
Los Angeles, CA....... Holthouse--Professional Services 10,300
Manchester, NH........ Berry Dunn--Professional Services 7,900
New Haven, CT......... Simione--Professional Services 14,100
New York, NY.......... Urbach--Professional Services 9,600
Newport Beach, CA..... Driver--Insurance Brokerage 11,900
Oakland, NJ........... IDA--Benefits Design and Administration 17,900
Ontario, CA........... Driver--Insurance Brokerage 12,600
Portland, ME.......... Berry Dunn--Professional Services 21,800
Poughkeepsie, NY...... Urbach--Professional Services 1,300
Sacramento, CA........ Driver--Insurance Brokerage 2,300
St. Louis, MO......... Grace--Professional Services 28,900
San Diego, CA......... Driver--Insurance Brokerage 39,400
San Francisco, CA..... Driver--Insurance Brokerage 3,600
San Rafael, CA........ Driver--Insurance Brokerage 3,200
Southfield, MI........ Follmer--Professional Services 35,300
Sterling Heights, MI.. Follmer--Professional Services 19,400
Washington, DC........ Urbach--Professional Services 3,100
Westlake Village, CA.. Holthouse--Professional Services 3,000
Yakima, WA............ Reppond--Insurance Brokerage 1,700
</TABLE>
Litigation
Centerprise is not involved in any legal proceedings which it believes are
material to its business, financial condition or results of operations.
Centerprise is not involved in any legal proceedings which it believes are
material to its business, financial condition or results of operations.
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CENTERPRISE MANAGEMENT
Executive Officers and Directors
The following table lists Centerprise's directors and executive officers, as
well as those persons who will become directors and executive officers upon
completion of the offering. In addition to the persons named as directors
below, stockholders of Centerprise intend to elect one additional independent
directors prior to the closing of the IPO. Centerprise is in the process of
selecting this individual.
<TABLE>
<CAPTION>
Name Age Position
--------------------- --- ----------------------------------------------
<C> <C> <S>
Robert C. Basten..... 39 Chairman of the board, president and chief
executive officer
Thomas W. Corbett.... 52 Executive vice president, president and chief
operating officer of business and financial
services and a director
DeAnn L. Brunts...... 37 Executive vice president, chief financial
officer and a director
Rondol E. Eagle...... 53 Executive vice president and chief integration
officer
Dennis W. Bikun...... 43 Vice president, chief accounting officer and
treasurer
David Reznick........ 61 Director
Richard H. Stein..... 46 Director
Anthony P. Frabotta.. 48 Director
Charles H. Roscoe.... 54 Director
Steven N. Fischer.... 55 Director
Robert F. Gallo...... 53 Director
Wayne J. Grace....... 58 Director
Philip J. Holthouse.. 40 Director
Anthony P. Scillia... 41 Director
Scott H. Lang........ 53 Director
Louis C. Fornetti.... 47 Director
William J. Lynch..... 56 Director
John M. Cook......... 56 Director
</TABLE>
Robert C. Basten joined Centerprise in November 1998 as chairman of the
board, president and chief executive officer. Prior to joining Centerprise, Mr.
Basten was a senior executive at American Express Company and most recently
served as president and chief executive officer of American Express Tax and
Business Services, a subsidiary of American Express. As head of this unit, Mr.
Basten led the firm's development and emergence as one of the fastest-growing
and most innovative professional and business advisory services firms in the
country. American Express Tax and Business Services was ranked by Accounting
Today as the 11th largest accounting firm in the United States based on fiscal
1997 revenues. Mr. Basten has extensive experience in leading the development
of new businesses both inside and outside of American Express. From 1984 to
April 1998, he held leadership roles at American Express in technology,
financial services marketing and brokerage.
Thomas W. Corbett will become a director and the president and chief
operating officer of Centerprise's business and financial services group upon
the closing of the offering. Mr. Corbett joined Driver in 1977 and assumed the
responsibilities of chief executive officer and chairman of the board of Driver
in 1994. Prior to joining Driver, Mr. Corbett was associated with Allendale
Insurance and spent three years as a loss prevention engineer at Factory Mutual
Engineering Association.
DeAnn L. Brunts joined Centerprise in March 1999 as executive vice
president, chief financial officer and a director. From 1985 until joining
Centerprise, Ms. Brunts was associated with PricewaterhouseCoopers LLP, where
she became a partner in 1996. Ms. Brunts' experience includes strategic
planning, mergers and acquisitions consulting and auditing services for public
and private companies. Ms. Brunts received an MBA in 1992 from the Wharton
School.
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Rondol E. Eagle joined Centerprise in January 1999 as executive vice
president and chief integration officer. From 1990 until joining Centerprise,
Mr. Eagle was a partner and managing director of management consulting services
at Olive LLP, one of the country's 20 largest accounting and consulting firms.
Mr. Eagle is the chairman of the board of the Information Technology Alliance,
one of the oldest and largest trade associations in the accounting profession.
In 1997 and 1998, Mr. Eagle was named in the Accounting Profession's 100 Most
Influential People List as compiled by Accounting Today magazine.
Dennis W. Bikun joined Centerprise in February 1999 as a vice president,
chief accounting officer and treasurer. Prior to joining Centerprise, Mr. Bikun
was a senior executive and most recently a vice president and chief financial
officer of Associated Estates Realty Corporation, a publicly-held real estate
investment trust that owned over 120 multifamily apartment properties located
throughout the United States.
David Reznick will become a director of Centerprise upon the closing of the
offering. Mr. Reznick has been a principal of Reznick since its founding in
1977. Prior to joining Reznick, he was an audit partner of Alexander Grant &
Company, the predecessor to Grant Thornton LLP.
Richard H. Stein will become a director of Centerprise upon the closing of
the offering. Mr. Stein joined Mann Frankfort in 1977 and is a member of its
management committee. Prior to joining Mann Frankfort, Mr. Stein was associated
with Ernst & Ernst from 1974 to 1977.
Anthony P. Frabotta will become a director of Centerprise upon the closing
of the offering. Mr. Frabotta joined Follmer in 1974 and has served as chairman
of Follmer's executive committee since 1997.
Charles H. Roscoe will become a director of Centerprise upon the closing of
the offering. Mr. Roscoe joined Berry Dunn in 1979 and became its president and
managing principal in 1990. Prior to joining Berry Dunn, Mr. Roscoe was
associated with Coopers & Lybrand for 12 years.
Steven N. Fischer will become a director of Centerprise upon the closing of
the offering. Mr. Fischer has served as president and chief executive officer
of Urbach since 1985. Mr. Fischer is the chairman of Urbach Hacker Young
International Limited and also serves as a trustee for Adelphi University.
Robert F. Gallo will become a director of Centerprise upon the closing of
the offering. Mr. Gallo has served as chief executive officer of IDA since
1991. Prior to joining IDA, Mr. Gallo practiced law at a firm which he founded.
Wayne J. Grace will become a director of Centerprise upon the closing of the
offering. Mr. Grace has been a partner of Grace since its founding in 1983 and
served as its managing partner from 1983 to 1998. Prior to establishing Grace,
he was a partner in the accounting firm, Fox & Company from 1969 to 1983, and
served as the managing partner of its St. Louis office from 1979 to 1983. Mr.
Grace served as a director of Petrolite Corporation from 1995 until its merger
with Baker Hughes Incorporated in 1997.
Philip J. Holthouse will become a director of Centerprise upon the closing
of the offering. Mr. Holthouse has been a partner of Holthouse since its
founding in 1991. Mr. Holthouse is on the faculty of the University of Southern
California, Masters of Business Taxation Program and a member of the board of
advisors for the Leventhal School of Accounting.
Anthony P. Scillia will become a director of Centerprise upon the closing of
the offering. Mr. Scillia co-founded Simione in 1996. From 1991 to 1996, Mr.
Scillia was a principal with the accounting firm of Scillia & Larrow, P.C. Mr.
Scillia was associated with McGladrey & Pullen from 1988 to 1991 and Ernst &
Young from 1979 to 1988. Mr. Scillia is a member of the Construction Financing
Committee of the Associated General Contractors of America and the National
Construction Industry Conference Committee of the AICPA.
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Scott H. Lang became a director of Centerprise in November 1998. Since 1996,
Mr. Lang has been managing member of BGL Management Company, LLC, which is the
managing member of BGL Capital Partners L.L.C., a merchant banking firm which
originates and finances industry consolidations. Mr. Lang is also a managing
director and principal of Brown, Gibbons, Lang & Company, L.P., an investment
banking firm, a position he has held since 1995. From 1985 to 1995, he served
as executive vice president and managing director of investment banking at
Rodman & Renshaw, Inc., a Chicago-based securities firm. Prior to 1985, Mr.
Lang practiced law in Washington, D.C., where he was a partner at Arnold &
Porter. Mr. Lang is a director of Compass International Services Corporation.
Louis C. Fornetti will become a director of Centerprise upon the closing of
the offering. From 1995 to 1997, Mr. Fornetti was the executive vice president
and chief financial officer of Interra Financial Inc., now known as Dain
Rauscher, Inc., a regional brokerage firm, and president and chief executive
officer of Interra Clearing Services. From 1985 to 1995, Mr. Fornetti held
various management positions, including senior vice president and chief
financial officer, with American Express Financial Advisors, formerly IDS, a
subsidiary of American Express Corporation and a manufacturer and distributor
of financial products.
William J. Lynch will become a director of Centerprise upon the closing of
the offering. Since 1996, Mr. Lynch has been a managing director of Capstone
Partners, LLC, a special situations venture capital firm. From October 1989 to
March 1996, Mr. Lynch was a partner in the law firm Morgan, Lewis & Bockius
LLP. Mr. Lynch is a director of Coach USA, Inc.
John M. Cook will become a director of Centerprise upon the closing of the
offering. Mr. Cook is chairman of the board and chief executive officer of The
Profit Recovery Group International, Inc., an audit recovery services firm, and
has served in such capacities since founding PRG in November 1990. Mr. Cook
served as president of PRG from November 1990 through January 1998. Prior to
forming PRG, Mr. Cook served as president and chief operating officer of Roy
Greene Associates from 1989 to 1990. From 1987 to 1989, Mr. Cook served as
senior vice president of Caldor Stores, Inc., a division of May Department
Stores Co.
Board of Directors
After completion of the mergers, the board of directors of Centerprise will
consist of 17 directors, each serving for a term of one year. At each annual
meeting of stockholders, stockholders will elect all directors. The current
stockholders of Centerprise have entered into an agreement with respect to
nominating and electing directors through the fifth annual meeting following
the offering. See "Description of Centerprise's Capital Stock--Stockholders'
Agreement" for a description of the agreement. Centerprise expects that the
board of directors will establish an executive committee, an audit committee, a
compensation committee, and such other committees as the board may determine.
The board expects to appoint the members of each committee at the first meeting
of the board of directors following the completion of the IPO.
Director Compensation
Directors who are also employees of Centerprise or one of its subsidiaries
do not receive compensation for serving as directors. Each director who is not
an employee of Centerprise or one of its subsidiaries will receive an annual
stipend of $15,000, a fee of $2,000 for attendance at each board of directors
meeting and $1,000 for each committee meeting unless held on the same day as a
board of directors meeting. Centerprise will also reimburse directors for out-
of-pocket expenses incurred in attending board of directors or committee
meetings or otherwise incurred in their capacity as directors. Upon completion
of the offering, Centerprise will grant each non-employee director options to
purchase 15,000 shares of common stock at an exercise price equal to the
initial public offering price.
Employment Agreements; Covenants-Not-To-Compete
BGL Capital has entered into agreements with Robert C. Basten, DeAnn L.
Brunts, Rondol E. Eagle and Dennis W. Bikun pursuant to which these individuals
provide consulting services to BGL Capital in connection
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with the mergers and the offering. As compensation for his consulting services,
Mr. Basten is receiving annual consulting fees of $225,000 and a signing bonus
of $210,000. Ms. Brunts is receiving annual consulting fees of $175,000 and a
signing bonus of $100,000. Mr. Eagle is receiving annual consulting fees of
$190,000. Mr. Bikun is receiving annual consulting fees of $175,000. These
arrangements will remain in effect until the earliest of the closing of the
offering, the execution of an employment agreement with Centerprise or
termination of the consulting agreement. Amounts paid by BGL Capital under the
consulting agreements, together with interest at 8% per annum, will be
reimbursed by Centerprise from the offering proceeds.
Prior to the closing of the offering, Mr. Basten, Ms. Brunts, Mr. Eagle and
Mr. Bikun will enter into three-year employment agreements with Centerprise
providing for annual base salaries of $250,000, $225,000, $190,000 and
$175,000, respectively. Each employment agreement will also provide for an
annual bonus of up to 100% of the employee's base salary based upon achieving
performance targets established by the compensation committee of the board of
directors. Unless terminated or not renewed by Centerprise or the executive,
the term of each employment agreement will continue after the initial term on a
year-to-year basis on the same terms and conditions existing at the time of
renewal. Each employment agreement will contain a covenant not to compete with
Centerprise for a period ending on the second anniversary of the date of
termination of employment. Under this covenant, the executive cannot:
. engage in any business in competition with Centerprise anywhere in the
United States;
. solicit for employment a Centerprise managerial employee unless that
person has been out of the employ of Centerprise for at least 180 days;
. solicit or sell any competitive products or services to any person or
entity which is, or has been within one year prior to the date of
termination, a customer of Centerprise, or that was known by the employee
to have been actively solicited by Centerprise during such period; or
. call upon a prospective acquisition candidate which was approached or
analyzed by Centerprise within the one year prior to the termination
date, for the purpose of acquiring the entity.
These provisions may be enforced by injunctions or restraining orders and will
be construed in accordance with the changing activities, businesses and
locations of Centerprise.
Each of these employment agreements will provide that, if Centerprise
terminates the executive's employment without cause or if the executive
terminates for "good reason," Centerprise will pay severance compensation.
Severance compensation consists of the executive's then current salary plus the
bonus paid for the last fiscal year for a period of two years following the
date of termination and bonus for the current year prorated through the
termination date. If termination of employment occurs prior to a change in
control of Centerprise, Centerprise will pay severance in equal installments on
the normal payroll payment dates during the severance period. If the
termination occurs after a change in control of Centerprise, Centerprise will
pay severance in a lump sum within 30 days of the termination date.
Cause is defined under the agreements to include:
. a final, non-appealable conviction of a felony or a crime involving moral
turpitude;
. employee's willful failure to comply with reasonable directions of the
board of directors following notice and opportunity to cure;
. the determination by the board of directors that employee has committed
fraud, willful dishonesty, material misconduct or misappropriation of
Centerprise property in the course of employment;
. material breach by employee of the non-competition provisions in the
agreement; and
. material breach by employee of other provisions of the agreement
following notice and opportunity to cure.
So long as the executive does not engage in conduct giving rise to the right to
terminate employment for cause, "good reason" includes:
. the failure to elect the executive to the office previously held, the
removal of the executive from his or her position or the assignment to
the executive of any additional duties or responsibilities or a
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reduction in executive's duties or responsibilities which, in either
case, are inconsistent with those customarily associated with such
position;
. a relocation by Centerprise of the executive's place of employment
beyond a specified area;
. a material decrease in the executive's salary or bonus opportunities;
. material breach by Centerprise of the agreement following notice and
opportunity to cure; and
. subject to certain exceptions, termination by Centerprise of any
employee benefit plan in which the executive participates.
Each of these employment agreements will provide that if, within 30 months
from the closing of the offering, the executive voluntarily terminates his or
her employment other than for "good reason" or under circumstances approved by
the board of directors with respect to the chief executive officer, or approved
by the chief executive officer with respect to other members of management,
restricted shares held by the executive at the date of termination will remain
restricted until the fifth anniversary of the offering. Mr. Basten's employment
agreement will further provide that if within 30 months after the closing of
the offering, he voluntarily terminates his employment other than for "good
reason" or under circumstances approved by the board of directors, he will be
required to pay liquidated damages to Centerprise within 30 days of his
termination. The amount of liquidated damages will be equal to three times the
sum of his base salary and maximum bonus, in each case as in effect at the time
of termination.
Business Services Employees
Upon the closing of the offering, Centerprise and Driver will enter into a
five-year employment agreement with Thomas W. Corbett pursuant to which he will
serve as chairman of the board and chief executive officer of Driver and as
president and chief operating officer of Centerprise's business and financial
services group. Mr. Corbett's annual base salary under this agreement will be
$350,000. Mr. Corbett is also entitled to an annual bonus of up to $250,000 and
additional commission-related compensation of $400,000 per year. Unless
terminated or not renewed by Driver or Mr. Corbett, the term of the employment
agreement will continue after the initial term on a year-to-year basis on the
same terms and conditions existing at the time of renewal. If Driver terminates
Mr. Corbett's employment without cause, or if he voluntarily terminates his
employment within 90 days after a "constructive termination," he will be
entitled to severance benefits equal to $800,000 times the greater of the
number of years left in the employment period or three years. Constructive
termination under Mr. Corbett's employment agreement includes:
. demotion from the position of chairman of the board or chief executive
officer of Driver;
. a reduction in salary, additional compensation, bonus opportunity or
expense allowance, and
. a change in control of Driver other than pursuant to a change in control
of Centerprise.
In addition, the employment agreements of Mr. Corbett, Jerold D. Hall and
Gregory P. Zimmer contain reciprocal provisions under which the triggering of
Driver's obligations to pay severance to any of such individuals will
constitute a constructive termination of the other two employees. Messrs. Hall
and Zimmer are executive officers of Driver. Driver's obligation to pay
severance to Messrs. Hall and Zimmer under their employment agreements would be
triggered by circumstances similar to those provided for in Mr. Corbett's
agreement. Severance benefits for each of Messrs. Hall and Zimmer would equal
their salary and bonus, as then in effect, for a three year period. Messrs.
Hall and Zimmer's annual base salaries will be $200,000 and $250,000,
respectively, and each of them will be entitled to receive an annual bonus in
an amount up to 100% of his base salary.
Under Mr. Corbett's employment agreement, Messrs. Corbett, Hall and Zimmer
have a limited right of first refusal with respect to a sale of Centerprise's
insurance business. Should Centerprise decide to accept an offer for the sale
of its insurance business to a company engaged in the commercial insurance
business, Messrs. Corbett, Hall and Zimmer will have the right, for 45 days
after notice, to purchase Centerprise's insurance
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business on the same terms. A covenant not to compete provides that, until the
second anniversary of the date of termination of employment, other than by the
expiration of Mr. Corbett's employment at the end of the employment period
without renewal of the agreement, Mr. Corbett is prohibited from:
. engaging in any business in direct competition with Driver or
Centerprise's business and financial services group in any territory
where Driver or Centerprise conducts such business;
. soliciting for employment a Centerprise employee;
. soliciting or selling any competitive products or services to any person
or entity which is, or has been within one year prior to the date of
termination, a customer of Driver or of Centerprise's business and
financial services group, or that was known by Mr. Corbett to have been
actively solicited by Centerprise during such period;
. calling upon a prospective acquisition candidate which was approached or
analyzed by Centerprise within one year prior to the termination date,
for the purpose of acquiring the entity; or
. disclosing the identity of any agents or brokers that produce or finance
insurance through Centerprise or any current or prospective policyholder
or premium finance customer for any reason or purpose.
Upon the closing of the offering, IDA will enter into a four-year employment
agreement with Robert F. Gallo, pursuant to which he will serve as IDA's chief
executive officer at an annual base salary of $200,000. This agreement also
provides for an annual bonus of up to 50% of base salary for 1999 and up to
100% of base salary thereafter. Unless terminated or not renewed by IDA or Mr.
Gallo, the agreement will continue after the initial term on a year-to-year
basis on the same terms and conditions existing at the time of renewal. In the
event IDA terminates Mr. Gallo's employment without cause or Mr. Gallo
voluntarily terminates his employment within 60 days after a "constructive
termination," Mr. Gallo will be entitled to severance
compensation which includes his base salary and prorated bonus for the
remainder of his employment term. Constructive termination under Mr. Gallo's
agreement includes:
. demotion to a position substantially below that of IDA's chief executive
officer or the assignment of duties and responsibilities that are not
commensurate with such position;
. substantial reduction in base salary;
. relocation of the place of employment outside the New Jersey area; or
. a change in control of IDA other than pursuant to a change in control of
Centerprise.
This employment agreement will contain a covenant not to compete whereby, until
the second anniversary of the date of termination of employment, Mr. Gallo is
prohibited from:
. engaging in any business in direct competition with IDA within any
business market where IDA conducts business;
. soliciting or selling any competitive products or services to any
person or entity which is, or has been within one year prior to the
date of termination, a customer of IDA or that was known by Mr. Gallo
to have been actively solicited by IDA during such period;
. enticing an employee of IDA away from IDA; or
. calling upon a prospective acquisition candidate which was approached
or analyzed by Centerprise within one year prior to the termination
date, for the purpose of acquiring the entity.
Professional Services Employees
Upon the closing of the mergers, each professional services firm and its
former owners and principals will enter into an incentive compensation
agreement with Centerprise. For a more detailed description of the incentive
compensation agreements, see "Business of Centerprise After the Mergers--
Employee Incentives--
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<PAGE>
Professional Services." The incentive compensation agreements include
nonsolicitation covenants by each employee which are effective until the second
anniversary of the date of termination of employment. Generally, during this
period, if the employee directly or indirectly provides services to any person
or entity who was a client of Centerprise at or within one year of the
employee's termination, the employee must pay to Centerprise 125% of the
greater of the average annual fees charged by Centerprise to such client during
the prior three-year period and the fees charged by Centerprise to such client
during the most recent 12-month period. In addition, if during the restricted
period the employee entices an employee of Centerprise away from Centerprise,
the employee must pay to his or her firm 50% of the greater of the solicited
person's total cash compensation for the 12 months preceding such person's
termination of employment or, if known, the 12 months following such
termination. The incentive compensation agreements also prohibit employees,
until the second anniversary of their employment termination date, from calling
upon prospective acquisition candidates which were approached or analyzed by
Centerprise within the six months preceding the employment termination date.
Employee Incentive Compensation Plan
Prior to the IPO, the board of directors and stockholders will adopt
Centerprise's employee incentive compensation plan. The purpose of this plan is
to provide directors, officers, employees, consultants and independent
contractors with additional incentives by increasing their ownership interests
in Centerprise. Individual awards may take the form of incentive stock options
or non-qualified stock options, stock appreciation rights, restricted or
deferred stock, dividend equivalents, and cash awards or other awards not
otherwise provided for, the value of which is based in whole or in part upon
the value of the common stock. Centerprise's compensation committee will
administer the plan, select the individuals who will receive awards and
determine the terms and conditions of those awards.
Centerprise has reserved 5,812,100 shares of common stock for use in
connection with the plan. However, the number of shares available for use under
the plan at any given time will not exceed 15% of the total number of shares of
common stock outstanding at that time. Shares attributable to awards which have
expired, terminated, canceled or forfeited are available for issuance for
future awards.
The plan will remain in effect until terminated by the board of directors.
The board of directors may amend the plan without the consent of the
stockholders, except that any amendment, although effective when made, will be
subject to stockholder approval if required by law or by the rules of any
national securities exchange or over-the-counter market on which the common
stock may then be listed or quoted.
Upon completion of the IPO, Centerprise will grant non-qualified stock
options to purchase a total of 2,020,500 shares of common stock. Centerprise
will grant options to purchase an aggregate of 290,000 shares of common stock
to its corporate management including 100,000 options to Mr. Basten, 100,000
options to Ms. Brunts, 50,000 options to Mr. Eagle and 40,000 options to Mr.
Bikun. Centerprise will grant options to purchase an aggregate of
shares to the employees of the founding companies. The grants
will be effective as of the date of the IPO and each option will have an
exercise price equal to the initial public offering price. These options will
vest over periods ranging from three to five years and will expire 10 years
from the date of grant or earlier if there is a termination of employment.
Subject to policies established by Centerprise's compensation committee, each
founding company will have discretion to determine the allocation of options
among its employees.
The plan also provides for the automatic grant to each non-employee director
serving at the closing of the IPO of an option to purchase 15,000 shares of
common stock, and after the IPO, the automatic grant to each non-employee
director of an option to purchase 15,000 shares when the director is initially
elected. In addition, the plan provides for an automatic annual grant to each
non-employee director of an option to purchase 7,500 shares at each annual
meeting of stockholders following the IPO. However, if the first annual meeting
of stockholders following a non-employee director's initial election is within
three months of the date of the election or appointment, the non-employee
director will not be granted an option at the annual meeting. These
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<PAGE>
options will have an exercise price per share equal to the fair market value of
a share at the date of grant, will expire at the earlier of 10 years from the
date of grant or one year after termination of service as a director, and will
be immediately exercisable upon grant.
Centerprise's compensation committee has discretion to grant performance
awards for eligible participants with incentives the committee deems
appropriate. It permits the issuance of awards in cash or common stock based on
the satisfaction of specific performance criteria. The performance goals for
any year may be based on a broad array of performance measures as selected by
the compensation committee, including financial results on a consolidated basis
or an operating unit basis depending on the responsibility of the employee, as
well as achievement of personal performance goals. The maximum value of these
awards for any employee in any year is 100% of the employee's salary. In
addition, the compensation committee has discretion to pay, cancel or provide
for the substitution or assumption of these bonus awards.
Employee Stock Purchase Plan
Prior to the closing of the IPO, Centerprise will adopt an employee stock
purchase plan, under which a total of 2,000,000 shares of common stock will be
reserved for issuance. The stock purchase plan, which is intended to qualify
under Section 423 of the Internal Revenue Code of 1986, permits eligible
employees of Centerprise to purchase common stock through payroll deductions
with all such deductions credited to an account under the stock purchase plan.
Payroll deductions may not exceed $25,000 for all purchase periods ending
within any year.
The stock purchase plan operates on a quarterly basis. To be eligible to
participate, an employee must file all requisite forms prior to a specified due
date known as the "grant date." Generally the first day of each quarter will be
the grant date and the last day of each quarter will be an exercise date. The
determination of the grant dates and the exercise dates is within the
discretion of the committee appointed to administer the stock purchase plan. On
each exercise date, payroll deductions credited to participants' accounts will
be automatically applied to the purchase price of common stock at a price per
share equal to eighty-five percent (85%) of the fair market value of the common
stock on the grant date or the exercise date, whichever is less. Employees
may end their participation in the stock purchase plan at any time during an
offering period, and their payroll deductions up to the date of termination
will be refunded. Participation ends automatically upon termination of
employment with Centerprise.
Employees are eligible to participate in the stock purchase plan if they are
customarily employed by Centerprise or a designated subsidiary for at least 20
hours per week and for more than six months in any calendar year. No employee
will be able to purchase common stock under the stock purchase plan if such
person, immediately after the purchase, would own stock possessing 5% or more
of the total shares of common stock outstanding or 5% of the value of all
outstanding shares of all classes of stock of Centerprise.
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<PAGE>
CERTAIN TRANSACTIONS
Organization of Centerprise
Centerprise was incorporated in November 1998 and is currently a 71.4%
subsidiary of CPA Holdings, LLC, a Delaware limited liability company. CPA
Holdings is owned by a group of investors that includes BGL Capital, Reznick,
Fedder & Silverman, C.P.A.s, L.L.C., MFSL Investments, L.P. and the CCP Group,
which served as one of Centerprise's sponsors and consists of Steven P. Colmar,
Benjamin H. Crawford, William G. Parkhouse, William J. Lynch, Leonard A. Potter
and James G. Lynch. William J. Lynch will become a director of Centerprise upon
the closing of the IPO. Centerprise has agreed to issue warrants to the CCP
Group to purchase a total of 100,000 shares of common stock at the initial
public offering price and reimburse PSG Funding Corp., a company affiliated
with the CCP Group, for offering expenses totaling $345,000.
Scott H. Lang, a director of Centerprise, is a managing member of BGL
Management Company, LLC, which is the managing member of BGL Capital which is,
in turn, the managing member of CPA Holdings. Reznick LLC was created by
certain owners of Reznick to hold its co-sponsor interest in Centerprise. David
Reznick, who will become a director of Centerprise upon the closing of the IPO,
is a member of Reznick LLC. MFSL Investments was created by Mann Frankfort's
shareholders and employees to hold its co-sponsor interest. Richard H. Stein,
who will become a director of Centerprise upon the closing of the IPO, is a
managing member of the general partner of MFSL Investments.
Following the IPO, CPA Holdings intends to distribute its shares of
Centerprise common stock to its members who, in turn, may further distribute
such shares to their respective members or partners. Notwithstanding such
distributions, these shares will remain subject to transfer restrictions
imposed by the underwriters and the stockholders' agreement.
The remaining 28.6% of Centerprise's outstanding shares of common stock are
held by Mr. Basten, Ms. Brunts, Mr. Eagle, Mr. Bikun, Jonathan R. Rutenberg and
Reznick LLC.
Following the approximate 221.17903-for-one stock split to be effected prior
to the closing of the IPO, the 17,500 shares of common stock initially issued
by Centerprise to its initial investors and management will total 3,870,633
shares. This number will be reduced if and to the extent additional shares are
paid to founding companies as described below the table under "The Mergers."
The Mergers
The aggregate purchase price to be paid by Centerprise in the mergers
consists of approximately $83.9 million in cash, a promissory note for $4.0
million and 12,569,367 shares of common stock, plus certain contingent payments
as described below. The following table sets forth the purchase price to be
paid to the stockholders of each of the founding companies and the percentage
of Centerprise's outstanding common stock to be beneficially owned by the
former owners of each founding company following the closing of the IPO.
<TABLE>
<CAPTION>
Percentage
Promissory Shares of Ownership of
Company Cash note common stock Centerprise
------------------------------ ------- ---------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Reznick....................... $16,899 $ -- 1,810,553 6.8%
Driver........................ 500 -- 2,944,445 11.0
Mann Frankfort................ 16,503 -- 1,768,200 6.6
Follmer....................... 13,600 -- 1,457,143 5.4
Berry Dunn.................... 6,821 -- 931,357 3.5
Urbach........................ 9,190 -- 1,023,943 3.8
IDA........................... 8,154 -- 873,669 3.3
Grace......................... 2,840 -- 304,286 1.1
Holthouse..................... 5,603 -- 600,343 2.2
Reppond....................... -- 4,000 447,428 1.7
Simione....................... 3,808 -- 408,000 1.5
------- ------ ---------- ----
Total..................... $83,918 $4,000 12,569,367 46.9%
======= ====== ========== ====
</TABLE>
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<PAGE>
The number of shares shown in the table assumes an initial public offering
price of at least $11.90 per share. If the price is below such level, the
number of shares issued to each founding company will increase on a pro rata
basis in accordance with the numbers shown in the table such that the aggregate
value of the shares issued equals $149,575,467.
The former stockholders of Driver will also be entitled to receive a
contingent cash payment equal to 6.75 times the amount, if any, by which
Driver's adjusted earnings before interest, taxes, depreciation and
amortization ("EBITDA") for 2000 exceed $11.6 million. The former stockholders
of IDA will also be entitled to a contingent cash payment equal to the lesser
of (a) $3,414,500 and (b) 6.75 times the amount, if any, by which IDA's
adjusted EBITDA for 2000 exceeds $3,290,000. The former stockholders of Reppond
will also be entitled to receive a contingent cash payment which will be
calculated with respect to a specified twelve month period ending in 2003 and
based on the amount by which the adjusted EBITDA of Centerprise's employee
benefits business, excluding IDA, exceeds specified thresholds. One of
Reppond's stockholders will also be entitled to receive contingent cash
payments with respect to each of the first five twelve month periods following
the closing of the mergers. Such payments will be based on the amount by which
Reppond's adjusted EBITDA for the applicable period exceeds specified
thresholds.
Centerprise and representatives of each founding company determined the
price to be paid for the founding companies through arm's-length negotiations.
The parties considered several factors including the amount of Centerprise Base
Earnings for each professional services firm, and the historical operating
results, net worth, level and type of indebtedness and future prospects of each
founding company. Each founding company was represented by independent counsel
in the negotiation of the terms and conditions of the merger agreement between
Centerprise, the founding company and its owners.
Each merger agreement contains standard representations and warranties of
each party as well as indemnification provisions relating to breaches of
representations and warranties made by the parties to the agreement and certain
liabilities under federal securities laws. Furthermore, each merger agreement
provides that the consummation of the merger is subject to certain conditions.
These conditions include:
. the continuing material accuracy on the closing date of the mergers of
the representations and warranties of the founding company, the owners of
the founding company and Centerprise;
. the performance by each of them of all covenants included in the merger
agreement;
. the absence of a material adverse change in the results of operations,
financial condition or business of the founding company;
. the simultaneous closing of all of the mergers;
. the approval of the merger agreement and related transactions by the
owners of the founding company as required by applicable law; and
. Centerprise's having entered into one or more credit facilities providing
for aggregate commitments of not less than $75 million.
Owners of each founding company who have voting power over equity interests
sufficient to approve the merger have entered into a voting agreement with
Centerprise to vote those interests in favor of the merger.
Under applicable state laws, shareholders of Mann Frankfort, Driver, Urbach
and Reppond may dissent by voting against the merger. Dissenting owners who
comply with the requirements of state law will have the right to demand
appraisal of and payment for their shares. Under applicable law, no dissenting
shareholder has any right to contest the validity of the merger or to have the
merger set aside or rescinded, except in an action to test whether the number
of shares required to approve the merger have legally been voted in favor of
the merger and, in the case of the holders of Reppond, in circumstances
involving fraud. The shareholders of the companies have agreed to indemnify
Centerprise for any payments required to be made with respect to dissenting
shares.
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Pursuant to each merger agreement, the owners of the founding companies have
agreed not to compete with Centerprise, for three years following the closing
of the mergers, with respect to Driver and Reppond, within any business market
where Driver or Reppond conducts business and with respect to the other
founding companies, within a 50-mile radius of any location at which the
particular founding company conducts business. The owners of the founding
companies have also agreed to restrictions on the transfer of the shares of
common stock they receive in the mergers. Any requested waiver of such transfer
restrictions must be approved by a majority of the members of the board of
directors who are not subject to transfer restrictions at the time of such
proposed waiver.
In connection with the mergers, and as consideration for their interests in
the founding companies, certain directors and officers of Centerprise will
receive cash and shares of common stock as follows:
<TABLE>
<CAPTION>
Shares of
Name Cash common stock
--------------------------------------------------- ---------- ------------
<S> <C> <C>
David Reznick...................................... $1,708,672 108,973
Thomas W. Corbett.................................. -- 509,388
Richard H. Stein................................... 2,857,390 306,148
Anthony P. Frabotta................................ 1,685,880 186,451
Charles H. Roscoe.................................. 380,000 45,142
Steven N. Fischer.................................. 727,700 79,031
Robert F. Gallo.................................... 4,647,780 497,991
Wayne J. Grace..................................... 583,000 54,714
Philip J. Holthouse................................ 1,360,000 145,714
Anthony P. Scillia................................. -- 154,876
</TABLE>
For information regarding these individuals' beneficial ownership of
Centerprise's common stock, see "Security Ownership of Management and Principal
Stockholders of Centerprise."
Ancillary Agreements with Professional Services Firms and their Affiliates
With respect to the professional services firms, the closing of their
respective mergers will be conditioned on the execution and delivery of several
ancillary documents. These documents are as follows:
Incentive Compensation Agreements. Upon the closing of the mergers,
Centerprise and each professional services firm will enter into an incentive
compensation agreement with each of the firm's former owners and principals.
Messrs. Reznick, Stein, Frabotta, Roscoe, Fischer, Grace, Holthouse and Scillia
will be parties to their firms' incentive compensation agreements. For a more
detailed description of these agreements, see "Business of Centerprise after
the Mergers--Employee Incentives--Professional Services."
Separate Practice Agreements. Under current state laws and regulations
governing the accounting profession, Centerprise is prohibited from providing
attest services to its clients. Centerprise has required that each professional
services firm divest its attest services prior to the closing of the mergers.
Following the closing, all attest services formerly provided by a professional
services firm will be provided by a separate attest firm in which Centerprise
has no ownership interest. Centerprise and the attest firm and its owners will
enter into a separate practice agreement, which permits the attest firm to
provide attest services to Centerprise's clients. Under such agreement, the
attest firm is responsible for the attest services provided by it and
compliance with applicable ethical, professional and legal requirements. While
the primary risk of professional liability for attest services lies with the
attest firm and the supervising CPA, it does not preclude the possibility that
Centerprise could be drawn into disputes surrounding attest services where
Centerprise employees were involved pursuant to services agreements. With
respect to non-attest services provided by Centerprise employees to clients
other than attest firms, Centerprise will bear the risk of professional
liability. Consequently, Centerprise will maintain a high degree of commitment
to training and internal quality control, as well as appropriate professional
liability insurance coverage. Each attest firm will be required to obtain its
own firm professional liability coverage.
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<PAGE>
The term of each separate practice agreement will be 40 years. Either
Centerprise's professional services firm or the attest firm may terminate the
separate practices agreement if a court or accounting or other regulatory body
finds that the separate practice structure violates applicable laws, rules or
regulations or subject to applicable cure periods, upon a breach of the
separate practice agreement or services agreement by the non-terminating party.
Under the separate practice structure, CPA employees who are also attest
firm owners will divide their time between Centerprise and the attest firms.
Decisions of how to allocate their time will be left to these individuals. As
was the case prior to the mergers, much of this decision making is expected to
be driven by client demands and schedules.
Services Agreements. Pursuant to non-exclusive services agreements between
Centerprise and the attest firms, Centerprise will manage and administer the
business functions and business affairs of each attest firm. Each attest firm
will retain the exclusive authority to direct the professional and ethical
aspects of the attest services that it provides. Centerprise is responsible for
providing:
.general administrative services, such as billing, collection, bookkeeping
and cash management;
.office space, facilities, equipment, furniture and other personal
property;
.professional, administrative, clerical and other personnel; and
.inventory and supplies.
In connection with the mergers, each of the attest firms will enter into a
binding commitment to use Centerprise to provide for budgeted levels of these
services, including professional and other personnel, for a period of one year.
This binding commitment will continue throughout the term of the services
agreements until and unless an attest firm provides Centerprise with a twelve-
month advance notice of its intention to obtain one or more of the services
previously provided by Centerprise from another source. If such notice were
received, the services agreement, which will initially be priced anticipating
significant usage of Centerprise staffing and other services, would be modified
to identify an alternative computational basis for recovery of the occupancy
and administrative costs that are still being incurred, for example, a cost per
square foot, or cost plus, or flat rate charge.
The term of each agreement will be 40 years. Centerprise's professional
services firm may terminate a services agreement upon certain bankruptcy events
related to the attest firm or if the attest firm or any of its employees fails
to adhere to any compliance plan, policy or manual of Centerprise, engages in
conduct or is formally accused of conduct for which the attest firm's license
would be expected to be subject to revocation or suspension or is otherwise
disciplined by any licensing, regulatory or professional entity or institution.
The attest firm may terminate a services agreement upon certain bankruptcy
events related to Centerprise, or subject to applicable cure periods, if
Centerprise engages in gross negligence or fraud in the performance of any
material duty or material obligation imposed under the services agreement,
which gross negligence or fraud has not been cured. The attest firm may also at
any time terminate Centerprise's duties to provide general and administrative
services, inventory and supplies by delivering written notice one year in
advance of the termination.
Under each of the services agreements, Centerprise and the attest firm have
agreed that if any provision of the agreement is found to be in violation of
applicable laws or regulations, Centerprise and the attest firm will amend the
agreement as necessary to preserve the underlying economic and financial
arrangements without substantial economic detriment to either party. If the
agreement cannot be so amended, it will terminate. These terms of the services
agreements could limit Centerprise's flexibility to modify its operations in
response to regulatory issues. See "Risk Factors--Regulation of the accounting
profession will constrain Centerprise's operations and impact its structure and
numerous issues arising out of that regulation, its interpretation or its
evolution could impair Centerprise's ability to provide services to some
clients, including the attest firms, reduce its revenues and cause the market
value of the common stock to decline."
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Other Transactions
As of March 31, 1999, BGL Capital had funded $715,000 in expenses in
connection with Centerprise's formation, the IPO and the mergers. This amount
includes legal, accounting and other fees including consulting fees and signing
bonuses payable to Mr. Basten, Ms. Brunts, Mr. Eagle and Mr. Bikun under their
consulting agreements. Centerprise anticipates that additional amounts will be
advanced by BGL Capital on Centerprise's behalf prior to the closing of the
IPO. All amounts advanced by BGL Capital to Centerprise or paid by BGL Capital
under the consulting agreements, together with interest at an annual rate of 8%
from the date of payment by BGL Capital, will be repaid by Centerprise from the
proceeds of the IPO.
Follmer leases its Southfield, Michigan space from Lincoln Development
Corporation, a company which is 50% owned by Follmer Rudzewicz Development.
Follmer Rudzewicz Development is a limited partnership which is owned in part
by Anthony P. Frabotta. The lease term began in 1988 and expires in 2004. The
current
annual rent is approximately $680,000, which amount increases over the term of
the lease. The annual rent for the 2003 to 2004 term is approximately $736,000.
At March 31, 1999, the outstanding balance of working capital advances to
Grace from Wayne J. Grace was approximately $60,000.
At March 31, 1999, the outstanding balance of loans made by David Reznick to
Reznick was approximately $66,000.
Pursuant to a promissory note dated as of March 16, 1999, Driver loaned
Thomas W. Corbett $250,000 to enable him to make certain tax payments. Interest
on this amount accrues at the prime rate published in The Wall Street Journal.
All loans and advances between the founding companies and their
shareholders, affiliates or employees will be paid in full prior to or at the
time of the closing of the mergers.
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INFORMATION REGARDING THE CENTERPRISE COMPANIES
Berry, Dunn, McNeil & Parker
General
Berry, Dunn, McNeil & Parker, Chartered, founded in 1974, provides a wide
range of accounting, tax and business consulting services to a variety of
business clients in both the private and public sectors. Berry Dunn is one of
the largest accounting firms in the Northeast in terms of number of
professionals, and was ranked No. 53 in the Top 100. Berry Dunn has
significant expertise serving clients in the health care, financial
institutions, telecommunications, real estate and construction industries. The
firm also provides information technology consulting services to clients in a
variety of industries. Berry Dunn maintains offices in Portland, Maine;
Bangor, Maine; Manchester, New Hampshire; and Lebanon, New Hampshire. In
addition to providing Centerprise with a regional distribution point in New
England, Berry Dunn will participate significantly in developing Centerprise's
anticipated national practice in health care consulting services. Its
principal executive offices are located at 100 Middle Street, Portland, Maine
04104.
Regulation
As a service provider in the accounting profession, Berry Dunn's operations
are subject to state regulation. See "Business of Centerprise After the
Mergers--Regulation."
Employees
As of May 31, 1999, Berry Dunn employed approximately 142 professional
employees, of which 79 were licensed CPAs, and 43 non-professional employees.
None of Berry Dunn's employees is represented by a labor union. Management of
Berry Dunn believes its employee relations are good.
Selected Financial Data
The following table sets forth selected financial data for Berry Dunn on a
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended June 30, March 31,
------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $14,844 100.0% $16,812 100.0% $17,916 100.0% $14,201 100.0% $14,692 100.0%
Expenses:
Member compensation and
related costs......... 5,024 33.8 6,214 37.0 7,113 39.7 5,986 42.2 5,611 38.2
Employee compensation
and related costs..... 6,037 40.7 6,441 38.3 6,318 35.3 4,712 33.2 5,196 35.4
Other operating
expenses.............. 3,727 25.1 4,113 24.4 4,405 24.6 3,371 23.7 3,656 24.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from operations.. $ 56 0.4% $ 44 0.3% $ 80 0.4% $ 132 0.9% $ 229 1.6%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results for the Nine Months Ended March 31, 1999 Compared to the Nine Months
Ended March 31, 1998--Berry Dunn
Revenues. Revenues increased $491,000, or 3.5%, from $14.2 million in the
nine months ended March 31, 1998 to $14.7 million in the nine months ended
March 31, 1999, primarily due to a net increase in billings for recurring
services as well as special projects.
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<PAGE>
Member Compensation and Related Costs. Member compensation and related costs
decreased $375,000, or 6.3%, from $6.0 million in the nine months ended March
31, 1998 to $5.6 million in the nine months ended March 31, 1999, primarily due
to the departure of two members. As a percentage of revenues, these expenses
decreased from 42.2% in the nine months ended March 31, 1998 to 38.2% in the
nine months ended March 31, 1999.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $484,000, or 10.3%, from $4.7 million in the nine months ended
March 31, 1998 to $5.2 million in the nine months ended March 31, 1999,
primarily due to staff additions and salary increases. As a percentage of
revenues, these expenses increased from 33.2% in the nine months ended March
31, 1998 to 35.4% in the nine months ended March 31, 1999.
Other Operating Expenses. Other operating expenses increased $285,000, or
8.5%, from $3.4 million in the nine months ended March 31, 1998 to $3.7 million
in the nine months ended March 31, 1999, primarily due to increased business
development costs, depreciation, occupancy costs and expenditures for new tax
software. As a percentage of revenues, these expenses increased from 23.7% in
the nine months ended March 31, 1998 to 24.8% in the nine months ended March
31, 1999.
Results for the Year Ended June 30, 1998 Compared to the Year Ended June 30,
1997--Berry Dunn
Revenues. Revenues increased $1.1 million, or 6.6%, from $16.8 million in
the year ended June 30, 1997 to $17.9 million in the year ended June 30, 1998,
primarily due to an increase in the hourly billing rates for information
technology and other consulting projects.
Member Compensation and Related Costs. Member compensation and related costs
increased $899,000, or 14.5%, from $6.2 million in the year ended June 30, 1997
to $7.1 million in the year ended June 30, 1998, primarily due to increased
profits. As a percentage of revenues, these expenses increased from 37.0% in
the year ended June 30, 1997 to 39.7% in the year ended June 30, 1998.
Employee Compensation and Related Costs. Employee compensation and related
costs decreased $123,000, or 1.9%, from $6.4 million in the year ended June 30,
1997 to $6.3 million in the year ended June 30, 1998, primarily due to
reduction in administrative staff offset in part by salary increases. As a
percentage of revenues, these expenses decreased from 38.3% in the year ended
June 30, 1997 to 35.3% in the year ended June 30, 1998.
Other Operating Expenses. Other operating expenses increased $292,000, or
7.1%, from $4.1 million in the year ended June 30, 1997 to $4.4 million in the
year ended June 30, 1998, primarily due to an increase in depreciation of
personal computers. As a percentage of revenues, these expenses increased from
24.4% in the year ended June 30, 1997 to 24.6% in the year ended June 30, 1998.
Results for the Year Ended June 30, 1997 Compared to the Year Ended June 30,
1996--Berry Dunn
Revenues. Revenues increased $2.0 million or 13.3%, from $14.8 million in
the year ended June 30, 1998 to $16.8 million in the year ended June 30, 1997,
primarily due to a net increase in billings to clients for recurring services
as well as special projects.
Member Compensation and Related Costs. Member compensation and related costs
increased $1.2 million, or 23.7%, from $5.0 million in the year ended June 30,
1996 to $6.2 million in the year ended June 30, 1997, primarily due to
increased profits and the admission of new principals. As a percentage of
revenues, these expenses increased from 33.8% in the year ended June 30, 1996
to 37.0% in the year ended June 30, 1997.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $404,000, or 6.7%, from $6.0 million in the year ended June 30,
1996 to $6.4 million in the year ended June 30, 1997, primarily due to salary
increases. As a percentage of revenues, these expenses decreased from 40.7% in
the year ended June 30, 1996 to 38.3% in the year ended June 30, 1997.
79
<PAGE>
Other Operating Expenses. Other operating expenses increased $386,000, or
10.4%, from $3.7 million in the year ended June 30, 1996 to $4.1 million in the
year ended June 30, 1997, primarily due to increases in health insurance,
occupancy, software, insurance and telephone expenses. As a percentage of
revenues, these expenses decreased from 25.1% in the year ended June 30, 1996
to 24.4% in the year ended June 30, 1997.
Liquidity and Capital Resources--Berry Dunn
Berry Dunn generated cash from operating activities of approximately
$516,000 in the nine months ending March 31, 1999. Net cash used in operations
was approximately $35,000 in the nine months ending March 31, 1998. Berry Dunn
generated net cash flow from operating activities of approximately $1.6
million, $1.1 million and $29,000 in the years ended June 30, 1998, 1997 and
1996, respectively. Net cash used in investing activities was approximately
$1.4 million and $938,000 in the nine months ended March 31, 1999 and 1998,
respectively, primarily for property and equipment purchases and business
acquisitions. Net cash used in investing activities was approximately $1.1
million in each of the years ended June 30, 1998 and 1997 and $1.3 million in
the year ended June 30, 1996. Net cash used in financing activities was
approximately $1.1 million for the nine months ended March 31, 1999,
principally due to payments of debt net of capital contributed by principals
and repayments from related parties. Net cash provided by financing activities
was approximately $310,000 in the nine months ended March 31, 1998,
representing repayments from related parties, proceeds from the issuance of
debt and capital contributed by principals. In the years ended June 30, 1998,
1997 and 1996, net cash provided by financing activities was approximately
$337,000, $1.1 million and $501,000, respectively, principally from repayments
from related parties, proceeds from debt and capital contributed by principals.
At March 31, 1999, Berry Dunn had a net working capital deficit of $2.4
million.
Interest of Continuing Directors
Upon completion of the IPO, Charles H. Roscoe will become a director of
Centerprise. See "Centerprise Management."
80
<PAGE>
Principal Stockholders
The following table sets forth, as of April 1, 1999, the number of shares
beneficially owned by all of the stockholders of Berry Dunn. Unless otherwise
indicated, the persons named below have sole voting and investment power with
respect to all shares shown as beneficially owned by them:
<TABLE>
<CAPTION>
Shares Approximate
Name Beneficially Owned Percent Owned
---- ------------------ -------------
<S> <C> <C>
Charles H. Roscoe........................ 484.694 4.97
Richard R. Gossellin..................... 382.653 3.93
Gerald R. Lavigne(1)..................... 382.653 3.93
Erick L. Wordon.......................... 382.653 3.93
Kenneth L. Roberts....................... 178.571 1.83
Lee J. Chick............................. 255.102 2.62
Edward G. Asherman, Jr................... 382.653 3.93
Elliot D. Lerner......................... 204.082 2.09
Christopher T. Tyson..................... 178.571 1.83
Harry E. Meyer........................... 382.653 3.93
Janice D. Latulippe...................... 153.061 1.57
James R. Maynard......................... 382.653 3.93
Lawrence E. Parker, Jr................... 663.265 6.81
Raymond L. Cunliffe...................... 382.653 3.93
Stephanie Rice........................... 153.061 1.57
John T. Gurley........................... 382.653 3.93
Michael T. McNeil........................ 612.245 6.28
John H. Jackson, Jr...................... 382.653 3.93
Drew E. Swenson.......................... 331.633 3.40
John M. Chandler......................... 331.633 3.40
Tracy W. Harding......................... 331.633 3.40
Clifford C. Abbott, Jr................... 178.571 1.83
Francis P. Johnson....................... 382.653 3.93
Rodney F. Irish.......................... 484.694 4.97
Kenneth S. Jones......................... 331.633 3.40
Ralph A. Pascale, Jr..................... 204.082 2.09
Jeffrey D. Walla......................... 255.102 2.62
Stephen J. Ferrari....................... 1.000 0.01
J. Maurice L. Bisson..................... 382.653 3.93
Richard A. Charpentier................... 204.082 2.09
--------- ------
9,744.898 100.00
</TABLE>
- --------
(1) Mr. Lavigne does not currently have any voting or dispositive power with
respect to these shares.
Follmer, Rudzewicz & Company, P.C.
General
Follmer, Rudzewicz & Company, P.C., the predecessor of which was founded in
1968, provides a broad range of accounting, tax and business consulting
services to closely held companies with an emphasis on manufacturing companies.
Follmer is headquartered in Southfield, Michigan and also maintains an office
in Sterling Heights, Michigan. After the Big Five, Follmer is the second
largest firm in the Detroit metropolitan area based on the number of
professionals, and was ranked No. 46 in the Top 100. Follmer will provide
Centerprise with a regional distribution point in the upper Midwest and a
platform for Centerprise's anticipated national practice focused on the
manufacturing industry. Its principal executive offices are located at 12900
Hall Road, Suite 500, Sterling Heights, Michigan 48313.
81
<PAGE>
Regulation
As a service provider in the accounting profession, Follmer's operations are
subject to state regulation. See "Business of Centerprise After the Mergers--
Regulation."
Employees
As of May 31, 1999, Follmer employed 145 professional employees, of which 75
were licensed CPAs, and 47 non-professional employees. None of Follmer's
employees is represented by a labor union. Management of Follmer believes its
employee relations are good.
Selected Financial Data
The following table sets forth selected financial data for Follmer on a
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------------
1997 1998 1999
------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $17,954 100% $19,417 100% $22,525 100%
Expenses:
Member compensation and
related costs......... 6,646 37.0 7,339 37.8 8,797 39.0
Employee compensation
and related costs..... 7,567 42.1 8,225 42.4 9,949 44.2
Other operating
expenses.............. 4,042 22.6 3,891 20.0 4,688 20.8
------- ---- ------- ---- ------- ----
Income (loss) from
operations............. $ (301) (1.7)% $ (38) (0.2)% $ (909) (4.0)%
======= ==== ======= ==== ======= ====
</TABLE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results for the Year Ended May 31, 1999 Compared to the Year Ended May 31,
1998--Follmer
Revenues. Revenues increased $3.1 million, or 16.0%, from $19.4 million in
the year ended May 31, 1998 to $22.5 million in the year ended May 31, 1999,
primarily due to an expansion of the firm's computer information service,
organizational development and training ("ODT") and ISO service lines. Follmer
was also able to increase its realization rates as demand for its services
increased.
Member Compensation and Related Costs. Member compensation and related costs
increased $1.5 million, or 19.9%, from $7.3 million in the year ended May 31,
1998 to $8.8 million in the year ended May 31, 1999, primarily due to an
increase in operating income of the firm over the comparable period. As a
percentage of revenues, these expenses increased from 37.8% in the year ended
May 31, 1998 to 39.0% in the year ended May 31, 1999.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $1.7 million, or 21.0%, from $8.2 million in the year ended May
31, 1998 to $9.9 million in the year ended May 31, 1999, primarily due to an
increase in base compensation levels of the professional staff in an effort to
be more competitive with the Big Five in the Detroit metropolitan area. As a
percentage of revenues, these expenses increased from 42.4% in the year ended
May 31, 1998 to 44.2% in the year ended May 31, 1999.
Other Operating Expenses. Other operating expenses increased $797,000, or
20.5%, from $3.9 million in the year ended May 31, 1998 to $4.7 million in the
year ended May 31, 1999, primarily due to an increase in occupancy costs and
consulting fees related to the outsourcing of personnel used to staff the
firm's ODT services product. As a percentage of revenues, these expenses
increased from 20.0% in the year ended May 31, 1998 to 20.8% in the year ended
May 31, 1999.
82
<PAGE>
Results for the Year Ended May 31, 1998 Compared to the Year Ended May 31,
1997--Follmer
Revenues. Revenues increased $1.5 million, or 8.2%, from $18.0 million in
the year ended May 31, 1997 to $19.4 million in the year ended May 31, 1998,
primarily due to an increase in realized billing rates, a modest number of new
clients and the growth in the firm's valuation services, ODT and ISO service
lines.
Member Compensation and Related Costs. Member compensation and related costs
increased $693,000, or 10.4%, from $6.6 million in the year ended May 31, 1997
to $7.3 million in the year ended May 31, 1998. This increase was due to the
growth in the firm's net operating income available for member compensation. As
a percentage of revenues, these expenses increased from 37.0% in the year ended
May 31, 1997 to 37.8% in the year ended May 31, 1998.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $658,000, or 8.7%, from $7.6 million in the year ended May 31,
1997 to $8.2 million in the year ended May 31, 1998, primarily due to an
increase in base compensation levels of the professional staff in an effort to
be more competitive with the Big Five in the Detroit metropolitan area. As a
percentage of revenues, these expenses increased from 42.1% in the year ended
May 31, 1997 to 42.4% in the year ended May 31, 1998.
Other Operating Expenses. Other operating expenses decreased $151,000, or
3.7%, from $4.0 million in the year ended May 31, 1997 to $3.9 million in the
year ended May 31, 1998, primarily due to a reduction in bad debts and practice
development expenses. As a percentage of revenues, these expenses decreased
from 22.6% in the year ended May 31, 1997 to 20.0% in the year ended May 31,
1998.
Results for the Year Ended May 31, 1997 Compared to the Year Ended May 31,
1996--Follmer
Revenues. Revenues increased $2.4 million, or 15.6%, from $15.5 million in
the year ended May 31, 1996 to $18.0 million in the year ended May 31, 1997.
This increase was due to an increase in realized billing rates, a modest number
of new clients and the growth in the firm's valuation services, ODT and ISO
service lines.
Member Compensation and Related Costs. Member compensation and related costs
increased $1.8 million, or 37.5%, from $4.8 million in the year ended May 31,
1996 to $6.6 million in the year ended May 31, 1997. This increase was due to
the addition of one new partner and an increase in net operating income upon
which member compensation is determined. As a percentage of revenues, these
expenses increased from 31.1% in the year ended May 31, 1996 to 37.0% in the
year ended May 31, 1997.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $918,000, or 13.8%, from $6.6 million in the year ended May 31,
1996 to $7.6 million in the year ended May 31, 1997, primarily due to the
addition of 20 professional staff members and annual performance-based
compensation increases. As a percentage of revenues, these expenses decreased
from 42.8% in the year ended May 31, 1996 to 42.1% in the year ended May 31,
1997.
Other Operating Expenses. Other operating expenses increased $261,000, or
6.9%, from $3.8 million in the year ended May 31, 1996 to $4.0 million in the
year ended May 31, 1997, primarily due to increases in training, occupancy,
advertising, promotional and depreciation expenses. As a percentage of
revenues, these expenses decreased from 24.4% in the year ended May 31, 1996 to
22.6% in the year ended May 31, 1997.
Liquidity and Capital Resources--Follmer
Follmer used cash in operating activities of approximately $228,000 in the
year ended May 31, 1999. Net cash flow from operating activities was
approximately $1.4 million and $226,000 in the years ended May 31, 1998 and
1997, respectively. Net cash used in investing activities was approximately
$1.1 million, $927,000
83
<PAGE>
and $1.2 million in the years ended May 31, 1999, 1998 and 1997, respectively,
primarily for purchases of property and equipment. Net cash provided by
financing activities for the year ended May 31, 1999 was approximately $1.4
million and was generated primarily by advances from shareholders and proceeds
from borrowings on line of credit net of payments of debt and the acquisition
and retirement of stock. In the year ended May 31, 1998, cash provided by
financing activities totaled $37,000 and was generated primarily from advances
from shareholders and the issuance of stock net of proceeds and payments of
debt. Net cash provided by financing activities in the year ended May 31, 1997
totaled $1.2 million and was provided by net advances from shareholders and
payments of debt. At May 31, 1999, Follmer had a working capital deficit of
$1.8 million.
Interest of Continuing Directors
Upon completion of the IPO, Anthony P. Frabotta will become a director of
Centerprise. See "Centerprise Management."
Principal Stockholders
The following table sets forth, as of March 1, 1999, the number of shares
beneficially owned by all of the stockholders of Follmer. The persons named
below have sole voting and investment power with respect to all shares shown as
beneficially owned by them:
<TABLE>
<CAPTION>
Shares Approximate
Name Beneficially Owned Percent Owned
---- ------------------ -------------
<S> <C> <C>
Michael Santicchia....................... 200 2.0
Anthony P. Frabotta...................... 1,100 10.8
Timothy J. Caughlin...................... 900 8.9
Peter E. Meagher, III.................... 550 5.4
Patrick J. Gregory....................... 350 3.4
Daniel P. Markey......................... 350 3.4
James J. Bauters......................... 300 2.9
Gordon R. Follmer........................ 2,900 28.5
John J. Rudzewicz........................ 2,900 28.5
Dennis J. Petri.......................... 200 2.0
Gerald J. Grady.......................... 200 2.0
Dennis J. LaPorte........................ 200 2.0
------ ------
Total.................................. 10,150 100.00
</TABLE>
Grace & Company, P.C.
General
Grace & Company, P.C., founded in 1983, provides a full range of accounting,
tax and consulting services to clients in a spectrum of industries including
manufacturing, construction and real estate. Grace is headquartered in St.
Louis, Missouri and, after the Big Five, is the second largest accounting firm
in St. Louis in terms of number of professionals. Grace will provide
Centerprise with a lower-Midwest regional distribution point. Its principal
executive offices are located at 3117 South Big Bend Boulevard, Suite 100, St.
Louis, Missouri 63143.
Regulation
As a service provider in the accounting profession, Grace's operations are
subject to state regulation. See "Business of Centerprise After the Mergers--
Regulation."
84
<PAGE>
Employees
As of May 31, 1999, Grace employed 95 professional employees, of which 50
were licensed CPAs, and 29 non-professional employees. None of Grace's
employees is represented by a labor union. Management of Grace believes its
employee relations are good.
Selected Financial Data
The following table sets forth selected financial data for Grace on a
historical basis and as a percentage of revenues for the period indicated:
<TABLE>
<CAPTION>
Three Months Ended March
31,
Year Ended --------------------------
December 31, 1998 1998 1999
------------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................... $ 9,691 100.0% $3,380 100.0% $3,687 100.0%
Expenses:
Member compensation and
related costs........... 2,709 28.0 711 21.0 733 19.9
Employee compensation and
related costs........... 5,075 52.4 1,445 42.8 1,542 41.8
Other operating
expenses................ 1,380 14.2 385 11.4 430 11.7
--------- -------- ------ ----- ------ -----
Income from operations..... $ 527 5.4% $ 839 24.8% $ 982 26.6%
========= ======== ====== ===== ====== =====
</TABLE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results for the Three Months Ended March 31, 1999 Compared to the Three
Months Ended March 31, 1998--Grace
Revenues. Revenues increased $307,000, or 9.1%, from $3.4 million for the
three months ended March 31, 1998 to $3.7 million for the three months ended
March 31, 1999, primarily due to a net increase in billings to clients for
recurring work as well as special projects.
Member compensation and related costs. Member compensation and related
costs remained relatively constant at $711,000 and $733,000 for the three
months ended March 31, 1998 and 1999, respectively. As a percentage of
revenues, these expenses decreased from 21.0% in the three months ended March
31, 1998 to 19.9% in the three months ended March 31, 1999.
Employee compensation and related costs. Employee compensation and related
costs increased $97,000, or 6.7%, from $1.4 million in the three months ended
March 31, 1998 to $1.5 million in the three months ended March 31, 1999,
primarily due to annual performance-based compensation increases. As a
percentage of revenues, these expenses decreased from 42.8% in the three
months ended March 31, 1998 to 41.8% in the three months ended March 31, 1999.
Other operating expenses. Other operating expenses increased $45,000, or
11.7%, from $385,000 in the three months ended March 31, 1998 to $430,000 in
the three months ended March 31, 1999. The increase was primarily due to
increased occupancy costs related to a recent expansion. As a percentage of
revenues, these expenses increased from 11.4% in the three months ended March
31, 1998 to 11.7% in the three months ended March 31, 1999.
Liquidity and Capital Resources--Grace
Grace used cash in operating activities of approximately $396,000 and
$39,000 in the three months ended March 31, 1999 and 1998, respectively. For
the three months ended March 31, 1999 and 1998, net cash used in
85
<PAGE>
investing activities was approximately $40,000 and $27,000, respectively,
principally for property and equipment purchases. In the three months ended
March 31, 1999 and 1998, net cash provided by financing activities was
approximately $621,000 and $57,000 respectively, principally from short-term
borrowings. At March 31, 1999, Grace had working capital of approximately
$228,000.
Interest of Continuing Directors
Upon completion of the IPO, Wayne J. Grace will become a director of
Centerprise. See "Centerprise Management."
Principal Stockholders
Grace Capital owns 100% of the common stock of Grace. The following table
sets forth, as of March 30, 1999, the membership interests beneficially owned
by all of the members of Grace Capital. The persons named below have sole
voting and investment power with respect to all interests shown as beneficially
owned by them.
<TABLE>
<CAPTION>
Approximate
Name Percent Owned
---- -------------
<S> <C>
Wayne J. Grace.............................................. 19.4
Paul E. Schiavo............................................. 9.4
Frank H. Brandhorst......................................... 11.8
Patrick P. Rohrkaste........................................ 8.1
Jeffrey R. Greene........................................... 7.0
Patrick E. Stark............................................ 13.9
Robert J. Bauer............................................. 6.5
David W. Gresham............................................ 5.6
Lawrence J. Porschen........................................ 10.9
Kent T. Cornell............................................. 5.2
Larry R. Jourden............................................ 0.7
Gerald P. Townsend.......................................... 0.7
Larry H. Weber.............................................. 0.7
-----
Total..................................................... 100.0
</TABLE>
Holthouse Carlin & Van Trigt LLP
General
Holthouse Carlin & Van Trigt LLP, founded in 1991, provides accounting
services, tax services and litigation consulting services. Holthouse is
headquartered in Los Angeles, California and maintains offices in Long Beach
and Westlake Village, California. Holthouse will provide Centerprise with a
regional distribution point on the West Coast and participate significantly in
Centerprise's anticipated national practice in litigation consulting services.
Its principal executive offices are located at 11845 West Olympic Boulevard,
Suite 1177, Los Angeles, California 90064.
Regulation
As a service provider in the accounting profession, Holthouse's operations
are subject to state regulation. See "Business of Centerprise After the
Mergers--Regulation."
Employees
As of May 31, 1999, Holthouse employed 50 professional employees, of which
29 were licensed CPAs and 16 non-professional employees. None of Holthouse's
employees is represented by a labor union. Management of Holthouse believes its
employee relations are good.
86
<PAGE>
Selected Financial Data
The following table sets forth selected financial data for Holthouse on a
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March
Year Ended December 31, 31,
-------------------------- --------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $7,720 100.0% $9,446 100.0% $2,848 100.0% $3,234 100.0%
Expenses:
Employee compensation
and related costs.... 2,617 33.9 3,089 32.7 745 26.2 839 25.9
Other operating
expenses............. 1,448 18.8 1,578 16.7 416 14.6 289 8.9
------ ----- ------ ----- ------ ----- ------ -----
Income from operations.. $3,655 47.3% $4,779 50.6% $1,687 59.2% $2,106 65.2%
====== ===== ====== ===== ====== ===== ====== =====
Partners' withdrawals... $3,530 45.7% $4,238 44.9% $ 990 34.8% $1,062 32.8%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results for the Three Months Ended March 31, 1999 Compared to the Three
Months Ended March 31, 1998--Holthouse
Revenues. Revenues increased $386,000, or 13.6%, from $2.8 million for the
three months ended March 31, 1998 to $3.2 million for the three months ended
March 31, 1999, primarily due to increases in the number of clients and the
firm's audit services business.
Employee compensation and related costs. Employee compensation and related
costs increased $94,000, or 12.6%, from $745,000 in the three months ended
March 31, 1998 to $839,000 in the three months ended March 31, 1999, primarily
due to staff additions and performance-based compensation increases. As a
percentage of revenues, these expenses decreased from 26.2% in the three
months ended March 31, 1998 to 25.9% in the three months ended March 31, 1999.
Other operating expenses. Other operating expenses decreased $127,000, or
30.5%, from $416,000 in the three months ended March 31, 1998 to $289,000 in
the three months ended March 31, 1999. The decrease was primarily due to a
reduction in bad debt expenses. As a percentage of revenues, these expenses
decreased from 14.6% in the three months ended March 31, 1998 to 8.9% in the
three months ended March 31, 1999.
Results for the Year Ended December 31, 1998 Compared to the Year Ended
December 31, 1997--Holthouse
Revenues. Revenues increased $1.7 million, or 22.4%, from $7.7 million for
the year ended December 31, 1997 to $9.4 million for the year ended December
31, 1998, primarily due to an increase in billable hours and an increase in
hourly billing rates. The increase in billable hours resulted from the
expansion of services provided to the firm's clients supported by an increase
in professional staff.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $472,000, or 18.0%, from $2.6 million in the year ended
December 31, 1997 to $3.1 million in the year ended December 31, 1998,
primarily due to the addition of professional and administrative staff and
annual performance-based compensation increases. As a percentage of revenues,
these expenses decreased from 33.9% in the year ended December 31, 1997 to
32.7% in the year ended December 31, 1998.
Other Operating Expenses. Other operating expenses increased $130,000, or
9.0%, from $1.4 million in the year ended December 31, 1997 to $1.6 million in
the year ended December 31, 1998, primarily due to higher occupancy costs
resulting from an expansion of the firm's office. As a percentage of revenues,
these expenses decreased from 18.8% in the year ended December 31, 1997 to
16.7% in the year ended December 31, 1998.
87
<PAGE>
Liquidity and Capital Resources--Holthouse
Holthouse generated net cash flow from operating activities of approximately
$607,000 and $749,000 in the three months ended March 31, 1999 and 1998,
respectively. Holthouse generated net cash from operating activities of
approximately $4.5 million in the year ended December 31, 1998 and
approximately $3.7 million in the year ended December 31, 1997. For the three
months ended March 31, 1999 and 1998, net cash used in investing activities was
approximately $60,000 and $21,000, respectively, principally for property and
equipment purchases. Net cash used in investing activities was approximately
$142,000 and $115,000 in the years ended December 31, 1998 and 1997,
respectively, principally for property and equipment purchases. In the three
months ended March 31, 1999 and 1998, cash used in financing activities was
approximately $1.1 million and $990,000, respectively, primarily for payments
of partner capital. Cash used in financing activities was approximately $4.2
million and $3.5 million in the years ended December 31, 1998 and 1997,
primarily due to payments of partner capital. At March 31, 1999, Holthouse had
working capital of approximately $4.1 million.
Interest of Continuing Directors
Upon completion of the IPO, Philip J. Holthouse will become a director of
Centerprise. See "Centerprise Management."
Principal Partners
The following table sets forth, as of January 1, 1999, the capital account
allocation of all of the partners of Holthouse. These percentages shift
periodically. The persons named below have sole voting and investment power
with respect to the interests shown as beneficially owned by them:
<TABLE>
<CAPTION>
Capital Account
Name Allocation
---- ---------------
<S> <C>
James S. Carlin........................................... 20.51%
Blake E. Christian........................................ 11.18
Philip J. Holthouse....................................... 24.61
Gregory J. Hutchins....................................... 11.81
Janet L. Pass............................................. 3.91
Zachary G. Shuman......................................... 10.21
John E. Van Trigt......................................... 17.76
------
Total................................................... 100.00%
======
</TABLE>
Insurance Design Administrators
General
Self Funded Benefits, Inc., which does business under the trade name
Insurance Design Administrators, was founded in 1979. IDA is an independent
healthcare management company that designs healthcare programs and provides
claims administration services in both the private and public sectors. IDA has
made significant investments in technology to develop a scalable infrastructure
capable of handling a large volume of business. IDA is headquartered in
Oakland, New Jersey. In addition to designing healthcare programs, IDA also
manages healthcare claims of its clients. Based on the annual volume of claims
handled, IDA was ranked by Employee Benefit News in July 1998 as the 11th
largest third party administrator in the United States. IDA will provide the
platform for Centerprise's anticipated national practice in third party
administration and self insurance services. Its principal executive offices are
located at 169 Ramapo Valley Road, Oakland, New Jersey 07436.
Regulation
As a service provider in the employee benefit plan business, IDA's
operations are subject to state regulation. See "Business of Centerprise After
the Mergers--Regulation."
88
<PAGE>
Employees
As of May 31, 1999, IDA had 129 employees, of which 12 were in management,
2 in sales, 94 in claims administration and 21 in general administration.
Selected Financial Data
The following table sets forth selected financial data for IDA on a
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March
Year Ended December 31, 31,
--------------------------- --------------------------
1997 1998 1998 1999
------------ ------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $9,756 100.0% $10,933 100.0% $2,902 100.0% $2,978 100.0%
Expenses:
Employee compensation
and related costs.... 6,047 62.0 6,361 58.2 1,394 48.0 1,557 52.3
Other operating
expenses............. 2,668 27.3 3,050 27.9 1,073 37.0 1,002 33.6
------ ----- ------- ----- ------ ----- ------ -----
Income from operations.. $1,041 10.7% $ 1,522 13.9% $ 435 15.0% $ 419 14.1%
====== ===== ======= ===== ====== ===== ====== =====
</TABLE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results for the Three Months Ended March 31, 1999 Compared to the Three
Months Ended March 31, 1998--IDA
Revenues. Revenues remained relatively constant at approximately $2.9
million for the three months ended March 31, 1998 and 1999.
Employee compensation and related costs. Employee compensation and related
costs increased $163,000, or 11.7%, from $1.4 million in the three months
ended March 31, 1998 to $1.6 million in the three months ended March 31, 1999,
primarily due to staff additions, salary increases and bonuses. As a
percentage of revenues, these expenses increased from 48.0% in the three
months ended March 31, 1998 to 52.3% in the three months ended March 31, 1999.
Other operating expenses. Other operating expenses remained relatively
constant at approximately $1.0 million in the three months ended March 31,
1998 and 1999. As a percentage of revenues, these expenses decreased from
37.0% in the three months ended March 31, 1998 to 33.6% in the three months
ended March 31, 1999.
Results for the Year Ended December 31, 1998 Compared to the Year Ended
December 31, 1997--IDA
Revenues. Revenues increased $1.2 million, or 12.1%, from $9.8 million for
the year ended December 31, 1997 to $10.9 million for the year ended December
31, 1998, primarily as a result of the addition of a major customer in January
1998 for which IDA provides benefits administration for an approximate
enrollment of 2,300 lives. In addition IDA experienced an increase in COBRA
and PPO administration fees.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $314,000, or 5.2%, from $6.0 million in the year ended
December 31, 1997 to $6.4 million in the year ended December 31, 1998, as a
result of annual performance-based compensation increases, additional staffing
and an increase in overtime compensation. As a percentage of revenues, these
expenses decreased from 62.0% in the year ended December 31, 1997 to 58.2% in
the year ended December 31, 1998.
89
<PAGE>
Other Operating Expenses. Other operating expenses increased $382,000, or
14.3%, from $2.7 million in the year ended December 31, 1997 to $3.1 million in
the year ended December 31, 1998. As a percentage of revenues, these expenses
increased slightly from 27.3% in the year ended December 31, 1997 to 27.9% in
the year ended December 31, 1998.
Liquidity and Capital Resources--IDA
IDA generated net cash flow from operating activities of approximately
$443,000 and 362,000 in the three months ended March 31, 1999 and 1998,
respectively. IDA generated net cash from operating activities of approximately
$1.8 million and $996,000 in the years ended December 31, 1998 and 1997,
respectively. For the three months ended March 31, 1999 and 1998, net cash used
in investing activities was approximately $2,000 and $50,000, respectively, for
property and equipment purchases. Net cash used in investing activities was
approximately $105,000 and $451,000 in the years ended December 31, 1998 and
1997, respectively, used for purchases of property and equipment. In the three
months ended March 31, 1999 and 1998, net cash used in financing activities was
approximately $244,000 and $207,000, respectively, for payments of long-term
debt and dividends. Cash used in financing activities was approximately $1.1
million and $730,000 in the years ended December 31, 1998 and 1997,
respectively, primarily for payments of dividends of $850,000 and $980,000 in
1998 and 1997, respectively, and payments of long-term debt of $202,000 in 1998
and net proceeds from the issuance of debt long-term of $350,000 in 1997. At
March 31, 1998, IDA had working capital of approximately $1.3 million.
Interest of Continuing Directors
Upon completion of the IPO, Robert F. Gallo will become a director of
Centerprise. Further, upon completion of the offering, Mr. Gallo will enter
into a four-year employment agreement with IDA pursuant to which Mr. Gallo will
serve as IDA's chief executive officer, at an annual base salary of $200,000,
This agreement also provides for a bonus of up to 50% of base salary for 1999
and up to 100% of base salary thereafter. See "Centerprise Management."
Principal Stockholders
The following table sets forth, as of March 26, 1999, the number of shares
beneficially owned by all of the stockholders of IDA. The persons named below
have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
Shares Beneficially Owned of Shares Beneficially Owned of Class B Approximate
Name Class A Voting Common Stock Non-Voting Common Stock Percent Owned
---- ---------------------------- ------------------------------------ -------------
<S> <C> <C> <C>
Robert F. Gallo......... 75 7,425 50.7
Russell Minetti......... 74 7,235 49.3
--- ------ -----
Total................. 149 14,600 100.0
</TABLE>
Mann Frankfort Stein & Lipp, P.C.
General
Mann Frankfort Stein & Lipp, P.C., founded in 1971, provides accounting,
tax, financial reporting, consulting and litigation consulting services
primarily to closely held clients in a wide range of industries. Mann
Frankfort, located in Houston, Texas, is Houston's largest accounting firm
other than the Big Five based on the number of professionals, and was ranked
No. 44 in the Top 100. Mann Frankfort provides a regional distribution point in
Texas and will be the lead member of Centerprise's anticipated national
practice in litigation consulting services. Its principal executive offices are
located at 12 Greenway Plaza, 8th Floor, Houston, Texas 77046.
90
<PAGE>
Regulation
As a service provider in the accounting profession, Mann Frankfort's
operations are subject to state regulation. See "Business of Centerprise After
the Mergers--Regulation."
Employees
As of May 31, 1999, Mann Frankfort had 142 professional employees, of which
100 were licensed CPAs, and 45 non-professional employees. None of Mann
Frankfort's employees is represented by a labor union. Management of Mann
Frankfort believes its employee relations are good.
Selected Financial Data
The following table sets forth selected financial data for Mann Frankfort
on a historical basis and as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $13,292 100.0% $17,475 100.0% $21,631 100.0% $ 5,889 100.0% $ 8,324 100.0%
Expenses:
Member compensation and
related costs......... 4,423 33.3 6,636 38.0 8,921 41.2 1,317 22.4 1,572 18.9
Employee compensation
and related costs..... 4,896 36.8 6,405 36.7 8,829 40.8 2,269 38.5 2,966 35.6
Other operating
expenses.............. 2,307 17.4 2,996 17.1 3,347 15.5 1,011 17.2 1,254 15.1
------- ----- ------- ----- ------- ----- ------- ------ ------- ------
Income from operations.. $ 1,666 12.5% $ 1,438 8.2% $ 534 2.5% $ 1,292 21.9% $ 2,532 30.4%
======= ===== ======= ===== ======= ===== ======= ====== ======= ======
</TABLE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results for the Three Months Ended March 31, 1999 Compared to the Three
Months Ended March 31, 1998--Mann Frankfort
Revenues. Revenues increased $2.4 million, or 41.3%, from $5.9 million for
the three months ended March 31, 1998 to $8.3 million for the three months
ended March 31, 1999, primarily due to increases in billing rates and billable
hours and the addition of new clients.
Member compensation and related costs. Member compensation and related
costs increased $255,000, or 19.4%, from $1.3 million for the three months
ended March 31, 1998 to $1.6 million for the three months ended March 31,
1999, primarily due to an increase in the operating income of the firm over
the comparable periods and a slight increase in the number of shareholders. As
a percentage of revenues, these expenses decreased from 22.4% in the three
months ended March 31, 1998 to 18.9% in the three months ended March 31, 1999.
Employee compensation and related costs. Employee compensation and related
costs increased $697,000, or 30.7%, from $2.3 million in the three months
ended March 31, 1998 to $3.0 million in the three months ended March 31, 1999,
primarily due to an increase in professional and administrative staff and
performance-based compensation increases. As a percentage of revenues, these
expenses decreased from 38.5% in the three months ended March 31, 1998 to
35.6% in the three months ended March 31, 1999.
Other operating expenses. Other operating expenses increased $243,000, or
24.0%, from $1.0 million in the three months ended March 31, 1998 to $1.3
million in the three months ended March 31, 1999. The increase was primarily
due to an increase in occupancy costs and legal fees related to the merger. As
a percentage of revenues, these expenses decreased from 17.2% in the three
months ended March 31, 1998 to 15.1% in the three months ended March 31, 1999.
91
<PAGE>
Results for the Year Ended December 31, 1998 Compared to the Year Ended
December 31, 1997--Mann Frankfort
Revenues. Revenues increased $4.2 million, or 23.8%, from $17.5 million in
the year ended December 31, 1997 to $21.6 million in the year ended December
31, 1998, primarily due to increases in billing rates and billable hours and
the addition of new clients.
Member Compensation and Related Costs. Member compensation and related costs
increased $2.3 million, or 34.4%, from $6.6 million in the year ended December
31, 1997 to $8.9 million in the year ended December 31, 1998, primarily due to
an increase in the operating income of the firm over the comparable periods
while the number of shareholders increased only slightly from 15 to 16 from
1997 to 1998. As a percentage of revenues, these expenses increased from 38.0%
in the year ended December 31, 1997 to 41.2% in the year ended December 31,
1998.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $2.4 million, or 37.8%, from $6.4 million in the year ended
December 31, 1997 to $8.8 million in the year ended December 31, 1998,
primarily due to the addition of professional and administrative staff and
performance-related compensation increases. As a percentage of revenues, these
expenses increased from 36.7% in the year ended December 31, 1997 to 40.8% in
the year ended December 31, 1998.
Other Operating Expenses. Other operating expenses increased $351,000, or
11.7%, from $3.0 million in the year ended December 31, 1997 to $3.3 million in
the year ended December 31, 1998, primarily due to (a) higher occupancy costs
resulting from an expansion of the firm's office and (b) additional
depreciation expenses resulting from investments in computer hardware and
software and leasehold improvements. As a percentage of revenues, these
expenses decreased from 17.1% in the year ended December 31, 1997 to 15.5% in
the year ended December 31, 1998.
Results for the Year Ended December 31, 1997 Compared to the Year Ended
December 31, 1996--Mann Frankfort
Revenues. Revenues increased $4.2 million, or 31.5%, from $13.3 million in
the year ended December 31, 1996 to $17.5 in the year ended December 31, 1997,
due in part to a January 1997 merger (the "Mann Frankfort Merger") with a
Houston based accounting firm which added incremental 1997 revenues of $3.4
million. Also contributing to the revenue growth were increases in billing
rates and billable hours as well as the addition of new clients during 1997.
Member Compensation and Related Costs. Member compensation and related costs
increased $2.2 million, or 50.0%, from $4.4 million in the year ended December
31, 1996 to $6.6 million in the year ended December 31, 1997, primarily due to
an increase in the number of shareholders resulting from the Mann Frankfort
Merger and their related compensation and a corresponding increase in the
firm's operating income over the period. As a percentage of revenues, these
expenses increased from 33.3% in the year ended December 31, 1996 to 38.0% in
the year ended December 31, 1997.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $1.5 million, or 30.8%, from $4.9 million in the year ended
December 31, 1996 to $6.4 million in the year ended December 31, 1997,
primarily due to an increase in professional and administrative staff because
of the Mann Frankfort Merger and performance-based compensation increases. As a
percentage of revenues, these expenses decreased from 36.8% in the year ended
December 31, 1996 to 36.7% in the year ended December 31, 1997.
Other Operating Expenses. Other operating expenses increased $689,000, or
29.9%, from $2.3 million in the year ended December 31, 1996 to $3.0 million in
the year ended December 31, 1997, primarily due to an increase in operating
costs because of the Mann Frankfort Merger and merger-related transaction
costs. As a percentage of revenues, these expenses decreased from 17.4% in the
year ended December 31, 1996 to 17.1% in the year ended December 31, 1997.
92
<PAGE>
Liquidity and Capital Resources--Mann Frankfort
Mann Frankfort generated net cash flow from operating activities of
approximately $797,000 and $466,000 in the three months ended March 31, 1999
and 1998, respectively. Mann Frankfort generated net cash flow from operating
activities of approximately $454,000 in the year ended December 31, 1998. Net
cash generated by operating activities was approximately $292,000 and $1.3
million in the years ended December 31, 1997 and 1996, respectively. Net cash
used in investing activities was approximately $100,000 and $58,000 in the
three months ended March 31, 1999 and 1998, respectively, principally for
property and equipment purchases. Net cash used in investing activities was
approximately $534,000, $625,000 and $123,000 in the years ended December 31,
1998, 1997 and 1996, respectively, primarily for the purchases of property and
equipment. In the three months ended March 31, 1999, cash provided by financing
activities was approximately $301,000, consisting principally of proceeds from
the issuance of long-term debt. In the three months ended March 31, 1998, cash
used in financing activities was approximately $263,000, consisting primarily
of payments of long-term debt. Net cash provided by financing activities for
the years ended December 31, 1998 and 1997 was approximately $398,000 and
$520,000, respectively, principally from the issuance of debt in the year ended
December 31, 1998 and from the issuances of debt and stock in the year ended
December 31, 1997. Net cash used in financing activities was approximately $2.1
million for the year ended December 31, 1996, principally due to draws on
partners' capital, as well as net repayments of debt. At March 31, 1999, Mann
Frankfort had net working capital of $4.5 million.
Interest of Continuing Directors
Upon completion of the IPO, Richard H. Stein will become a director of
Centerprise. See "Centerprise Management."
Principal Stockholders
The following table sets forth, as of January 1, 1999, the number of shares
beneficially owned by all of the stockholders of Mann Frankfort. Unless
otherwise indicated, the persons named below have sole voting and investment
power with respect to all shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
Shares Approximate
Name Beneficially Owned Percent Owned
---- ------------------ -------------
<S> <C> <C>
Richard H. Stein......................... 277.4085 17.6212
Steven Albert............................ 23.9720 1.5227
Jeffri Botkin............................ 27.5325 1.7489
Milton Frankfort......................... 321.8190 20.4422
Bill Hickl............................... 18.9537 1.2040
John Landers............................. 20.7066 1.3153
Bruce Layer.............................. 35.7447 2.2705
Arnold Lipp.............................. 267.4085 16.9860
Paul Mueller............................. 61.7414 3.9219
Glea Ramey............................... 27.5325 1.7489
Laura Rice............................... 42.1000 2.6742
Michael Richter.......................... 313.7965 19.9326
Craig Shenkman........................... 22.3300 1.4184
Saul Solomon............................. 70.9898 4.5093
Gregg Steffen............................ 5.5065 0.3498
Suhrid Thakore........................... 35.7447 2.2705
Jerry Guillot............................ 1.0000 0.0635
-------- -------
Total................................ 1,574.29 100.00
</TABLE>
93
<PAGE>
Reppond
General
The Reppond Company, Inc., Reppond Administrators, LLC, and VeraSource
Excess Risk Ltd., founded in 1981, provide group benefits insurance and
consulting services to privately-held companies. Reppond is headquartered in
Bellevue, Washington and maintains offices in Yakima, Washington and Brooklyn
Park, Minnesota. Reppond enhances Centerprise's anticipated national practice
in insurance and benefits brokerage and consulting services. Its principal
executive offices are located at 10900 Northeast 4th Street, Suite 1200,
Bellevue, Washington 98004.
Regulation
As a service provider in the insurance brokerage profession, Reppond's
operations are subject to state regulation. See "Business of Centerprise After
the Mergers--Regulation."
Employees
As of May 31, 1999, Reppond had 83 employees.
Selected Financial Data
The following table sets forth selected financial data for Reppond on a
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March
31,
Year Ended --------------------------
December 31, 1998 1998 1999
----------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................... $ 7,892 100.0% $1,909 100.0% $2,191 100.0%
Expenses:
Producer compensation and
related costs........... 2,359 29.9 635 33.3 674 30.8
Employee compensation and
related costs........... 2,708 34.3 586 30.7 646 29.5
Other operating
expenses................ 2,314 29.3 478 25.0 712 32.5
----------- ---------- ------ ----- ------ -----
Income from operations..... $ 511 6.5 $ 210 11.0% $ 159 7.2%
=========== ========== ====== ===== ====== =====
</TABLE>
Results for the Three Months Ended March 31, 1999 Compared to the Three
Months Ended March 31, 1998--Reppond
Revenues. Revenues increased $282,000, or 14.8%, from $1.9 million for the
three months ended March 31, 1998 to $2.2 million for the three months ended
March 31, 1999, primarily due to premium increases and the addition of several
new customers.
Producer compensation. Producer compensation increased $39,000, or 6.1%,
from $635,000 for the three months ended March 31, 1998 to $674,000 for the
three months ended March 31, 1999, primarily due to the increase in revenues
as producers are generally compensated based on a percentage of revenues. As a
percentage of revenues, these expenses decreased from 33.3% in 1998 to 30.8%
in 1999.
Employee compensation and related costs. Employee compensation and related
costs increased $60,000, or 10.2%, from $586,000 in the three months ended
March 31, 1998 to $646,000 in the three months ended March 31, 1999, primarily
due to annual performance-based compensation increases and staff additions. As
a percentage of revenues, these expenses decreased from 30.7% in the three
months ended March 31, 1998 to 29.5% in the three months ended March 31, 1999.
94
<PAGE>
Other operating expenses. Other operating expenses increased $234,000, or
49.0%, from $478,000 in the three months ended March 31, 1998 to $712,000 in
the three months ended March 31, 1999. The increase was primarily due to
professional fees related to the merger and technical support for computer
system upgrades. As a percentage of revenues, these expenses increased from
25.0% in the three months ended March 31, 1998 to 32.5% in the three months
ended March 31, 1999.
Liquidity and Capital Resources--Reppond
Reppond used cash in operating activities of approximately $112,000 in the
three months ended March 31, 1999 and generated net cash flow from operating
activities of approximately $182,000 in the three months ended March 31, 1998.
For the three months ended March 31, 1999 and 1998, net cash used in investing
activities was approximately $121,000 and $48,000, respectively, principally
for property and equipment purchases. In the three months ended March 31, 1999,
net cash provided by financing activities was approximately $259,000,
principally from the issuance of short-term debt. In the three months ended
March 31, 1998, net cash used in financing activities was approximately
$81,000, principally for the repayment of long-term and short-term debt. At
March 31, 1999, Reppond had a working capital deficit of approximately $24,000.
Principal Stockholders
The following table sets forth, as of March 31, 1999, the number of shares
or membership interests, as the case may be, for Reppond. The persons named
below have sole voting and investment power with respect to the shares or
membership interests shown as beneficially owned by them.
The Reppond Company, Inc.
<TABLE>
<CAPTION>
Shares Approximate
Name Beneficially Owned Percent Owned
---- ------------------ -------------
<S> <C> <C>
Ben W. Reppond........................... 375 75
Louis R. Baransky........................ 125 25
--- ---
500 100
</TABLE>
Reppond Administrators, L.L.C.
<TABLE>
<CAPTION>
Shares Approximate
Name Beneficially Owned Percent Owned
---- ------------------ -------------
<S> <C> <C>
Ben W. Reppond........................... 247.5 49.5
Deborah Reppond.......................... 247.5 49.5
Louis R. Baransky........................ 5 1.0
----- ----
250 100
</TABLE>
VeraSource Excess Risk Ltd.
<TABLE>
<CAPTION>
Shares Approximate
Name Beneficially Owned Percent Owned
---- ------------------ -------------
<S> <C> <C>
Ben W. Reppond........................... 125 50
Scott D. Perry........................... 125 50
--- ---
250 100
</TABLE>
Reznick, Fedder & Silverman
General
Reznick Fedder & Silverman, P.C., founded in 1977, provides business,
accounting and tax advisory services that include tax consulting, real estate
consulting, business consulting and due diligence. Reznick is ranked No. 22 in
the Top 100 and is the largest non-Big Five firm headquartered in the Mid-
Atlantic region.
95
<PAGE>
Reznick is known nationally for its expertise in the real estate industry and
also has substantial experience serving closely held commercial businesses and
clients in the health care and construction industries. Reznick maintains
offices in Bethesda, Maryland; Baltimore, Maryland; Boston, Massachusetts;
Charlotte, North Carolina; and Atlanta, Georgia. In addition to providing
Centerprise with multiple distribution points in the Mid-Atlantic region,
Reznick will provide the foundation for Centerprise's anticipated national
practice in real estate consulting services and participate significantly in
Centerprise's anticipated national practice in health care consulting services.
Its principal executive offices are located at 4520 East West Highway, Suite
300, Bethesda, Maryland 20814.
Regulation
As a service provider in the accounting profession, Reznick's operations are
subject to state regulation. See "Business of Centerprise After the Mergers--
Regulation."
Employees
As of May 31, 1999, Reznick had 421 professional employees, of which 185
were licensed CPAs, and 114 non-professional employees. None of Reznick's
employees is represented by a labor union. Management of Reznick believes its
employee relations are good.
Selected Financial Data
The following table sets forth selected financial data for Reznick on a
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30, Six Months Ended March 31,
------------------------------------------------ -------------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $31,483 100.0% $35,103 100.0% $47,877 100.0% $27,887 100.0% $31,552 100.0%
Expenses:
Member compensation and
related costs......... 7,784 24.7 8,170 23.3 13,516 28.2 10,782 38.7 11,528 36.5
Employee compensation
and related costs..... 17,477 55.5 19,617 55.9 25,792 53.9 12,766 45.8 15,413 48.8
Other operating
expenses.............. 6,231 19.8 7,530 21.4 8,502 17.8 4,356 15.6 4,687 14.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating loss.......... $ (9) (0.0)% $ (214) (0.6)% $ (67) (0.1)% $ (17) (0.1)% $ (76) (0.2)%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results for the Six Months Ended March 31, 1999 Compared to the Six Months
Ended March 31, 1998--Reznick
Revenues. Revenues increased $3.7 million, or 13.1%, from $27.9 million in
the six months ended March 31, 1998 to $31.6 million in the six months ended
March 31, 1999, primarily due to an expansion of the firm's core real estate
and health care practices.
Member Compensation and Related Costs. Member compensation and related costs
increased $746,000, or 6.9%, from $10.8 million in the six months ended March
31, 1998 to $11.5 million in the six months ended March 31, 1998, primarily due
to an increase in operating income available for member compensation. As a
percentage of revenues, these expenses decreased from 38.7% in the six months
ended March 31, 1998 to 36.5% in the six months ended March 31, 1999.
96
<PAGE>
Employee Compensation and Related Costs. Employee compensation and related
costs increased $2.6 million, or 20.7%, from $12.8 million in the six months
ended March 31, 1998 to $15.4 million in the six months ended March 31, 1999,
primarily due to an increase in the number of professional employees and
annual performance-based compensation increases. As a percentage of revenues,
these expenses increased from 45.8% in the six months ended March 31, 1998 to
48.8% in the six months ended March 31, 1999.
Other Operating Expenses. Other operating expenses increased $331,000, or
7.6%, from $4.4 million in the six months ended March 31, 1998 to $4.7 million
in the six months ended March 31, 1999. The increase was primarily due to
higher occupancy, selling, general and administrative expenses. As a
percentage of revenues, these expenses decreased from 15.6% in the six months
ended March 31, 1998 to 14.9% in the six months ended March 31, 1999.
Results for the Year Ended September 30, 1998 Compared to the Year Ended
September 30, 1997--Reznick
Revenues. Revenues increased $12.8 million, or 36.4%, from $35.1 million in
the year ended September 30, 1997 to $47.9 million in the year ended September
30, 1998, primarily due to an expansion of the firm's practice as a result of
a merger with a Baltimore-based accounting firm (the "Reznick Merger") and an
expansion of the firm's core real estate practice and growth in other practice
areas such as due diligence, bankruptcy and litigation consulting services.
Member Compensation and Related Costs. Member compensation and related
costs increased $5.3 million, or 65.4%, from $8.2 million in the year ended
September 30, 1997 to $13.5 million in the year ended September 30, 1998,
primarily due to an increase in operating income available for member
compensation and the admission of three members during 1998. As a percentage
of revenues, these expenses increased from 23.3% in the year ended September
30, 1997 to 28.2% in the year ended September 30, 1998.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $6.2 million, or 31.5%, from $19.6 million in the year ended
September 30, 1997 to $25.8 million in the year ended September 30, 1998,
primarily due to the addition of approximately 50 professional employees and
approximately 25 administrative support personnel as a result of the Reznick
Merger. As a percentage of revenues, these expenses decreased from 55.9% in
the year ended September 30, 1997 to 53.9% in the year ended September 30,
1998.
Other Operating Expenses. Other operating expenses increased $972,000, or
12.9%, from $7.5 million in the year ended September 30, 1997 to $8.5 million
in the year ended September 30, 1998, primarily due to an increase in rent
expense resulting from the leasing of additional office space, an increase in
recruiting fees and an increase in office operating expenses. As a percentage
of revenues, these expenses decreased from 21.4% in the year ended September
30, 1997 to 17.8% in the year ended September 30, 1998.
Results for the Year Ended September 30, 1997 Compared to the Year Ended
September 30, 1996--Reznick
Revenues. Revenues increased $3.6 million, or 11.5%, from $31.5 million in
the year ended September 30, 1996 to $35.1 million in the year ended September
30, 1997, primarily due to expansion of the firm's real estate, construction,
not-for-profit and closely held business support services.
Member Compensation and Related Costs. Member compensation and related
costs increased $386,000, or 5.0%, from $7.8 million in the year ended
September 30, 1996 to $8.2 million in the year ended September 30, 1997,
primarily due to an increase in operating income available for member's
compensation. As a percentage of revenues, these expenses decreased from 24.7%
in the year ended September 30, 1996 to 23.3% in the year ended September 30,
1997.
97
<PAGE>
Employee Compensation and Related Costs. Employee compensation and related
costs increased $2.1 million, or 12.2%, from $17.5 million in the year ended
September 30, 1996 to $19.6 million in the year ended September 30, 1997,
primarily due to an increase in the number of employees required as a result of
the expansion in the firm's practice. As a percentage of revenues, these
expenses increased from 55.5% in the year ended September 30, 1996 to 55.9% in
the year ended September 30, 1997.
Other Operating Expenses. Other operating expenses increased $1.3 million,
or 20.8%, from $6.2 million in the year ended September 30, 1996 to $7.5
million in the year ended September 30, 1997, primarily due to an increase in
occupancy, practice development and office operating expenses. As a percentage
of revenues, these expenses increased from 19.8% in the year ended September
30, 1996 to 21.4% in the year ended September 30, 1997.
Liquidity and Capital Resources--Reznick
Reznick used net cash from operating activities of approximately $6.8
million and $3.0 million in the six months ended March 31, 1999 and 1998,
respectively. Net cash generated from operating activities was approximately
$3.7 million, $1.7 million and $1.4 million in the years ended September 30,
1998, 1997 and 1996, respectively. For the six months ended March 31, 1999 and
1998, net cash used in investing activities was approximately $207,000 and $1.0
million, principally for property and equipment purchases. Net cash used in
investing activities was approximately $1.5 million, $1.3 million and $684,000
in the years ended September 30, 1998, 1997 and 1996, respectively, primarily
for the purchases of property and equipment. In the six months ended March 31,
1999 and 1998, net cash provided by financing activities was approximately $3.1
million and $1.9 million, respectively, principally from proceeds of short-term
borrowings and long-term debt. Reznick used net cash of approximately $402,000
in financing activities in the year ended September 30, 1998, primarily
representing payments of debt. Net cash provided by financing activities in the
year ended September 30, 1997 totaled $509,000, generated by net proceeds from
the issuance of long-term debt. In the year ended September 30, 1996, cash used
in financing activities totaled $162,000 and was used primarily for net
payments of long-term debt. At March 31, 1999, Reznick had working capital of
$3.6 million.
Interest of Continuing Directors
Upon completion of the IPO, David Reznick will become a director of
Centerprise. See "Centerprise Management."
98
<PAGE>
Principal Stockholders
The following table sets forth, as of March 1, 1999, the number of shares
beneficially owned by all of the shareholders of Reznick Unless otherwise
indicated, the persons named below have sole voting and investment power with
respect to all shares shown as beneficially owned by them:
<TABLE>
<CAPTION>
Shares Approximate
Name Beneficially Owned Percent Owned
---- ------------------ -------------
<S> <C> <C>
David Reznick............................ 100 3.4
Stuart M. Fedder......................... 100 3.4
Ivan B. Silverman........................ 100 3.4
William T. Riley, Jr..................... 100 3.4
Craig Birmingham......................... 100 3.4
Wallace L. Scruggs, Jr................... 100 3.4
Jeffrey D. Barsky........................ 100 3.4
Lester A. Kanis.......................... 100 3.4
Ronald G. Vance.......................... 100 3.4
Renee G. Scruggs......................... 100 3.4
Lee Isaacson............................. 100 3.4
Gary Perlow.............................. 100 3.4
Gary C. Pokrant.......................... 100 3.4
Leslie A. Mostow......................... 100 3.4
Kenneth J. Shapiro....................... 100 3.4
Edward Ryan.............................. 100 3.4
Mark J. Einstein......................... 100 3.4
Harry L. Silverman....................... 100 3.4
Anthony V. Portal........................ 100 3.4
Kenneth E. Baggett....................... 100 3.4
Beth Mullen.............................. 100 3.4
Lenard A. Sacks.......................... 100 3.4
Timothy McGibney......................... 100 3.4
Patrick Trotta........................... 100 3.4
Mark Koppelman........................... 100 3.4
Jerry Herskovitz......................... 100 3.4
Michael Beck............................. 100 3.4
Robert Denmark........................... 100 3.4
Kirk T. Rogers........................... 100 3.4
----- -----
Total................................ 2,900 100.0
</TABLE>
Robert F. Driver Co., Inc.
General
Robert F. Driver Co., Inc., founded in 1925, is a multi-line insurance
brokerage company that provides property and casualty insurance services,
workers compensation coverage, employee benefits products, surety coverage and
various financial services to a broad range of domestic and international
clients. Driver maintains offices in San Diego, Newport Beach, Escondido,
Sacramento, Fresno, San Francisco, San Rafael and Ontario, California. Driver
manages in excess of $500 million in premiums and was ranked by the San Diego
Business Journal as San Diego's largest independent insurance brokerage firm in
1998 based on premium volume. In terms of brokerage revenues, Driver was ranked
No. 33 nationally in 1998 by Business Insurance. Driver will provide
Centerprise with a platform for its anticipated national practice in insurance
and benefits brokerage and consulting services. Its principal executive offices
are located at 1620 5th Avenue, San Diego, California 92101.
Regulation
As a service provider in the insurance brokerage industry, Driver's
operations are subject to state regulation. See "Business of Centerprise After
the Mergers--Regulation."
99
<PAGE>
Employees
As of May 31, 1999, Driver had 319 employees.
Selected Financial Data
The following table sets forth selected financial data for Driver on a
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended July 31, April 30,
------------------------------------------- -----------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commissions and fees.... $26,939 100.0% $28,170 100.0% $32,886 100.0% $21,477 100.0% $26,050 100.0%
Expenses:
Producer compensation.. 13,074 48.5 12,965 46.0 15,422 46.9 10,259 47.8 10,559 40.5
Employee compensation
and related costs..... 7,261 27.0 7,433 26.4 8,475 25.8 6,092 28.4 9,895 38.0
Other operating
expenses.............. 6,214 23.1 6,548 23.3 6,631 20.1 4,160 19.3 6,420 24.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income (loss) from
operations............. $ 390 1.4% $ 1,224 4.3% $ 2,358 7.2% $ 966 4.5% $ (824) (3.2)%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results for the Nine Months Ended April 30, 1999 Compared to the Nine Months
Ended April 30, 1998-- Driver
Commissions and Fees. Commissions and fees increased $4.6 million, or 21.2%,
from $21.5 million in the nine months ended April 30, 1998 to $26.1 million in
the nine months ended April 30, 1999, primarily due to revenues derived from
two insurance brokerage firms acquired in 1998.
Producer Compensation. Producer compensation increased $300,000 or 2.9%,
from $10.3 million in the nine months ended April 30, 1998 to $10.6 million in
the nine months ended April 30, 1999 due to the addition of ten producers in
1998 and the related compensation expense. As a percentage of revenues, these
expenses decreased from 47.8% in the nine months ended April 30, 1998 to 40.5%
in the nine months ended April 30, 1999.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $3.8 million, or 62.4%, from $6.1 million in the nine months
ended April 30, 1998 to $9.9 million in the nine months ended April 30, 1999,
primarily due to an increase in the number of employees, annual performance-
based compensation increases and bonuses. As a percentage of revenues, these
expenses increased from 28.4% in the nine months ended April 30, 1998 to 38.0%
in the nine months ended April 30, 1999.
Other Operating Expenses. Other operating expenses increased $2.3 million,
or 54.3%, from $4.2 million in the nine months ended April 30, 1998 to $6.4
million in the nine months ended April 30, 1999, primarily due to an increase
in depreciation and amortization resulting from the restatement of Driver's
assets and liabilities at fair value and recognition of goodwill, which is
being amortized over 40 years. The restatement of the assets and liabilities
and recognition of goodwill resulted from a May 1998 management buyout of the
predecessor company. Also contributing to the increase in operating expenses
were professional fees incurred in 1998 when Driver pursued a non-compete
agreement infringement suit against a former employee. As a percentage of
revenues, these expenses increased from 19.3% in the nine months ended April
30, 1998 to 24.7% in the nine months ended April 30, 1999.
100
<PAGE>
Results for the Year Ended July 31, 1998 Compared to the Year Ended July 31,
1997--Driver
Commissions and Fees. Commissions and fees increased $4.7 million, or 16.7%,
from $28.2 million in the year ended July 31, 1997 to $32.9 million in the year
ended July 31, 1998. $2.6 million of the increase was due to the addition of
ten producers and the acquisition of two insurance brokerage firms in 1998
which resulted in an increase in the volume of sales transactions. The balance
of the increase was due to an increase in the number of policies written.
Producer Compensation. Producer compensation increased $2.5 million, or
19.0%, from $13.0 million in the year ended July 31, 1997 to $15.4 million in
the year ended July 31, 1998, primarily due to the addition of ten producers in
1998 and the related compensation expense. As a percentage of revenues, these
expenses increased from 46.0% in the year ended July 31, 1997 to 46.9% in the
year ended July 31, 1998.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $1.0 million, or 14.0%, from $7.4 million in the year ended
July 31, 1997 to $8.5 million in the year ended July 31, 1998. This increase
was due to an increase in the number of employees in response to continued
revenue growth as well as annual performance-based compensation increases. As a
percentage of revenues, these expenses decreased from 26.4% in the year ended
July 31, 1997 to 25.8% in the year ended July 31, 1998.
Other Operating Expenses. Other operating expenses increased $83,000, or
1.3%, from $6.5 million in the year ended July 31, 1997 to $6.6 million in the
year ended July 31, 1998. This increase was primarily due to an increase in
depreciation and amortization resulting from the restatement of Driver's assets
and liabilities at fair value and the recognition of goodwill and the value of
customer lists, which are being amortized over 40 years. The restatement of the
assets and liabilities and the recognition of the goodwill and customer lists
were recorded following a management buyout of the company in May 1998. Also
contributing to the increase in operating expenses were professional fees
incurred in 1998 while pursuing a non-compete agreement infringement suit
against a former employee. As a percentage of revenues, these expenses
decreased from 23.3% in the year ended July 31, 1997 to 20.1% in the year ended
July 31, 1998.
Results for the Year Ended July 31, 1997 Compared to the Year Ended July 31,
1996--Driver
Commissions and Fees. Commissions and fees increased $1.2 million, or 4.6%,
from $26.9 million in the year ended July 31, 1996 to $28.2 million in the year
ended July 31, 1997, primarily due to an expansion of Driver's public entity
and specialty refuse lines of business and an increase in the number of
producers.
Producer Compensation. Producer compensation decreased $109,000 or 0.8%,
from $13.1 million in the year ended July 31, 1996 to $13.0 million in the year
ended July 31, 1997, primarily due to a reduction in producer compensation
rates. As a percentage of revenues, these expenses decreased from 48.5% in the
year ended July 31, 1996 to 46.0% in the year ended July 31, 1997.
Employee Compensation and Related Costs. Employee compensation and related
costs increased $172,000 or 2.4%, from $7.3 million in the year ended July 31,
1996 to $7.4 million in the year ended July 31, 1997, primarily due to annual
performance-based compensation increases. As a percentage of revenues, these
expenses decreased from 27.0% in the year ended July 31, 1996 to 26.4% in the
year ended July 31, 1997.
Other Operating Expenses. Other operating expenses increased $334,000, or
5.4%, from $6.2 million in the year ended July 31, 1996 to $6.5 million in the
year ended July 31, 1997, primarily due to increases in depreciation,
consulting fees and legal expenses. As a percentage of revenues, these expenses
increased from 23.1% in the year ended July 31, 1996 to 23.3% in the year ended
July 31, 1997.
Liquidity and Capital Resources--Driver
Driver generated net cash from operating activities of approximately $2.8
million and $2.4 million in the nine months ended April 30, 1998 and 1999,
respectively. Net cash flow from operating activities was approximately $2.5
million, $426,000 and $515,000 in the years ended July 31, 1998, 1997 and 1996,
101
<PAGE>
respectively. Net cash used in investing activities was approximately $11.5
million in the nine months ended April 30, 1999, primarily for the purchases of
property and equipment and acquisitions. In the nine months ended April 30,
1998, cash used in investing activities was approximately $1.6 million
primarily for the purchase of property and equipment. Net cash used in
investing activities was approximately $530,000 in the year ended July 31,
1998, excluding the purchase of the predecessor company, and $491,000 and
$327,000 in the years ended July 31, 1997 and 1996, primarily for the purchases
of property and equipment. Net cash provided by financing activities was
approximately $9.1 million in the nine months ended April 30, 1999, consisting
primarily of proceeds from the repayment of stockholder notes and proceeds from
issuance of debt. Net cash used in financing activities in the nine months
ended April 30, 1998 was approximately $767,000 and was primarily due to
contributions to the ESOP. In the year ended July 31, 1998, cash generated by
financing activities totaled $16.5 million consisting primarily of proceeds
from the issuance of debt. Net cash used in financing activities in the year
ended July 31, 1997 and 1996 totaled $64,000 and $546,000, respectively. At
April 30, 1999, Driver had a working capital deficit of $3.7 million.
Interest of Continuing Directors
Upon completion of the IPO, Thomas W. Corbett will become a director and the
president and chief operating officer of Centerprise's business and financial
services group. In addition, upon completion of the IPO, Thomas W. Corbett, P.
Gregory Zimmer and Jerold Hall will enter into employment agreements with
Driver and Centerprise. See "Centerprise Management."
Principal Stockholders
The following table sets forth, as of March 30, 1999, the number of shares
beneficially owned by:
(a) each person known by Driver to own beneficially more than five percent
of the outstanding common stock,
(b) each director and
(c) all directors and executive officers as a group. Unless otherwise
indicated, the persons named below have sole voting and investment power
with respect to all shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
Shares Approximate
Name* Beneficially Owned Percent Owned
----- ------------------ -------------
<S> <C> <C>
Thomas W. Corbett...................... 202,428 19.1171
Jerold D. Hall......................... 75,000 7.1689
Ted E. Davidson........................ 35,640 3.4067
Robert G. Combe........................ 62,596 5.9833
Gordon DesCombes....................... 64,091 6.1261
Michael D. Driver...................... 63,402 6.0604
John T. Warnock........................ 62,011 5.9274
Lawrence A. Weitzen.................... 61,535 5.8819
P. Gregory Zimmer, Jr.................. 60,000 5.7352
R. Joseph DeBriyn...................... 10,000 0.9559
Robert R. Gould**...................... -0- -0-
Richard B. Gulley...................... 64,725 6.1868
All directors and executive officers as
a group............................... 826,037 78.7254
</TABLE>
--------
* Scheduled ownership is inclusive of shares held personally, shares held in
living trusts and shares held through self-directed 401(k) investments.
** Robert Gould is an employee of Brown Brothers Harriman, which holds 73,042
warrants.
Simione, Scillia, Larrow & Dowling
General
Simione, Scillia, Larrow & Dowling LLC, the predecessor of which was founded
in 1974, provides accounting and tax services and management consulting
services. Simione has significant expertise in providing
102
<PAGE>
services to construction companies and serves as an advisor to many of New
England's major road builders and contractors. Simione maintains offices in New
Haven and Hartford, Connecticut and will serve as a regional distribution point
in its markets. Its principal executive offices are located at 555 Long Wharf
Drive, New Haven, Connecticut 06511.
Regulation
As a service provider in the accounting profession, Simione's operations are
subject to state regulation. See "Business of Centerprise After the Mergers--
Regulation."
Employees
As of May 31, 1999, Simione had 50 professional employees, of which 32 were
licensed CPAs, and 9 non-professional employees. None of Simione's employees is
represented by a labor union. Management of Simione believes its employee
relations are good.
Selected Financial Data
The following table sets forth selected financial data for Simione on a
historical basis and as a percentage of revenues for the period indicated:
<TABLE>
<CAPTION>
Three Months Ended March
31,
Year Ended --------------------------
December 31, 1998 1998 1999
------------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 6,217 100.0% $1,983 100.0% $2,478 100.0%
Expenses:
Membership
compensation and
related expenses..... 2,306 37.1 570 28.7 627 25.3
Employee compensation
and related costs.... 2,090 33.6 588 29.7 574 23.2
Other operating
expenses............. 1,364 21.9 327 16.5 333 13.4
--------- -------- ------ ----- ------ -----
Income from operations.. $ 457 7.4% $ 498 25.1% $ 944 38.1%
========= ======== ====== ===== ====== =====
</TABLE>
Results for the Three Months Ended March 31, 1999 Compared to the Three
Months Ended March 31, 1998--Simione
Revenues. Revenues increased $495,000, or 25%, from $2.0 million for the
three months ended March 31, 1998 to $2.5 million for the three months ended
March 31, 1999, primarily due to expansion in the existing audit and tax
practices, the addition of one individual practitioner and the acquisition of
an audit and tax practice.
Member Compensation and Related Costs. Member compensation and related costs
increased $57,000, or 10.0%, from $570,000 for the three months ended March 31,
1998 to $627,000 for the three months ended March 31, 1999, primarily due to
the addition of three members. As a percentage of revenues, these expenses
decreased from 28.7% for the three months ended March 31, 1998 to 25.3% for the
three months ended March 31, 1999.
Employee Compensation and Related Costs. Employee compensation and related
costs remained relatively constant at $588,000 and $574,000 for the three
months ended March 31, 1998 and 1999, respectively. As a percentage of
revenues, these expenses decreased from 29.7% for the three months ended March
31, 1998 to 23.2% for the three months ended March 31, 1999.
103
<PAGE>
Other Operating Expenses. Other operating expenses remained relatively
constant at $327,000 and $333,000 for the three months ended March 31, 1998 and
1999, respectively. As a percentage of revenues, these expenses decreased from
16.5% for the three months ended March 31, 1998 to 13.4% for the three months
ended March 31, 1999.
Liquidity and Capital Resources--Simione
Simione generated net cash flow from operating activities of approximately
$33,000 and $57,000 for the three months ended March 31, 1999 and 1998,
respectively. Net cash provided by financing activities was $33,000 for the
three months ended March 31, 1999, principally from the proceeds from short-
term debt. Net cash used in financing activities was $27,000 for the three
months ended March 31, 1998, primarily for payments of debt. At March 31, 1999,
Simione had working capital of approximately $1.3 million.
Interest of Continuing Directors
Upon completion of the IPO, Anthony P. Scillia will become a director of
Centerprise. See "Centerprise Management."
Principal Members
The following table sets forth, as of March 1, 1999, all of the members of
Simione. Unless otherwise indicated, the persons named below have sole voting
and investment power with respect to all membership interests shown as
beneficially owned by them:
<TABLE>
<CAPTION>
Approximate
Name Percentage Owned
---- ----------------
<S> <C>
Richard Simione.......................................... 16.12
Anthony P. Scillia....................................... 16.12
Ronald Larrow............................................ 15.16
Edward Dowling........................................... 9.40
Richard DeVita(1)........................................ 11.515
Peter Laine.............................................. 11.515
Joseph Natarelli......................................... 8.06
John Schuyler............................................ 4.24
Walter Fulton............................................ 2.90
William McCabe........................................... 1.93
George Riggs III......................................... 1.50
Mary Ellen Walkama....................................... 1.50
Other.................................................... 0.04
------
100.00
</TABLE>
- --------
(1) Pursuant to a Letter Agreement between Simione and Richard L. DeVita dated
January 5, 1996, although DeVita is not a CPA, DeVita is treated
economically as a member of Simione and the ownership interests of all
other members are diluted on a pro rata basis.
Urbach Kahn & Werlin PC
General
Urbach Kahn & Werlin PC, the predecessor of which was founded in 1963,
provides a broad range of accounting and business consulting services to a
variety of clients in both the private and public sectors. Urbach has
significant practices in the not-for-profit and state and federal government
arenas. Urbach maintains offices in Albany, New York; New York, New York;
Washington, D.C.; Los Angeles, California; Glens Falls, New York; and
Poughkeepsie, New York. Urbach, ranked No. 48 in the Top 100, will provide
regional
104
<PAGE>
distribution points in the Northeast and Mid-Atlantic regions and play a
significant role in Centerprise's anticipated national practice in litigation
consulting services. In addition, through Urbach's international affiliate,
Urbach Hacker Young International Limited, Centerprise will be able to help
clients achieve their business and financial objectives in the international
marketplace. Its principal executive offices are located at 66 State Street,
Albany, New York 12207.
Regulation
As a service provider in the accounting profession, Urbach's operations are
subject to state regulation. See "Business of Centerprise After the Mergers--
Regulation."
Employees
As of May 31, 1999, Urbach had 123 professional employees, of which 55 were
licensed CPAs, and 40 non-professional employees. None of Urbach's employees is
represented by a labor union. Management of Urbach believes its employee
relations are good.
Selected Financial Data
The following table sets forth selected financial data for Urbach on a
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended October 31, Six Months Ended April 30,
---------------------------- ----------------------------
1997 1998 1998 1999
------------- ------------- ------------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $16,012 100.0% $17,085 100.0% $9,671 100.0% $11,716 100.0%
Expenses:
Shareholders
compensation and
related costs......... 4,798 30.0 4,853 28.4 3,194 33.0 5,309 45.3
Employee compensation
and related costs..... 6,590 41.1 7,147 41.8 3,707 38.4 4,220 36.0
Other operating
expenses.............. 4,317 27.0 4,860 28.5 2,429 25.1 2,330 19.9
------- ----- ------- ----- ------ ----- ------- -----
Income (loss) from
operations............. $ 307 1.9% $ 225 1.3% $ 341 3.5% $ (143) (1.2)%
======= ===== ======= ===== ====== ===== ======= =====
</TABLE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results for the Six Months Ended April 30, 1999 Compared to the Six Months
Ended April 30, 1998--Urbach
Revenues. Revenues increased $2.0 million, or 21.1%, from $9.7 million for
the six months ended April 30, 1998 to $11.7 million for the six months ended
April 30, 1999, as a result of revenues derived from an increase in net
realizable billing rates and new client engagements.
Shareholder compensation and related costs. Shareholder compensation and
related costs increased $2.1 million, or 66.2%, from $3.2 million for the six
months ended April 30, 1998 to $5.3 million for the six months ended April 30,
1999, primarily due to an increase in the net operating income available for
shareholder compensation. As a percentage of revenues, these expenses increased
from 33.0% in 1998 to 45.3% in 1999.
Employee compensation and related costs. Employee compensation and related
costs increased $513,000, or 13.8%, from $3.7 million in the six months ended
April 30, 1998 to $4.2 million in the six months ended April 30, 1999,
primarily due to an increase in professional and administrative staff resulting
from the Urbach Acquisition as well as performance-based compensation
increases. As a percentage of revenues, these expenses decreased from 38.4% in
the six months ended April 30, 1998 to 36.0% in the six months ended April 30,
1999.
105
<PAGE>
Other operating expenses. Other operating expenses decreased $99,000, or
4.1%, from $2.4 million in the six months ended April 30, 1998 to $2.3 million
in the six months ended April 30, 1999. The decrease was attributable to a
reduction of operating costs as the firm began to realize certain economies of
scale. As a percentage of revenues, these expenses decreased from 25.1% in the
six months ended April 30, 1998 to 19.9% in the six months ended April 30,
1999.
Results for the Year Ended October 31, 1998 Compared to the Year Ended October
31, 1997--Urbach
Revenues. Revenues increased $1.1 million, or 6.7%, from $16.0 million for
the year ended October 31, 1997 to $17.1 million for the year ended October 31,
1998, primarily due to the Urbach Acquisition which added incremental 1998
revenues of $850,000. Also contributing to the revenue growth was a 10%
increase in billing rates during 1998.
Shareholder compensation and related costs. Shareholder compensation and
related costs remained relatively constant at $4.8 and $4.9 million in the
years ended October 31, 1997 and 1998, respectively. As a percentage of
revenues, these expenses decreased from 30.0% in the year ended October 31,
1997 to 28.4% in the year ended October 31, 1998.
Employee compensation and related costs. Employee compensation and related
costs increased $557,000, or 8.5%, from $6.6 million in the year ended October
31, 1997 to $7.1 million in the year ended October 31, 1998, primarily due to
an increase in professional and administrative staff resulting from the Urbach
Acquisition as well as performance-based compensation increases. As a
percentage of revenues, these expenses increased slightly from 41.1% in the
year ended October 31, 1997 to 41.8% in the year ended October 31, 1998.
Other operating expenses. Other operating expenses increased $543,000, or
12.6%, from $4.3 million in the year ended October 31, 1997 to $4.9 million in
the year ended October 31, 1998, due in part to increased occupancy costs
resulting from the additional office space acquired as part of the Urbach
Acquisition. As a percentage of revenues, these expenses increased from 27.0%
in the year ended October 31, 1997 to 28.5% in the year ended October 31, 1998.
Liquidity and Capital Resources--Urbach
Urbach used cash in operating activities of approximately $1.3 million and
$350,000 in the six months ended April 30, 1998 and 1999, respectively. Net
cash from operating activities was approximately $157,000 and $9,000 in the
years ended October 31, 1998 and 1997, respectively. Net cash used in investing
activities was approximately $187,000 in the six months ended April 30, 1998,
principally from the purchase of equipment and advances to shareholders. Net
cash provided by investing activities was approximately $1.2 million in the six
months ended April 30, 1999, primarily generated from the sale of investments.
Net cash used in investing activities was approximately $349,000 and $178,000
in the years ended October 31, 1998 and 1997, respectively, primarily used for
purchases of equipment and advances to shareholders in the year ended October
31, 1998. In the six months ended April 30, 1998 and 1999, cash provided by
financing activities was approximately $1.7 million and $525,000, respectively,
principally from proceeds from the issuance of debt. Cash provided by financing
activities was approximately $363,000 and $181,000 in the years ended October
31, 1998 and 1997, respectively. This was generated by borrowings, net of
repayments, and the issuance and payments of subscriptions, net of retirements,
of common stock. At April 30, 1999, Urbach had working capital of approximately
$4.2 million.
Interest of Continuing Directors
Upon completion of the IPO, Steven N. Fischer will become a director of
Centerprise. See "Centerprise Management."
106
<PAGE>
Principal Stockholders
The following table sets forth, as of February 1, 1999, the number of shares
beneficially owned by all of the stockholders of Urbach. Unless otherwise
indicated, the persons named below have sole voting and investment power with
respect to all shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
Shares Approximate
Name Beneficially Owned Percent Owned
---- ------------------ -------------
<S> <C> <C>
William Chandler......................... 1415 7.51
David Evans.............................. 745 3.96
Steven N. Fischer........................ 1500 7.97
Robert Fleming........................... 800 4.25
Howard Foote............................. 1020 5.42
John Gijanto............................. 1300 6.90
Arthur Heisman........................... 935 4.97
Jeffrey Hershow.......................... 295 1.57
Lloyd Jones.............................. 430 2.28
William Kahn............................. 1095 5.82
Richard Kotlow........................... 1415 7.51
Richard Lipman........................... 495 2.63
Michael Mahoney.......................... 250 1.33
Harold Mandel............................ 515 2.74
Michael McCarthy......................... 500 2.66
Donald Neubecker......................... 625 3.32
Marilyn Pendergast....................... 1300 6.90
Joseph Peterson.......................... 150 0.80
Jeffrey M. Rosenbaum..................... 775 4.12
Alan A. Schachter........................ 1400 7.43
John E. Wolfgang......................... 1465 7.78
James Daniels............................ 90 0.48
Marianne DeMario......................... 120 0.64
Paul Goetz............................... 80 0.42
Kevin O'Donoughue........................ 115 0.61
------ ------
Total................................ 18,830 100.00
</TABLE>
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DESCRIPTION OF CENTERPRISE CAPITAL STOCK
Upon the completion of the IPO, the authorized capital stock of Centerprise
will consist of 50,000,000 shares of common stock, $.01 par value per share,
and 10,000,000 shares of preferred stock, $.01 par value per share.
Common Stock
Of the 50,000,000 shares of common stock authorized, 26,940,000 shares will
be outstanding upon completion of the IPO. Subject to the rights of the holders
of preferred stock, the holders of common stock are entitled to share ratably
in dividends declared out of assets legally available therefor at such time and
in such amounts as the board of directors may from time to time lawfully
determine. Each holder of common stock is entitled to one vote for each share
held. Subject to the rights of holders of preferred stock, upon liquidation,
dissolution or winding up of Centerprise, any assets legally available for
distribution to stockholders as such are to be distributed ratably among the
holders of the common stock then outstanding. The shares of common stock
currently outstanding are, and the shares of common stock issued in the mergers
will be, fully paid and nonassessable. Holders of common stock have no
preemptive, subscription, redemption, sinking fund or conversion rights.
The board of directors will initially consist of 17 directors, each serving
for a term of one year. At each annual meeting of stockholders, all directors
will be elected by the stockholders. Cumulative voting for the election of
directors is not permitted. Therefore, the holders of a majority of the
outstanding common stock can elect all directors.
Preferred Stock
The certificate of incorporation of Centerprise authorizes the board of
directors to issue preferred stock in classes or series and to establish the
designations, preferences, qualifications, limitations or restrictions of any
class or series. Such designations and preferences include the rate and nature
of dividends, the price, terms and conditions on which shares may be redeemed,
the terms and conditions for conversion or exchange into any other class or
series of the stock and voting rights. Centerprise will have authority, without
approval of the holders of common stock, to issue preferred stock that has
voting, dividend or liquidation rights superior to the common stock and that
may adversely affect the rights of holders of common stock. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of common stock and delay, defer or
prevent a change in control of Centerprise. Centerprise currently has no plans
to issue any shares of preferred stock.
The existence of undesignated preferred stock may enable the board of
directors to discourage or deter any unsolicited takeover attempts, and thereby
protect the continuity of Centerprise's management. The issuance of shares of
the preferred stock pursuant to the board of directors' authority described
above may adversely affect the rights of the holders of common stock. For
example, preferred stock issued by Centerprise may rank prior to the common
stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for
the common stock or may otherwise adversely affect the market price of the
common stock.
Stockholders' Agreement
Upon the closing of the mergers, Centerprise's initial investors, management
and the owners and employees of the founding companies who receive common stock
in the mergers will enter into a stockholders' agreement governing the
nomination and election of Centerprise's directors. The stockholders' agreement
sets
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forth the manner and terms by such persons may nominate directors. Each of the
parties to the stockholders' agreement has agreed to take all action necessary
as a stockholder, director or officer of Centerprise, including voting its
common stock, to cause the incumbent directors of Centerprise or their
successors, as described below, to be nominated and elected at the first five
annual meetings following the closing of the IPO. In the event that an
incumbent director designated by BGL Capital or a founding company is unable to
or does not stand for reelection, representatives of BGL Capital or such
founding company may designate his successor for nomination. Nominees for other
vacancies will be selected by a majority of the then-incumbent board of
directors. The parties to the stockholders' agreement have also agreed to
restrictions on the transfer of shares of common stock.
The stockholders' agreement terminates immediately following
Centerprise's annual meeting of stockholders relating to fiscal year 2003, but
expected to occur in 2004. The stockholders' agreement may be amended by the
holders of 66 2/3% of the total number of shares of common stock then held by
the parties to the agreement. In addition, any requested waiver of the stock
transfer restrictions must be approved by a majority of the members of the
board of directors who are not subject to transfer restrictions at the time of
such proposed waiver.
Certain Provisions Affecting Stockholders
Delaware, like many other states, permits a corporation to adopt a number
of measures through amendment of the corporate charter or bylaws or otherwise,
that may have the effect of delaying or deterring any unsolicited takeover
attempts. In addition, Delaware law restricts certain "business combinations"
with "interested stockholders," generally a holder of 15% or more of
Centerprise's voting stock, for three years following the date that person
becomes an interested stockholder. By delaying or deterring unsolicited
takeover attempts, these provisions could adversely affect prevailing market
prices for the common stock.
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COMPARISON OF RIGHTS OF SECURITY HOLDERS
OF CENTERPRISE AND THE CENTERPRISE COMPANIES
Upon completion of the mergers, the holders of equity interests in the
eleven Centerprise founding companies will become holders of Centerprise common
stock. Centerprise is a Delaware corporation and is bound by Delaware law,
whereas each of the founding companies is bound by the corporate, partnership
or limited liability company law of the state in which such company was
organized. In addition, the Centerprise certificate of incorporation and bylaws
differ from the governance documents of each Centerprise company. The
difference between the Centerprise certificate of incorporation and bylaws and
the governance documents of each founding company, and between Delaware
corporate law and the corporate law of each state in which each Centerprise
company was organized, will ultimately result in changes to the rights of
holders of common stock, partnership or membership interests of each of the
Centerprise companies.
The following is a summary of the material differences between the rights of
the security holders of Centerprise and the security holders of each of Berry
Dunn, Follmer, Grace, Holthouse, IDA, Mann Frankfort, Reppond Company, Reppond
Administrators, VeraSource, Reznick, Driver, Simione and Urbach. This summary
does not purport to be a complete discussion of, and is qualified in its
entirety by reference to, Delaware corporate law, the Centerprise certificate
of incorporation and bylaws and the applicable state laws and governance
documents of the Centerprise companies.
Although Driver is incorporated in Delaware, as a corporation conducting
substantial business in California with more than half of its record holders
having addresses in California, it is also subject to provisions of the
California Corporations Code. The California law provisions to which Driver is
subject include provisions governing a director's standard of care in
performing the duties of a director, a stockholder's right to vote cumulatively
in any election of directors, a director's or stockholder's right to inspect
corporate records, indemnification requirements concerning directors, officers
and others and the corporate requirements to effectuate corporate
reorganizations, including mergers and acquisitions.
Dividends
As a Founding Company Security Holder:
. Berry Dunn--Maine law provides that the board of directors of a
corporation may declare and the corporation may pay dividends on its
outstanding shares in cash or property, except when the corporation is
insolvent or when the payment of the dividend would render the
corporation insolvent or when such declaration or payment would be
contrary to any restrictions contained in the articles of incorporation.
. Follmer--The bylaws of Follmer provide that the board of directors, in
its discretion, may declare dividends upon the capital stock from the
surplus and net profits of the company.
. Grace--Missouri law provides that the board of directors of a corporation
may declare and the corporation may pay dividends on its outstanding
shares in cash, property, or its own shares except that no dividend can
be declared or paid at a time when the net assets of the corporation are
less than its stated capital or when such payment would reduce the net
assets of the corporation below its stated capital. Neither the bylaws
nor the articles of incorporation of Grace contain provisions relating to
the declaration and payment of dividends that are inconsistent with the
Missouri law.
. Holthouse--California law provides that a limited liability partnership
shall not make a distribution if, as a result of such distribution:
(a) the partnership would not be able to pay its debts as they become due
in the ordinary course of business, or
(b) the partnership's liabilities would exceed its assets if it were to
be dissolved at the time of the distribution.
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The Holthouse partnership agreement provides that the partners shall
receive cash distributions from the liquid funds of the partnership after
providing for necessary reserves.
. IDA--New Jersey law provides that a corporation may pay dividends unless,
after giving effect to the dividends, the corporation would be unable to
pay its debts in the usual course of business, or the corporation's total
assets would be less than its total liabilities. The bylaws of IDA state
that the board of directors shall have full power to determine whether
any funds are available for the payment of dividends to shareholders.
. Mann Frankfort--Texas law prohibits the board of directors from making
distributions if:
(a) after giving effect to the distribution, the corporation would be
insolvent; and
(b) the distribution exceeds the surplus of the corporation.
Texas law provides that the corporation may make a distribution involving a
purchase or redemption of any of its own shares if the purpose of such purchase
or redemption is to:
(a) eliminate fractional shares;
(b) collect or compromise indebtedness owed by or to the corporation;
(c) pay dissenting shareholders entitled to payment for their shares; or
(d) effect the purchase or redemption of redeemable shares.
The bylaws of Mann Frankfort provide that the board of directors may, within
its discretion and with the prior written approval of the management committee,
declare dividends on its outstanding shares upon the terms and conditions
provided by law and its articles of incorporation. The articles of
incorporation of Mann Frankfort do not address the distribution of dividends.
. Reppond--Under Washington law, a corporation may make a distribution in
cash or in property to its shareholders upon the authorization of its
board of directors unless, after giving effect to the distribution:
(a) the corporation would be unable to pay its debts as they become due
in the usual course of business, or
(b) the corporation's total assets would be less than the sum of its
total liabilities plus the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to
satisfy the preferential rights of shareholders whose preferential
rights are superior to those receiving the distribution.
The bylaws of Reppond Company provide that dividends may be declared by
the Reppond Company board and paid out of the annual profits of the
corporation or out of its net assets in excess of its capital, subject to
the laws of the state of Washington. The bylaws of VeraSource provide
that dividends may be declared by the VeraSource board and paid out of
the annual profits of the corporation or out of its net assets in excess
of its capital, subject to the laws of the state of Washington.
Washington limited liability company law provides that a limited liability
company shall not make a distribution to a member to the extent that at the
time of the distribution, after giving effect to the distribution:
(a) the limited liability company would not be able to pay its debts as
they become due in the usual course of business, or
(b) all liabilities of the limited liability company interests and
liabilities to members on account of their interests for which the
recourse of creditors is limited to specified property of the limited
liability company, exceed the fair value of the assets of the limited
liability company.
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The operating agreement of Reppond Administrators does not contain
provisions relating to dividends.
. Reznick-- Maryland law provides that the board of directors may authorize
the corporation to make distributions to its shareholders, subject to any
restriction in its charter. The bylaws of Reznick provide that the
stockholders may from time to time declare, and Reznick may pay,
dividends on its outstanding shares in the manner and upon the terms and
conditions provided by law and its charter.
. Driver--Delaware law provides that a corporation may pay dividends out of
surplus, defined as the excess, if any, of net assets over capital, or,
if no such surplus exists, out of its net profits for the fiscal year in
which such dividends are declared and/or for its preceding fiscal year.
However, dividends may not be paid out of net profits if the capital of
such corporation is less than the aggregate amount of capital represented
by the outstanding stock of all classes having a preference upon
distribution of assets.
California law provides that a corporation may not make any
distribution, including dividends, unless either the corporation's
retained earnings immediately prior to the proposed distribution equal or
exceed the amount of the proposed distribution or, immediately after such
distribution, the corporation's assets, not including goodwill,
capitalized research and development expenses and deferred charges, would
be at least equal to 1 1/4 times its liabilities, not including deferred
taxes, deferred income and other deferred credits, and the corporation's
current assets would be at least equal to its current liabilities. The
certificate of incorporation of Driver provides that Driver's board may
authorize and pay dividends at its discretion subject to preferred
shareholders.
. Simione--Neither Connecticut limited liability company law nor the
operating agreement of Simione address dividends.
. Urbach--New York law provides that a corporation may pay dividends,
except when the corporation is insolvent or would thereby be made
insolvent. Furthermore, dividends may be paid out of surplus only, so
that the net assets of the corporation remaining after such distribution
shall at least equal the amount of its stated capital. The bylaws of
Urbach provide that subject to applicable law, dividends may be declared
in the board's discretion.
As a Centerprise Stockholder:
Under Delaware law, a corporation may pay dividends out of surplus, defined
as the excess of net assets over capital. If no such surplus exists, dividends
may be paid out of its net profits for the fiscal year. However, dividends may
not be paid out of net profits if the capital of such corporation is less than
the aggregate amount of capital represented by the outstanding stock of all
classes having a preference upon distribution of assets. The Centerprise
certificate of incorporation and bylaws contain provisions relating to the
declaration and payment of dividends consistent with Delaware law.
Voting Rights
As Both a Founding Company Security Holder and a Centerprise Stockholder:
Each holder of a voting security is entitled to one vote per share or
interest owned. Neither any of the founding companies security holders nor
Centerprise stockholders have cumulative voting rights in the election of
directors or other governing board members.
Directors--Number of Directors
As a Founding Company Security Holder:
. Berry Dunn--Maine law provides that if a corporation has a board of
directors, there shall be at least three directors, except that if all
shares of a corporation are owned beneficially and of record by fewer
than three shareholders, the number of directors may be less than three
but not less than the number of shareholders. The number of directors may
be increased or decreased only by:
(a) amendment of the articles of incorporation; or
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(b) if the articles of incorporation set out a maximum and minimum number
of directors, within the limits set in the articles by (1) a
resolution of the shareholders, or (2) a resolution of the directors,
if the articles authorize such a resolution.
The bylaws of Berry Dunn provide for a board of five directors, unless there
are fewer shareholders.
. Follmer--Michigan law provides that the board shall consist of one or
more members and the number should be fixed in the company's articles or
bylaws. Follmer has 12 directors.
. Grace--Missouri law provides that a corporation shall have three or more
directors, except that a corporation may have one or two directors if
stated in the articles of incorporation. The articles of incorporation of
Grace provide that the number of directors shall be fixed in the manner
set forth in the bylaws, but shall not be less than three. The bylaws of
Grace provide that the number of directors shall be set by a majority of
all of the issued and outstanding stock. Presently the number of
directors is ten.
. Holthouse--California partnership law does not address the number of
directors. The Holthouse partnership agreement provides for a managing
partner to be elected by a majority of the partners for a one year term.
. IDA--New Jersey law provides that the charter document or bylaws of a
corporation may specify the number of directors. The charter of IDA
provides for two initial directors. The bylaws of IDA state that the IDA
board shall consist of not less than one director, elected for a one-year
term, with the exact number determined by the IDA board. The bylaws of
IDA also provide that the directors have the power to increase or
decrease their own number by amendment to the bylaws.
. Mann Frankfort--Texas law provides that the board of directors shall
consist of one or more directors, and shall be fixed by the corporation's
articles of incorporation or bylaws. However, the number of directors
constituting the initial board of directors shall be fixed by the
articles of incorporation. The number of directors may be increased or
decreased by amendment. The articles of incorporation of Mann Frankfort
provide that the number of the initial board of directors is four and
that four shall be the authorized number of directors until such number
is changed by the bylaws. The bylaws of Mann Frankfort state that the
number of directors may be increased or decreased by amendment to the
bylaws; however, the number of directors shall never be less than four
persons.
. Reppond--Washington law provides that the board of directors of a
Washington corporation shall consist of one or more directors as fixed by
the corporation's articles of incorporation or bylaws. The bylaws of
Reppond Company provide for a board of directors comprised of not less
than two directors. The bylaws of VeraSource provide for a board of
directors comprised of two directors. Members govern the affairs of
Reppond Administrators pursuant to its operating agreement. The members,
including the manager, shall be fiduciaries as to each other and Reppond
Administrators.
. Reznick--Maryland law provides that a close corporation shall have at
least one director until an election by the corporation in its charter to
have no board of directors becomes effective. The amended and restated
articles of incorporation of Reznick provide that the corporation will
have no board of directors.
. Driver--Delaware law provides the charter document or bylaws of a
corporation may specify the number of directors. The Driver bylaws
provide that the number of directors shall be nine.
. Simione--Connecticut law provides that the articles of organization may
vest management of the business, property and affairs of a limited
liability company in a manager or managers. It provides that the
operating agreement may set forth the number and qualification of the
managers and the manner in which the managers are designated or elected,
removed and replaced. The articles of organization of Simione vest
management of the business affairs of the company in managers. The
operating agreement of Simione provides that the managers shall vote to
decide any matter connected with the business or affairs of the company.
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. Urbach--New York law provides that the board of directors shall consist
of one or more members. The number of directors constituting the board
may be fixed by the bylaws, or by action of the shareholders or of the
board under the specific provisions of a bylaw adopted by the
shareholders. The bylaws of Urbach provide that the number of directors
is five and no person owning less than 700 shares of corporate stock may
be elected a director.
As a Centerprise Stockholder:
Under Delaware law, a corporation's board of directors must consist of at
least one member, with the number fixed by the charter document or bylaws of
the corporation. The Centerprise bylaws provide that the number of directors
shall be fixed by resolution of the board. Upon completion of the mergers,
Centerprise expects its board to have 17 directors.
Directors--Vacancies
As a Founding Company Security Holder:
. Berry Dunn--Maine law provides that unless the articles of incorporation
or bylaws reserve to the shareholders the right to fill vacancies,
vacancies may be filled by a majority of the remaining directors, or by a
sole director. However, Article IV of the bylaws of Berry Dunn reserves
to the shareholders the right to fill any vacancy on the board of
directors. Any director elected to fill a vacancy shall be elected for
the unexpired term of his predecessor.
. Follmer--Michigan law provides that unless limited by the articles of
incorporation, the shareholders, the board, or if the directors remaining
in office are less than a quorum, by majority vote, may fill vacancies on
the Board. The bylaws of Follmer provide that vacancies on the board
shall be filled by the remaining members of the board and each person so
elected shall be a director until his successor is elected at the next
annual meeting or at a special meeting called for that purpose.
. Grace--Missouri law provides that unless otherwise provided in the
articles of incorporation or bylaws of the corporation, vacancies on the
board and newly created directorships resulting from any increase in the
number of directors may be filled by a majority of the directors then in
office, or by a sole remaining director, until the next election of
directors by the shareholders of the corporation. The bylaws of Grace
provide that in case of the death, resignation or disqualification of one
or more directors, a majority of the survivors or remaining directors may
fill such vacancy or vacancies, from other shareholders of the
corporation, until the successor or successors are elected at the next
annual meeting of the shareholders. A director elected to fill a vacancy
shall serve as such until the next annual meeting of shareholders.
. Holthouse--Neither California partnership law nor the organizational
documents of Holthouse address vacancies.
. IDA--New Jersey law provides that vacancies and newly created
directorships may be filled by a majority of the directors then in office
or by the sole remaining director, unless otherwise provided in the
certificate of incorporation or bylaws of the corporation. An elected
director shall hold office until the next annual shareholders meeting.
Unless otherwise provided in the certificate of incorporation or the
bylaws, when one or more directors resigns effective at a future date, a
majority of the directors then in office including those who have
resigned shall have the power to fill a vacancy, the vote shall take
effect when such resignation becomes effective. In addition, if by reason
of death, resignation or other cause, a corporation has no directors in
office, any shareholder or the executor or administrator of a deceased
shareholder may call a special meeting of shareholders for the election
of directors. The bylaws of IDA provide that if the number of directors
is increased, the additional directors may be chosen by a majority of the
directors in office at the time of the increase, or if not so chosen
prior to the time of the next annual meeting of the shareholders, they
shall be chosen by the shareholders. In case of vacancies created by
death, resignation or otherwise, except those created by removal of
shareholders,
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the remaining directors, although less than a quorum, may, by unanimous
vote, choose a successor for the unexpired term.
. Mann Frankfort--Texas law provides that any vacancy occurring in the
board of directors may be filled by the affirmative vote of a majority of
the remaining directors. A directorship to be filled by reason of an
increase in the number of directors may be filled by the board for a term
continuing only until the next election of directors; provided that the
board may not fill more than two such directorships during the period
between any two successive annual or special meetings of shareholders.
Any director vacancy may be filled by election at an annual or special
meeting of shareholders called for that purpose. Mann Frankfort's bylaws
provide that any director vacancy shall be filled at the next meeting of
the board of directors. Such vacancy shall be filled by the affirmative
vote of a majority of the remaining directors even though less than a
quorum.
. Reppond--Washington law provides that unless the articles of
incorporation provide otherwise, if a vacancy occurs on a board of
directors, including a vacancy resulting from an increase in the number
of directors, the shareholders or the board of directors may fill the
vacancy, or if the directors in office constitute fewer than a quorum of
the board they may fill the vacancy by the affirmative vote of a majority
of all the directors in office. The organizational documents of Reppond
do not address vacancies. The Reppond Administrators operating agreement
provides that a new or replacement manager may be appointed with the
written approval of members holding a majority of the units in Reppond
Administrators.
. Reznick--Reznick does not have a board of directors.
. Driver--Vacancies and newly created directorships may be filled by a
majority of the Driver directors then in office.
. Simione--The operating agreement of Simione provides that the managers
shall vote to decide any matter connected with the business or affairs of
the company.
. Urbach--New York law provides that newly created directorships may be
filled by vote of the board. If the directors then in office constitute
less than a quorum, such directorships may be filled by a vote of a
majority of the directors then in office. Vacancies occurring in the
board by reason of removal of directors without cause may be filled only
by vote of the shareholders.
As a Centerprise Stockholder:
Vacant director positions may be filled by a majority of the Centerprise
directors then in office, even though less than a quorum.
Directors--Removal
As a Founding Company Security Holder:
. Berry Dunn--Maine law provides that the entire board of directors or any
individual directors may be removed, at a special meeting of shareholders
called expressly for that purpose, with or without just cause, by an
affirmative vote of two-thirds of the outstanding shares entitled to
vote.
. Follmer--Michigan law provides that the shareholders may remove one or
more directors with or without cause unless the articles of incorporation
provide that directors may be removed only for cause. The vote for
removal shall be by a majority of shares entitled to vote. Michigan law
provides that a director may be removed by a court in a proceeding
commenced by at least 10% of the outstanding
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shares if the court finds that the director engaged in fraudulent, illegal
or dishonest conduct or gross abuse of authority or discretion with
respect to the corporation and the removal is in the best interests of the
corporation.
. Grace--Missouri law provides that directors may be removed in a manner
provided by the statute at a meeting called expressly for that purpose.
One or more directors or the entire board of directors may be removed,
with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote at an election.
. Holthouse--Neither California partnership law nor the organizational
documents of Holthouse address removal of directors.
. IDA--New Jersey law provides that a director may be removed for cause or,
without cause, by a majority of the shareholders entitled to vote for the
election of directors. The removal of a director with or without cause is
subject to the following qualifications:
(a) where cumulative voting is authorized, if less than the total
number of the directors then serving on the board is to be removed
by the shareholders, no one of the directors may be removed if the
votes cast against his removal would be sufficient to elect him if
then voted cumulatively at an election of the entire board; or, if
there are classes of directors, at an election of the class of
directors of which he is part,
(b) a director elected by a class vote may be removed only by a class
vote of the holders of shares entitled to vote for his election,
(c) if the certificate of incorporation requires a greater vote than a
plurality of the votes cast for the election of directors, no
director may be removed except by the greater vote required to
elect him, and
(d) shareholders of a corporation whose board is classified may not
remove a director without cause.
The bylaws of IDA provide that directors may be removed either with or without
cause by the affirmative vote of the holders of a majority of all the shares of
common stock outstanding and entitled to vote for the election of directors.
. Mann Frankfort--Texas law provides that a corporation's bylaws or
articles of incorporation may provide that any director or the entire
board of directors may be removed at a shareholder meeting, with or
without cause, by a vote of the holders of a specific portion, but not
less than a majority, of shares then entitled to vote.
. Reppond--Washington law provides that a corporation's shareholders may
remove one or more directors with or without cause unless the articles of
incorporation provide that any director may be removed only for cause.
Neither the articles of incorporation nor the bylaws of Reppond Company
contain provisions relating to removal of directors which are
inconsistent with Washington law. The bylaws of VeraSource provide that a
removal of any member of the board with or without cause must occur at a
meeting of the shareholders called expressly for that purpose. The
Reppond Administrators operating agreement provides that a manager may be
removed with or without cause upon the written approval of members
holding 66 2/3% of the units in Reppond Administrators.
. Reznick--Reznick does not have a board of directors.
. Driver--Delaware law provides that any director or the entire board of
directors may be removed, with or without cause, by the holders of a
majority of the shares entitled to vote at an election of directors,
except:
(1) in the case of a corporation having a classified board,
stockholders may effect such removal only for cause unless the
certificate of incorporation otherwise provides; and
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(2) in the case of a corporation having cumulative voting, if less than
the entire board is to be removed, no director may be removed
without cause if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election
of the entire board of directors.
California law provides that any director or the entire board of
directors may be removed, with or without cause, if the removal is
approved by the affirmative vote of a majority of the outstanding shares
entitled to vote, subject to limitations, if applicable, of cumulative
voting, class or series voting and classified board requirements. The
bylaws of Driver provide that subject to the rights of holders of any
series of preferred stock then outstanding, any director, or the entire
board of directors, may be removed from office at anytime, but only for
cause and only by the affirmative vote of the holders of 67% of the total
voting power of all securities entitled to vote generally in the election
of directors of the corporation, voting together as a single class.
. Simione--Connecticut law provides that any or all managers may be
removed, with or without cause, by the vote of a majority in interest of
the members. The operating agreement of Simione provides that the
managers shall vote to decide any matter connected with the business or
affairs of the company.
. Urbach--New York law provides that any or all of the directors may be
removed for cause by vote of the shareholders. The certificate of
incorporation or the specific provisions of a bylaw may provide for such
removal by action of the board, except:
(1) in the case of any director elected by cumulative voting; or
(2) by the holders of the shares of any class, or holders of bonds,
voting as a class, when so entitled by the provisions of the
certificate of incorporation.
New York law also provides that any or all directors may be removed without
cause by vote of the shareholders. The bylaws of Urbach provide that any and
all of the directors may be removed for cause by vote of the shareholders or by
action of the board. The bylaws of Urbach provide that directors may be removed
without cause only by vote of the shareholders.
As a Centerprise Stockholder:
Delaware law provides that any director or the entire board of directors may
be removed, with or without cause, by the holders of a majority of the shares
entitled to vote in an election of directors, unless the certificate of
incorporation limits such removal only for cause.
Centerprise's charter provides that directors may be removed only for cause
by a vote of a majority of the combined voting power of Centerprise's
outstanding stock.
Directors--Nominations
As a Founding Company Security Holder:
. Berry Dunn--Neither Maine law nor the organizational documents of Berry
Dunn address nominations.
. Follmer--Neither Michigan law nor the organizational documents of Follmer
address nominations.
. Grace--Neither Missouri law nor the organizational documents of Grace
address nominations.
. Holthouse--Neither California partnership law nor the organizational
documents of Holthouse address nominations.
. IDA--Neither New Jersey law nor the organizational documents of IDA
address nominations.
. Mann Frankfort--Neither Texas law nor the organizational documents of
Mann Frankfort address nominations.
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. Reppond--Neither Washington corporation law, Washington limited liability
company law, nor the organizational documents of Reppond Company,
VeraSource or Reppond Administrators address nominations of directors.
. Reznick--In accordance with Maryland law, Reznick does not have a board
of directors.
. Driver--The bylaws of Driver provide that nominations for a directorship
shall be submitted to the corporation not less than 150 days prior to the
date of the general meeting of the shareholders and shall specify, among
other things, the need for the action to be taken, and the age and
business background and qualification of a nominee for a directorship.
. Simione--Neither Connecticut law nor the organizational documents of
Simione address nominations.
. Urbach--Neither New York law nor the organizational documents of Urbach
address nominations.
As a Centerprise Stockholder:
The Centerprise bylaws provide that nominations for directors may be made
only by or at the direction of the Centerprise board or by a stockholder
entitled to vote for the election of directors at a stockholders' meeting.
Written notice of such stockholder's intent to make a director nomination must
be received by the Secretary of Centerprise in a manner and within the time
period specified in the bylaws of Centerprise.
Limitation on Director's Liability; Indemnification of Officers and Directors
As a Founding Company Security Holder:
. Berry Dunn--Maine law provides that a director shall not be held
personally liable for monetary damages for failure to discharge any duty
as a director unless the director is found not to have acted honestly or
in the reasonable belief that the action was in or not opposed to the
best interests of the corporation or its shareholders. Article VI of the
Berry Dunn bylaws provide that to the extent permitted by the laws of the
State of Maine, the corporation shall indemnify any officer or director
who was or is a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that he or she is or was an
officer or director, against expenses, incurred by him in connection with
such action, suit or proceeding. However, no indemnification shall be
provided with respect to any matter as to which he or she shall have been
finally adjudicated, in any action, suit or proceeding to have not acted
honestly or in the reasonable belief that his action was in the best
interests of the corporation or its shareholders, or with respect to any
criminal action, to have had reasonable cause to believe that his conduct
was unlawful. This indemnification shall apply only to matters arising
out of an individual's capacity as an officer or director of the
corporation and not with respect to matters undertaken as an employee or
shareholder of the corporation or in any other capacity.
. Follmer--Michigan law provides that a corporation has the power to
indemnify a person who was or is a party to a threatened, pending or
completed action, other than an action by or in the right of the
corporation, by reason of the fact that he or she is or was a director of
the corporation, against expenses incurred in connection with the action,
if the person acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation
or its shareholders. Michigan law provides that a corporation has the
power to indemnify a person who was or is a party to a threatened,
pending, or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that
he or she is or was a director, against expenses, incurred by the person
in connection with the action or suit, if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to
the best interests of the corporation or its shareholders.
Indemnification shall not be made for a claim, issue, or matter in which
the person has been found liable to the corporation. Michigan law
provides that to the extent that a director, officer, employee, or agent
of a corporation has been successful on the merits or otherwise in
defense of an action, or in defense of a claim, issue, or matter in the
action, suit, or proceeding, he or she shall be indemnified against
actual and reasonable expenses, including attorneys' fees, incurred by
him or her in connection with the action. The organizational documents of
Follmer do not address indemnification.
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. Grace--Missouri law provides that a corporation may indemnify any person
who was or is a party to any threatened, pending or completed action,
other than an action by or in the right of the corporation, by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another entity, against expenses
incurred by him in connection with such action, if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The corporation may indemnify any person who was or is a party
to any action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
entity against expenses actually and reasonably incurred by him in
connection with the defense or settlement of the action if he acted in
good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the corporation. However, no indemnification
shall be made in respect of any claim as to which such person shall have
been adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation unless and only to the extent
that the court in which the action brought determines that, despite the
adjudication of liability and in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper. Any permissive
indemnification, unless ordered by a court, shall be made by the
corporation only as authorized in the specific case and upon a
determination made by the majority vote of a quorum of directors not
parties to the action. To the extent that a director, officer, employee
or agent of the corporation has been successful on the merits or
otherwise in defense of any action or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses, actually and
reasonably incurred by him in connection with the action.
The bylaws of Grace provide that each director or officer or former
director or officer shall be indemnified against liabilities, expenses,
counsel fees and costs reasonably incurred by him or his estate in
connection with, or arising out of, any action, in which he was made a
party because of his position as a director or officer. However, nothing
in the bylaws shall restrict or limit the authority and duty of any
regulating board for the licensing of individual persons rendering
professional services or the practice of the profession which is within
the jurisdiction of the regulating board.
. Holthouse--California partnership law does not address indemnification.
The partnership agreement of Holthouse provides that, unless the partners
agree otherwise, any expenses and losses attributable to any act of
negligence or professional malpractice or any intentional tort on the
part of a partner, to the extent such liabilities are not paid or
reimbursed under a policy of insurance, shall be specifically allocated
to that partner and charged solely to his or her capital account.
. IDA--New Jersey law provides that a corporation's certificate of
incorporation may provide that a director or officer shall not be
personally liable, or shall be liable only to the extent provided
therein, to the corporation or its shareholders for damages for breach of
any duty owed to the corporation or its shareholders, except that this
provision shall not relieve a director or officer from liability for any
breach of duty based upon an act or omission
(a)in breach of the person's duty of loyalty;
(b)not in good faith or involving a known violation of the law or
(c)resulting in receipt by the person of an improper personal
benefit.
A corporation may indemnify a corporate agent against his expenses and
liabilities in connection with any proceeding by reason of his having been
such corporate agent, other than a proceeding by or in the right of the
corporation, if:
(a) the agent acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
corporation, and
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(b) with respect to criminal proceedings, he had no reasonable cause
to believe his conduct was unlawful.
The corporation may also indemnify a corporate agent against expenses
incurred in connection with any proceeding by or in the right of the
corporation, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation.
A corporation shall indemnify an agent against expenses to the extent the
agent has been successful on the merits or otherwise in any proceeding
referred to above, or in defense of any claim, issue or matter therein.
Any indemnification, unless ordered by a court, may be made by the
corporation only as authorized in a specific case upon a determination
that indemnification is proper in the circumstances. Unless otherwise
provided in the certificate of incorporation or bylaws, the determination
shall be made:
(a) by the board or a committee thereof, acting by a majority vote of
a quorum consisting of directors who were not parties to or
involved in the proceeding,
(b) if a quorum is not obtainable, or if obtainable but the quorum so
directs, by independent legal counsel, or
(c) by the shareholders if the certificate of incorporation or bylaws
or a resolution of the board or shareholders so directs.
Expenses incurred by a corporate agent in connection with a proceeding may
be paid by the corporation in advance of the final disposition of the
proceeding as authorized by the board upon receipt of an undertaking by
the agent to repay such amount if it is later determined that he was not
entitled to indemnification.
The bylaws of IDA provide that directors and officers of IDA and
directors or officers of any other corporation serving as such at the
request of IDA shall be indemnified by IDA against reasonable costs,
expenses, exclusive of any amount paid to IDA in settlement, and counsel
fees paid or incurred in connection with any action, suit or proceeding
to which the director or officer may be made a party by reason of his
having been a director or officer, provided:
(a) the action, suit or proceeding shall be prosecuted against the
director or officer to final determination, and it shall not be
finally adjudged in the action, suit or proceeding that he had
been derelict in the performance of his duties as a director or
officer, or
(b) the action, suit or proceeding shall be settled or otherwise
terminated as against a director or officer or his legal
representative without final determination on the merits, and it
shall be determined by the board that the director or officer had
not in any substantial way been derelict in the performance of his
duties as charged in the action, suit or proceeding.
. Mann Frankfort--Texas law provides that a corporation may indemnify a
director who was, is or is threatened to be made a defendant or
respondent in a proceeding if he conducted himself in good faith,
reasonably believed, with respect to his official capacity as a director,
that his conduct was in the corporation's best interests and reasonably
believed, with respect to other cases, that his conduct was at least not
opposed to the corporation's best interests. In the case of a criminal
proceeding, a corporation may indemnify a director if he had no
reasonable cause to believe his conduct was unlawful. Except as specified
below, a director may not be indemnified where he is found liable on the
basis that he improperly received personal benefit or where he is found
liable to the corporation. A director may be indemnified against
judgments, penalties, fines, settlements and reasonable expenses incurred
in connection with the proceeding; however, if the director is liable on
the basis that he improperly received personal benefit or he is liable to
the corporation, indemnification is limited to reasonable expenses and is
not available where the director is liable for willful or intentional
misconduct in the performance of his duty to the corporation.
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A determination of indemnification must be made by any of the following
ways:
(1) by a majority vote of a quorum of directors who were not
defendants in the proceeding;
(2) if a quorum cannot be obtained, by a majority vote of a committee
of the board who were not defendants in the proceeding;
(3) by special legal counsel; or
(4) by the shareholders in a vote that excludes the shares held by
directors who are defendants in the proceeding.
Authorization of indemnification and determination as to reasonableness of
expenses must be made in the same ways, except that if indemnification is
determined to be permissible by special legal counsel, such authorization
or determination must similarly be made by special legal counsel.
A corporation must indemnify a director against expenses he reasonably
incurred in connection with a proceeding in which he was named a defendant
or respondent because he was a director if such director was successful in
defense of the proceeding. A court, if it determines that a director is
entitled to indemnification, must order indemnification and award such
director expenses incurred in securing the indemnification.
A corporation may indemnify and advance expenses to an officer, employee,
or agent of the corporation or to anyone who is or was serving at the
request of the corporation as a director, officer, partner or similar
functionary to another corporation to the same extent that it may
indemnify and advance expenses to a director. Texas law, provides that the
articles of incorporation may limit a director's liability in his capacity
as a director except if the director is found liable for:
(1) a breach of the director's duty of loyalty to the corporation or
its shareholders or members;
(2) an act or omission not in good faith that constitutes a breach of
duty of the director to the corporation or an act or omission that
involves intentional misconduct or a knowing violation of the law;
(3) a transaction from which the director received an improper
benefit; or
(4) an act or omission for which the liability of a director is
expressly provided by an applicable statute.
The articles of incorporation of Mann Frankfort provide that a director
shall not be liable to the corporation or its shareholders for an act or
omission in the director's capacity as a director, unless the director is
found liable for the following:
(1) a breach of the director's duty of loyalty to the corporation or
its shareholders;
(2) an act or omission not in good faith that constitutes a breach of
duty of the director to the corporation or an act or omission that
involves intentional misconduct or a knowing violation of the law;
(3) a transaction from which the director received an improper
benefit, whether or not the benefit resulted from an action within
the scope of the director's office; or
(4) an act or omission for which the liability of a director is
expressly provided by an applicable statute.
The articles of incorporation and bylaws of Mann Frankfort provide that
each director shall be indemnified by the corporation to the fullest
extent permitted by Texas law.
. Reppond--Washington law provides that a corporation's articles of
incorporation may include a provision that eliminates or limits the
personal liability of a director to the corporation or its shareholders
for monetary damages for conduct as a director. However, the provisions
may not
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eliminate or limit the liability of a director for acts or omissions that
involve intentional misconduct by the director or a knowing violation of
law by the director, for unlawful distributions, or for any transaction
from which the director will personally receive a benefit in money,
property or services to which the director is not legally entitled.
In addition, if authorized by the articles of incorporation or bylaws
adopted or ratified by the shareholders or by a resolution adopted or
ratified by the shareholders, a corporation has the power to indemnify a
director or officer made a party to a proceeding, or advance or reimburse
expenses incurred in a proceeding, under any circumstances, except that no
indemnification shall be allowed on account of
(1) acts or omissions of a director or officer finally adjudged to be
intentional misconduct or a knowing violation of the law,
(2) conduct of a director or officer finally adjudged to be an
unlawful distribution, or
(3) any transaction with respect to which it was finally adjudged that
such director or officer personally received a benefit in money,
property or services to which the director or officer was not
legally entitled.
Unless limited by the corporation's articles of incorporation, Washington
law requires indemnification if the director or officer is wholly
successful on the merits of the action or otherwise. Any indemnification
of a director must be reported to the shareholders in writing. The
articles of incorporation of Reppond Company and VeraSource provide for
the limitation of director liability and indemnification of a director or
officer to the fullest extent permitted by Washington law.
Washington limited liability company law provides that a limited
liability company may contain provisions limiting liability and
indemnifying members or managers. Pursuant to the operating agreement of
Reppond Administrators, Reppond Administrators indemnifies and holds its
members and managers harmless from any loss or damage, by reason of any
act or omission performed or omitted by a member or manager on behalf of
Reppond Administrators or in furtherance of Reppond Administrators'
interests; however, recovery under such indemnification or agreement to
hold harmless is limited to the assets of Reppond Administrators. The
indemnity is limited to acts or omissions performed or omitted in good
faith and in the belief that they were in Reppond Administrators'
interest or not opposed to the best interests of Reppond Administrators.
. Reznick--Maryland law provides that a corporation may indemnify any
director made a party to any proceeding excluding bad faith by the
director. A director cannot be indemnified where the proceeding was in
the right of the corporation. Under the bylaws of Reznick, Reznick shall
indemnify any person who was or is a party to any threatened, pending or
completed action whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director,
officer, employee or agent of Reznick, or is or was serving at the
request of Reznick as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or is
or was serving at the request of the corporation as a trustee or
administrator or in any other fiduciary capacity under any pension,
profit sharing or other deferred compensation plan, or any employee
welfare benefit plan of the corporation, to the full extent permitted by
law. Such provisions apply to the stockholders and key employees of
Reznick when acting in lieu of a board of directors to the fullest extent
permitted by law.
. Driver--Delaware law allows a corporation to include in its certificate
of incorporation a provision that limits or eliminates the personal
liability of directors of the corporation and its stockholders for
monetary damages for breach of fiduciary duty as a director. Delaware law
does not, however, permit a corporation to limit or eliminate the
personal liability of a director for:
(1) any breach of the director's duty of loyalty to the corporation or
its stockholders;
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(2) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) intentional or negligent payments of unlawful dividends or
unlawful stock purchases or redemption; or
(4) any transaction from which the director derives an improper
personal benefit. The Driver certificate of incorporation
provides for limitations on directors' liability to the fullest
extent permitted by Delaware law.
Delaware law permits a corporation to indemnify any person who was or
is a party to:
(1) any action, suit or proceeding, whether civil, criminal,
administrative or investigative, other than an action by or in
the right of the corporation, against expenses and reasonable
settlement amounts if such person acted in good faith and
reasonably believed that his or her actions were in or not
opposed to the best interests of such corporation and, with
respect to any criminal proceeding, had no reasonable cause to
believe that his or her conduct was unlawful;
(2) any derivative action or suit on behalf of such corporation
against expenses actually and reasonably incurred in connection
with the defense or settlement of such action or suit, if such
person acted in good faith and reasonably believed that his or
her actions were in or not opposed to the best interest of such
corporation.
With respect to derivative suits and actions, in the event that a person
is adjudged to be liable to the corporation, Delaware law prohibits
indemnification unless, and then only to the extent that, either the
Delaware Court of Chancery or the court in which such derivative action
or suit was brought determines that such person is entitled to
indemnification for those expenses which that court deems proper. To the
extent that a representative of a corporation has been successful on the
merits or otherwise in the defense of a third party or derivative action,
indemnification for actual and reasonable expenses incurred is mandatory.
Under both the Delaware and California law, other than an action
brought by or in the right of the corporation, indemnification is
available if it is determined that the proposed indemnitee acted in good
faith and in a manner he or she reasonably believed to be in, or under
Delaware law not opposed to, the best interests of the corporation, and,
with respect to any criminal action or proceedings, had no reasonable
cause to believe his or her conduct was unlawful. Similarly, in actions
brought by or in the right of the corporation, such indemnification is
limited to expenses actually and reasonably incurred and permitted only
if the indemnitee acted in good faith and in a manner he or she
reasonably believed to be in, or under the Delaware law not opposed to,
the best interests of the company, except that no indemnification may be
made in respect of any claim, issue or matter as to which such person is
adjudged to be liable to the corporation, unless and only to the extent
that the court in which the action was brought determines that, despite
the adjudication of liability but in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for such
expenses which the court deems proper. To the extent that the proposed
indemnitee, only officers or directors under Delaware law, has been
successful in defense of any action, suit or proceeding, he must be
indemnified against expenses actually and reasonably incurred by him in
connection with the action.
The bylaws of Driver provide that Driver shall indemnify its directors
and officers to the maximum extent permitted by Delaware law. The bylaws
also provide that Driver, by action of its board of directors, may
provide indemnification to employees and agents of the corporation with
the same scope and effect as provided to its officers and directors.
. Simione--Connecticut law provides that an operating agreement may:
(1) eliminate or limit the personal liability of a manager for
monetary damages for breach of duty of care; and
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(2) provide for indemnification of a manager for judgments,
settlements, penalties, fines or expenses incurred in a
proceeding to which an individual is a party because such
individual is or was a manager.
The organizational documents of Simione do not address director liability
or indemnification of officers and directors.
. Urbach--New York law provides that a director shall not be liable to
creditors or shareholders for the following if he performed his duty of
care and loyalty to the corporation:
(1) declaration of a dividend contrary to the New York law;
(2) purchase of shares contrary to New York law;
(3) distribution of assets after dissolution of the corporation
without adequately providing for known liabilities of the
corporation; and
(4) the making of any loan contrary to New York law.
However, no indemnification may be made to or on behalf of any director
or officer if a judgment or other final adjudication adverse to the
director or officer establishes that his acts were committed in bad faith
or were the result of active and deliberate dishonesty and were material
to the cause of action, or that he personally gained in fact a financial
profit or other advantage to which he was not legally entitled. New York
law permits a corporation to indemnify a director or officer if such
director or officer acted in good faith for a purpose which he reasonably
believed to be in, or, in the case of service for any other corporation
or enterprise, not opposed to, the best interests of the corporation and,
in criminal actions, in addition, had no reasonable cause to believe that
his conduct was unreasonable. New York law prohibits indemnification with
respect to:
(1) a threatened or pending action which is settled; or
(2) any claim, issue or matter as to which such director or officer
shall have been adjudged to be liable to the corporation, unless
and only to the extent that a court determines that the person is
fairly and reasonably entitled to indemnity.
New York law provides that no indemnification shall be made where:
(1) the indemnification would be inconsistent with the law of the
jurisdiction of incorporation of a foreign corporation;
(2) the indemnification would be inconsistent with a provision of the
certificate of incorporation, a bylaw, a resolution of the board
or of the shareholders, or any other corporate action, in effect
at the time of the proceeding; or
(3) if there has been a settlement approved by the court, that the
indemnification would be inconsistent with any condition with
respect to indemnification expressly imposed by the court in
approving the settlement.
As a Centerprise Stockholder:
Delaware law allows a corporation to include in its certificate of
incorporation a provision that limits or eliminates the personal liability of
directors to the corporation and its stockholders for monetary damages for a
breach of fiduciary duty as a director. However, a corporation may not limit or
eliminate the personal liability of a director for:
(a) any breach of the director's duty of loyalty to the corporation or
its stockholders;
(b) acts or omissions in bad faith or which involve intentional
misconduct or a knowing violation of law;
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(c) intentional or negligent payments of unlawful dividends or unlawful
stock purchases or redemption; or
(d) any transaction which derives the director an improper personal
benefit.
Delaware law permits a corporation to indemnify any person who was or is a
party or is threatened to be made a party to:
(a) any action, suit or proceeding, whether civil, criminal,
administrative or investigative, other than an action by or in the right of
the corporation, against expenses, and reasonable settlement amounts if
such person acted in good faith and reasonably believed that his or her
actions were in or not opposed to the best interests of such corporation
and, with respect to any criminal proceeding, had no reasonable cause to
believe that his or her conduct was unlawful; or
(b) any derivative action or suit on behalf of such corporation against
expenses, including attorneys' fees, actually and reasonably incurred in
connection with the defense or settlement of such action or suit, if such
person acted in good faith and reasonably believed that his or her actions
were in or not opposed to the best interest of such corporation.
In the event that a person is adjudged to be liable to the corporation in a
derivative suit, Delaware law prohibits indemnification unless either the
Delaware Court of Chancery or the court in which such derivative suit was
brought determines that such person is entitled to indemnification for those
expenses which such court deems proper. To the extent that a representative of
a corporation has been successful on the merits or otherwise in the defense of
a third party or derivative action, indemnification for actual and reasonable
expenses incurred is mandatory.
The Centerprise charter provides that Centerprise shall indemnify
Centerprise directors to the maximum extent permitted by Delaware law. The
Centerprise charter provides that Centerprise may, at the direction of the
Centerprise board, indemnify officers and employees of Centerprise.
Call of Special Meetings
As a Founding Company Security Holder:
. Berry Dunn--Maine law provides that special meetings of the shareholders
may be called by any of the following:
(a)the president; (b) the chairman of the board of directors;
(c)a majority of the board of directors; or
(d) such other officers or persons as may be provided by the articles
of incorporation or in the bylaws.
The bylaws of Berry Dunn provide that special meetings of the shareholders
shall be held whenever the president, clerk, a majority of the board of
directors, or the holders of not less than 50% of the shares entitled to
vote at the meeting, call such meeting and give written notice.
. Follmer--Michigan law provides that a special meeting may be called as
provided in the bylaws. Upon application of holders of at least 10% of
the voting shares, the circuit court may order a special meeting. The
bylaws of Follmer provide that special meetings of the shareholders may
be called by the president and secretary, in writing, by a majority of
the board or by shareholders in writing owning a majority of the capital
stock.
. Grace--Missouri law provides that special meetings of the shareholders
may be called by the board of directors or by such other persons as are
authorized in the articles of incorporation or bylaws. The bylaws of
Grace provide that special meetings may be called by the president, the
board of directors or the holders of not less than one-fifth of all of
the outstanding shares of the corporation.
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. Holthouse--Neither California partnership law nor the organizational
documents of Holthouse
address special meetings.
. IDA--New Jersey law provides that special meetings of the shareholders
may be called by the president or the board, or by such other officers,
directors or shareholders as may be provided in the bylaws. The holders
of 10% of the shares entitled to vote may apply to the superior court of
New Jersey to order a special meeting for good cause shown. The bylaws of
IDA provide that special meetings of the shareholders, for any purpose,
other than those prescribed by statute or by the certificate of
incorporation, may be called by the president, vice president, secretary
or assistant secretary of IDA at the request of a majority of the board
or at the request of stockholders owning at least 10% of the issued and
outstanding capital stock of IDA entitled to vote.
. Mann Frankfort--Texas law provides that special meetings of the
shareholders may be called:
(a) by the president, the board of directors or such other person(s)
as may be authorized in the articles of incorporation or bylaws;
or
(b) by the holders of at least 10% of all the shares entitled to
vote, unless the articles of incorporation provide for a number
of shares greater than or less than 10%, but in no event shall
the articles of incorporation provide for a number of shares
greater than 50%.
The bylaws of Mann Frankfort state that special meetings of the
shareholders may be called by the president and/or the chairman of the
board, but not by any other person(s).
. Reppond--Washington law provides that a special meeting of the
shareholders may be called by a corporation's board of directors or other
persons authorized by the corporation's articles of incorporation or
bylaws, or, unless limited by the articles of incorporation, on written
demand of holders of at least 10% of all votes entitled to be cast on any
issue proposed to be considered at the proposed special meeting. The
bylaws of Reppond Company provide that a special meeting of the
shareholders for purposes other than those regulated by statute may be
called at any time by the board upon written request of any director or
shareholder holding in the aggregate one-fifth of the voting power of all
shareholders. The bylaws of VeraSource provide that a special meeting of
the shareholders may be called at any time by the holders of 20% of the
voting shares of the corporation, or by the president, or by a majority
of the board of directors. The operating agreement of Reppond
Administrators provides special meetings of the members for any purposes
described in the meeting notice, may be called by a member or members
whose capital accounts, in the aggregate, are at least 10% of the total
value of all capital accounts of the members.
. Reznick--Maryland law provides that a special meeting of the stockholders
of a corporation may be called by:
(1)the president;
(2)the board of directors; or
(3) any other person specified in the charter or bylaws. The bylaws
of Reznick provide that special meetings of the stockholders may
be called by the chief executive or president, by a majority of
the stockholders or key employees or by the operating committee
by vote at a meeting or by unanimous consent in writing without a
meeting.
. Driver--Delaware law provides that special meetings of stockholders may
be called by the board of directors and by such other persons authorized
to do so by the corporation's certificate of incorporation or bylaws.
California law requirements concerning special meetings of shareholders
do not apply in this context. The bylaws of Driver provide that special
meetings of the stockholders of the corporation may be called for any
purpose at any time by the board of directors, or by a committee of the
board of directors which has been duly designated by the board of
directors and whose powers and authority, as provided in a resolution of
the board of directors or in these bylaws, include the power to call such
meetings. Such special meetings may not be called by any other person or
persons.
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. Simione--The operating agreement of Simione provides that any manager may
call a meeting to consider approval of an action under any provision of
the operating agreement by delivering to each other manager notice of the
time and purpose of such meeting at least five days before the day of
such meeting.
. Urbach--New York law provides that if there is a failure to elect a
sufficient number of directors for one month following the date of the
annual meeting or thirteen months following the formation of the
corporation or its last annual meeting, the board shall call a special
meeting for the election of directors. If no such meeting is called or if
there is a failure to elect the requisite number of directors, holders of
10% of the voting shares may, in writing, demand the call of a special
meeting. At any such meeting called on demand of shareholders, the voting
shareholders attending the meeting shall constitute a quorum for the
purpose of electing directors, but not for the transaction of any other
business. The bylaws of Urbach provide that special meetings of the
shareholders may be called by the board or the president and must be
called by the president or secretary at the written request of a majority
of the board or by shareholders owning a majority of the issued and
outstanding shares.
As a Centerprise Stockholder:
Delaware law provides that special meetings of stockholders may be called by
the board of directors and by such other person or persons authorized to do so
by the corporation's certificate of incorporation or bylaws. Under
Centerprise's bylaws, a special meeting of stockholders may be called only by
the Centerprise board.
Action of Shareholders Without a Meeting
As a Founding Company Security Holder:
. Berry Dunn--Maine law provides that any action required or permitted to
be taken at a meeting of the shareholders may be taken without a meeting
if written consents, setting forth the action so taken, are signed by the
holders of all outstanding shares entitled to vote on such action and are
filed with the clerk of the corporation as part of the corporate records.
Such consents have the same effect as a unanimous vote of the
shareholders.
. Follmer--Michigan law provides that the articles of incorporation may
provide that any action may be taken without a meeting, if consents in
writing, setting forth the action taken, are signed by at least the
minimum number of votes that would be required at a meeting.
. Grace--Missouri law provides that any action which may be taken or
required by statute to be taken at a meeting of the shareholders of a
corporation may be taken without a meeting if consents in writing,
setting forth the action taken, shall be signed by all of the
shareholders entitled to vote on the subject matter thereof. The bylaws
of Grace contain consistent provisions.
. Holthouse--Neither California partnership law nor the organizational
documents of Holthouse address action of shareholders without a meeting.
. IDA--New Jersey law permits the shareholders of a corporation to consent
in writing to any action without a meeting if all the shareholders
entitled to vote consent in writing, except that any action to be taken
with respect to a merger, consolidation, acquisition of all capital
shares of a corporation and sale of assets may be taken without a meeting
only if all shareholders consent in writing or all shareholders entitled
to vote thereon consent in writing and the corporation provides to all
other shareholders advance notification. Except as otherwise provided in
the certificate of incorporation and New Jersey law, any action required
or permitted to be taken at a meeting of shareholders, other than the
annual election of directors, may be taken without a meeting, without
prior notice and without a vote, upon the written consent of shareholders
who would have been entitled to cast the minimum number of votes which
would be necessary to authorize such action at a meeting at which all
shareholders entitled to vote thereon were present and voting. The
organizational documents of IDA do not address shareholder action without
a meeting.
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. Mann Frankfort--The articles of incorporation and bylaws of Mann
Frankfort provide that shareholder action may be taken without a meeting,
without prior notice and/or vote, if a written consent(s) setting forth
the action taken, is signed by the holder(s) of shares not having less
than the minimum number of votes that would be necessary to take such
action.
. Reppond--Washington law provides that shareholders action may be taken
without a meeting only if written consents setting forth such action are
signed by all holders of outstanding shares entitled to vote thereon. The
articles of incorporation and bylaws of Reppond Company and VeraSource do
not contain provisions relating to shareholders action without a meeting.
Under the operating agreement of Reppond Administrators, any action which
may be taken at a meeting of members may be taken without a meeting by
written consent signed by all the members.
. Reznick--Maryland law provides that any action required or permitted to
be taken at a meeting of stockholders may be taken without a meeting if
the following are filed with the records of stockholder meetings:
(1) a unanimous written consent which sets forth the action and is
signed by each stockholder entitled to vote on the matter; and
(2) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to
vote at it.
The bylaws of Reznick contain consistent provisions relating to action of
shareholders without a meeting.
. Driver--Delaware law permits the stockholders of a corporation to consent
in writing to any action without a meeting, unless the certificate of
incorporation of such corporation provides otherwise if such consent is
signed by the stockholders having at least the minimum number of votes
required to authorize such action at a meeting. The certificate of
incorporation and bylaws of Driver contain a prohibition that prevents
Driver's stockholders from taking any action without a meeting.
. Simione--Neither Connecticut law nor the organizational documents of
Simione address shareholder action without a meeting.
. Urbach--New York law provides that shareholder action may be taken
without a meeting on written consent, stating the action so taken, signed
by the holders of all outstanding shares entitled to vote.
As a Centerprise Stockholder:
Delaware law permits the stockholders of a corporation to consent in writing
to any action without a meeting, unless the certificate of incorporation of
such corporation provides otherwise. The Centerprise charter contains a
prohibition that prevents Centerprise's stockholders from taking any action
without a meeting.
Shareholder Proposals
As a Founding Company Security Holder:
. Berry Dunn--Shareholder proposals are not addressed by Maine law or Berry
Dunn's bylaws.
. Follmer--Shareholder proposals are not addressed by Michigan law or
Follmer's bylaws.
. Grace--Shareholder proposals are not addressed by Missouri law or Grace's
bylaws.
. Holthouse--Shareholder proposals are not addressed by California
partnership law or the Holthouse partnership agreement.
. IDA--Shareholder proposals are not addressed by New Jersey law or IDA's
bylaws.
. Mann Frankfort--Shareholder proposals are not addressed by Texas law or
Mann Frankfort's bylaws.
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. Reppond--Shareholder proposals are not addressed by the Washington
corporations law, Washington limited liability company law or the
organizational documents of Reppond Company, VeraSource or Reppond
Administrators.
. Reznick--Shareholder proposals are not addressed by Maryland law or
Reznick's bylaws.
. Driver--The bylaws of Driver provide that all stockholder proposals for
action at an annual or special meeting of stockholders, including any
nomination for a directorship, shall be submitted in writing to the
corporation not less than 150 days prior to the date of the meeting. Such
written proposal shall state the nature of the action sought, including
the form and text of proposed resolutions, reasonable explanations of the
need for the action to be taken, and the age and business background and
qualifications of a nominee for a directorship. Whether or not a proposal
so submitted shall be presented for action at a meeting of the
stockholders shall be at the sole discretion of the board of directors.
Except as pursuant to these terms, no proposal of a stockholder may be
presented for action at any meeting of stockholders.
. Simione--Shareholder proposals are not addressed by Connecticut law or
Simione's bylaws.
. Urbach--Shareholder proposals are not addressed by New York law or
Urbach's bylaws.
As a Centerprise Stockholder:
The Centerprise bylaws provide that, to be timely, the Secretary of
Centerprise must receive written notice at the principal executive offices of
Centerprise between 120 and 150 days prior to the first anniversary of the date
of Centerprise's consent solicitation or proxy statement distribution to
stockholders in connection with the previous year's election of directors or
meeting of stockholders. If no annual meeting of stockholders or election by
consent was held in the previous year, or if the date of the meeting has been
changed from the previous year's meeting date, a proposal must be received
within 10 days after the meeting date has been "publicly disclosed."
Amendment to Charter
As a Founding Company Security Holder:
. Berry Dunn--Maine law provides that a corporation may amend its articles
of incorporation, from time to time, in any respect as may be desired if
its articles of incorporation, as amended, contain only such provisions
as might lawfully be contained in original articles of incorporation. All
amendments to the articles of incorporation, aside from an enumerated
few, shall be made by action of the directors and shareholders in
accordance with the following procedure:
(a) the board of directors shall adopt a resolution setting forth the
proposed amendment and submit it to the shareholders to vote on; and
(b) the proposed amendment shall be adopted upon receiving the
affirmative vote of the holders of at least a majority of all
outstanding shares entitled to vote thereon.
. Follmer--Michigan law provides that some amendments to the articles of
incorporation may be made without shareholder action, for example, to
delete the name and address of the initial directors or the initial
registered agent. Other amendments to the articles of incorporation must
be set forth in a notice of a meeting to all shareholders and must be
approved by a majority of the shareholders.
. Grace--Missouri law provides that some amendments to the articles of
incorporation may be made by the board adopting a resolution setting
forth the proposed amendment and directing that it be submitted to a vote
at a meeting of shareholders or the proposed amendment may be directly
submitted to the shareholders without adoption by the board. Each
shareholder shall be given notice setting forth the proposed amendment.
Generally, the proposed amendment shall be adopted upon receiving the
affirmative vote of a majority of the outstanding shares entitled to
vote, unless any class of shares is entitled to vote as a class, in which
event the proposed amendment shall be adopted upon receiving the
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affirmative vote of a majority of the outstanding shares of each class of
shares entitled to vote as a class and of the total shares entitled to
vote. Neither the bylaws nor the articles of incorporation of Grace
contain provisions relating to amendments to the charter.
. Holthouse--The Holthouse partnership agreement provides that such
agreement may be amended by a vote of more than one-half of the partners,
except for those provisions requiring approval of more than one-half of
the partners.
. IDA--New Jersey law provides that the charter of a corporation may be
amended by board approval, notice to shareholders of the proposed changes
and summary of the changes to shareholders, and approval by a majority of
the shareholders entitled to vote and, in addition, if any class or
series of shares is entitled to vote as a class, the affirmative vote of
a majority of the votes cast in each class. The voting requirements are
subject to such greater requirements as are provided under New Jersey law
for specific amendments, or as may be provided for in the certificate of
incorporation. Additionally, amending the charter to effect certain
actions, such as mergers, requires additional steps. The organizational
documents of IDA do not address charter amendments.
. Mann Frankfort--Texas law provides that a corporation may amend its
articles of incorporation in any respect as may be desired, so long as
its articles of incorporation contain only such provisions as might be
lawfully contained in the original articles of incorporation. The
articles of incorporation of Mann Frankfort provide that no amendment of
the articles of incorporation shall have the effect of modifying any
provision of the bylaws contractually requiring unanimity, or other
level, of shareholder consent to such amendment.
. Reppond--Washington corporations law authorizes a corporation's board of
directors to make various changes of an administrative nature to the
corporation's articles of incorporation without shareholder action. Such
changes include a change to the corporate name, changes to the number of
outstanding shares in order to effectuate a stock split or stock dividend
in the corporation's shares and changes to or elimination of provisions
with respect to the par value of the corporation's stock. Washington
corporations law requires that other amendments to a corporation's
articles of incorporation must be recommended to the shareholders by the
board of directors, unless the board determines that, because of a
conflict of interest or other special circumstances, it should make no
recommendation and communicates the basis for its determination to the
shareholders. Such amendments must be approved by each voting group
entitled to vote thereon by a majority of all the votes entitled to be
cast by that voting group, unless another proportion is specified in the
articles of incorporation, by the board of directors as a condition to
its recommendation, or by other provisions of Washington corporations
law. Washington limited liability company law provides that a certificate
of formation may be amended by a member or manager on behalf of the
limited liability company. The organizational documents of Reppond
Company, VeraSource and Reppond Administrators do not address amendments
to the charter.
. Reznick--Maryland law provides the charter of a close corporation may be
amended to remove the statement of election to be a close corporation,
but only by the affirmative vote of every stockholder. Neither the
articles of incorporation nor the bylaws of Reznick address amendment to
charter.
. Driver--Delaware law provides the charter of a corporation may be amended
by resolution of the board of directors and the affirmative vote of the
holders of a majority of the outstanding shares of voting stock entitled
to vote. With respect to any amendment to the charter of a corporation
that would adversely affect a particular class or series of stock,
Delaware law requires the separate approval by the holders of the
affected class or series of stock, voting together as a single class. The
certificate of incorporation of Driver provides that it may be amended in
any manner prescribed by statute. However, Article VIII, dealing with
board authority to amendment of bylaws, Article X, dealing with amendment
of bylaws, Article XI, dealing with authorizing board members to fill
board vacancies, Article XII, dealing with removal of directors, Article
XIII, dealing with transacting business at stockholders' annual and
special meetings, Article XIV, dealing with special meetings and Article
XV, dealing with
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amending articles, may not be repealed or amended in any respect unless
such repeal or amendment is approved by the affirmative vote of the
holders of not less than 67% of the total voting power of all outstanding
securities entitled to vote generally in the election of directors of the
corporation, together as a single class.
. Simione--Connecticut law provides the articles of organization may be
amended in any and as many respects as may be desired, so long as the
articles of organization as amended contain only provisions that may be
lawfully contained in articles of organization at the time of making the
amendment. Unless the articles of organization provide otherwise, the
articles of organization may be amended by a vote of a majority in
interest of the members. Simione's articles of organization do not
address amendment to charter.
. Urbach--New York law provides a corporation may amend its certificate of
incorporation in any respect as may be desired, if such amendment
contains only such provisions that may be lawfully contained in the
original certificate of incorporation. New York law provides that an
amendment to the certificate of incorporation may be authorized by vote
of the board, followed by a vote of the holders of a majority of all
outstanding shares entitled to vote. The board may authorize the
following changes:
(a) specify or change the location of the corporation's office;
(b) specify or change the post office address to which the secretary
shall mail a copy of any process against the corporation served
upon him; and
(c) to make, revoke or change the designation of a registered agent,
or to specify or change the address of its registered agent.
As a Centerprise Stockholder:
Delaware provides that, the charter of a corporation may be amended by
resolution of the board of directors and the affirmative vote of the holders
of a majority of the outstanding shares of voting stock then entitled to vote.
Delaware provides that also permits a corporation to make provision in its
certificate of incorporation requiring a greater proportion of the voting
power to approve a specified amendment. Any amendment to the charter of a
corporation that adversely affects a particular class or series of stock
requires the separate approval of the holders of the affected class or series
of stock. Any amendment to the Centerprise charter relating to the creation of
a classified board of directors or affecting the prohibition on stockholder
action by written consent requires the approval of 80% of the outstanding
shares of voting capital stock of Centerprise.
Amendment to Bylaws
As a Founding Company Security Holder:
. Berry Dunn--Maine law provides that unless otherwise provided in the
articles of incorporation, either the board of directors or the holders
of shares entitled to vote to elect directors may amend or repeal the
bylaws or adopt new bylaws. The articles of incorporation may exclusively
vest in the directors or the shareholders, or both, the power to adopt,
amend and repeal the bylaws generally or a particular bylaw or class of
bylaws. The bylaws provide that the board of directors, by affirmative
vote of more than two-thirds of the board members, ratified by
affirmative vote of more than two-thirds of all shareholders may amend,
alter or repeal the bylaws.
. Follmer--The bylaws of Follmer provide that the shareholders or the board
may alter, amend, add to or repeal the bylaws.
. Grace--Missouri law provides that the power to alter, amend, or repeal
the bylaws of the corporation shall be vested in the shareholders, unless
and to the extent that such power may be vested in the board by the
articles of incorporation. The articles of incorporation of Grace state
that the power to make, alter, or amend or repeal the bylaws of the
corporation is vested in the board of directors.
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. Holthouse--Neither California partnership law nor the organizational
documents of Holthouse address amendment to the bylaws.
. IDA--New Jersey law provides that the bylaws of a corporation may be
altered by the board, unless such power is reserved to the shareholders
in the certificate of incorporation. Any bylaws made by the board may be
amended by the shareholders, and the shareholders may prescribe in the
bylaws that any bylaw made by them shall not be altered or repealed by
the board. The bylaws of IDA provide that the bylaws may be amended
either by the affirmative vote of a majority of the shareholders at an
annual or special meeting at which a quorum is present, or by a majority
of the whole board, at a regular or special meeting, provided that notice
of the proposal to amend the bylaws be included in the notice of such
meeting of the board of shareholders. Bylaws made or amended by the board
may be altered, amended or repealed by the shareholders.
. Mann Frankfort--The articles of incorporation of Mann Frankfort provide
that the bylaws may be amended or repealed only by the vote of the
requisite number of the shareholders as may be provided for in the bylaws
themselves. However no amendment of the bylaws shall modify any provision
of the bylaws contractually requiring unanimity, or other level, of
shareholder consent to the amendment thereof. The bylaws of Mann
Frankfort state that, except for those provisions requiring unanimous
consent, the bylaws may be amended only by the affirmative vote of those
shareholders owning at least 66 2/3% of the outstanding shares.
. Reppond--Washington corporations law provides that a corporation's board
of directors may amend or repeal the corporation's bylaws, or adopt new
bylaws, unless limited by the corporation's articles of incorporation or
bylaws. A corporation's shareholders may amend or repeal the
corporation's bylaws or adopt new bylaws, even though the bylaws may also
be amended or repealed, or new bylaws may also be adopted, by its board
of directors. The bylaws of Reppond Company provide that the bylaws may
be altered, amended or repealed by the affirmative vote of a majority of
the voting stock issued and outstanding at any regular or special meeting
of the shareholders if the notice of such meeting contains a statement of
the proposed alteration, amendment, or repeal; provided, however, that no
change of the time or place for the election of directors shall be made
within 30 days before the day on which the election is to be held, and
that in case of any change of such time or place, notice thereof shall be
given to each shareholder entitled to vote, at least 10 days before the
election is to be held. Under the bylaws of Reppond Company, the board of
directors also have the power to make, alter and repeal bylaws additional
and supplementary and not inconsistent to the current bylaws, but any
such additional or supplementary bylaws may be altered or released by the
holders of a majority of the stock entitled to vote. The VeraSource
bylaws provide that the bylaws may be altered, amended or repealed by the
affirmative vote of a majority of the voting stock issued and outstanding
at any regular or special meeting of the shareholders if the notice of
such meeting contains a statement of the proposed alteration, amendment,
or repeal, provided, however, that no change of the time or place for the
election of directors shall be made within 30 days before the day on
which the election is to be held, and that in case of any change of such
time or place, notice thereof shall be given to each shareholder entitled
to vote, at least 10 days before the election is to be held.
Washington limited liability company law provides that a majority vote by
the members is necessary to amend the limited liability company operating
agreement. The operating agreement of Reppond Administrators provides that
it may be amended by a vote or written consent of at least 66 2/3% of the
units in Reppond Administrators owned by the members.
. Reznick--Maryland law provides that the power to adopt, alter, and repeal
the bylaws of the corporation is vested in the stockholders except to the
extent that the charter or bylaws vest it in the board of directors. The
bylaws of Reznick provide that three-quarters ( 3/4) majority vote of the
key employees, each shareholder and each non-shareholder officer, shall
be required before Reznick may amend the bylaws of the corporation.
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. Driver--Delaware law provides that the power to adopt, amend or repeal
bylaws shall be in the stockholders entitled to vote, provided that a
corporation may, in its certificate of incorporation, confer such powers
on the board of directors. The certificate of incorporation of Driver
provides that the board of directors is expressly authorized to adopt,
repeal, alter, amend and rescind the bylaws of the corporation by
majority vote of the entire board of directors.
. Simione--The operating agreement of Simione provides that it may not be
amended except with the approval of all of the managers.
. Urbach--The bylaws of Urbach provide that the bylaws may be amended,
repealed or adopted by vote of the holders of the shares entitled to vote
in the election of directors. The bylaws may also be amended, repealed or
adopted by the board, but any such bylaw change may be amended by the
shareholders then entitled to vote. If any bylaw regulating the impending
election of the directors is adopted, amended or repealed by the board,
this change should be in the notice of the next meeting of shareholders
for the election of directors.
As a Centerprise Stockholder:
Delaware law provides that the power to adopt, amend or repeal bylaws shall
be in the stockholders entitled to vote. A corporation may, in its certificate
of incorporation, confer such powers on the board of directors. Under the
Centerprise charter, the Centerprise board is expressly authorized to make,
alter, amend or repeal the bylaws of Centerprise. If such action is to be taken
by stockholders, the affirmative vote of 66 2/3% of the total votes eligible to
be cast by stockholders is required.
Conflict of Interest
As a Founding Company Security Holder:
. Berry Dunn--Maine law and the bylaws of Berry Dunn provide that no
transaction in which a director or officer has a personal or adverse
interest shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the
meeting of the board of directors or committee which approves such
transaction, or because his vote is counted if:
(a) the material facts as to his interest and as to the transaction are
disclosed or known by the board of directors or the committee and the
board ratifies the transaction by a vote sufficient for such purpose
without counting the vote of the interested director(s);
(b) although the vote of the interested director(s) is decisive of
approval or disapproval, the material facts are disclosed or known to
the shareholders, and the transaction is specifically approved by the
vote of the shareholders, whether or not the votes of interested
shareholders are necessary for such approval; or
(c) although (a) and (b) have not been satisfied, the transaction is fair
and equitable at the time it is authorized or approved and the party
asserting fairness establishes such.
. Follmer--Michigan law states that a transaction in which a director or
officer is determined to have an interest shall not, because of the
interest, be enjoined, set aside, or give rise to an award of damages or
other sanctions in a proceeding by a shareholder or in the right of the
corporation, if the person interested in the transaction establishes any
of the following:
(1) the transaction was fair to the corporation at the time entered into;
(2) the material facts of the transaction and the director's or officer's
interest were disclosed or known to the board, a committee of the
board, or the independent director or directors, and the board,
committee, or independent director or directors authorized, approved
or ratified the transaction; or
(3) the material facts of the transaction and the director's or officer's
interest were disclosed or known to the shareholders entitled to vote
and they authorized, approved or ratified the transaction.
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The organizational documents of Follmer do not address conflict of interest.
. Grace--Missouri law provides that no contract or transaction between a
corporation or one or more of its directors, or between a corporation and
any other organization in which one or more of its directors or officers
are directors or officers, or have a financial interest, shall be void or
voidable solely for this reason, or solely because the directors or
officers are present at or participating in the meeting or solely because
his or their votes are counted for such purpose if:
(1) the material facts as to its relationship or interest as to the
contract or transaction are disclosed or are known to the board of
directors or committee and the board of directors or committee in
good faith authorizes the contract or transaction by the affirmative
vote of the majority of the disinterested directors even though the
disinterested directors may be less than a quorum;
(2) the material facts as to its relationship or interest as to the
contract or transaction are disclosed or known to the shareholders
then entitled to vote, and the contract or transaction is
specifically approved in good faith by the vote of the shareholders;
or
(3) the contract or transaction is fair as to the corporation as of the
time it is authorized or approved by the board of directors, a
committee thereof or the shareholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the board of directors or a committee which
authorizes the contract or transaction. Neither the bylaws nor the
articles of incorporation of Grace contain provisions relating to
conflict of interest.
. Holthouse--Neither California partnership law nor the organizational
documents of Holthouse address conflict of interest.
. IDA--New Jersey law provides that no contract between a corporation and
one or more of its directors or between the corporation and another
corporation, firm or association in which a director is also a director
or otherwise interested shall be void solely because of the interested
director or because the director was present at the meeting authorizing
the transaction if one of the following is true:
(a) the contract or transaction is fair or reasonable to the corporation
at the time it is approved or ratified;
(b) the fact of common directorship or interest is disclosed or known to
the board or committee who authorizes or ratifies the contract or
transaction by unanimous written consent, provided at least one
director so consenting is disinterested, or by affirmative vote of a
majority of the disinterested directors, though less than a quorum,
or
(c) the fact of common directorship or interest is disclosed or known to
the shareholders, and they authorize the contract or transaction.
Interested directors may be counted in determining the presence of a
quorum at a board or committee meeting authorizing an interested director
transaction. The organizational documents of IDA do not address conflicts
of interest for directors or officers.
. Mann Frankfort--Texas law provides that an otherwise valid contract or
transaction between a corporation and a director or officer, or between a
corporation and any other entity in which a director or officer has a
financial interest, shall be valid regardless of whether such director or
officer participates in the meeting at which the contract or transaction
is authorized, or solely because his votes are counted for such purpose,
if any of the following is satisfied:
(a) the material facts as to the relationship and as to the contract or
transaction are disclosed to the board of directors or committee, and
the board or committee in good faith authorizes the contract or
transaction by the affirmative vote and a majority of disinterested
directors, even though the disinterested directors may be less than a
quorum;
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(b) the material facts as to the relationship and as to the contract or
transaction are disclosed to the shareholders entitled to vote
thereon, and such contract or transaction is specifically approved in
good faith by the shareholders; or
(c) the contract or transaction is fair as to the corporation as of the
time it is authorized, approved or ratified by the board, a committee
or the shareholders.
Interested directors may be counted in determining a quorum at a meeting of
the board or committee which authorizes the contract or transactions. Mann
Frankfort's Agreement of Shareholders provides that each shareholder shall
devote all of his time, knowledge and skill to the business and affairs of
the corporation.
. Reppond--Washington corporations law provides that a director's
conflicting interest transaction may not be enjoined, set aside or give
rise to an award of damages or other sanctions because the director or
any person with whom the director has a personal, economic, or other
association, has an interest in the transaction, if:
(a) after the required disclosure, the transaction received the
affirmative vote of a majority of those disinterested directors on
the board of directors,
(b) the transaction received the affirmative vote of a majority of the
shares held by disinterested shareholders, or
(c) the transaction, judged according to the circumstances at the time of
commitment, is established to have been fair to the corporation.
Neither Washington limited liability company law nor the organizational
documents of Reppond Company, VeraSource and Reppond Administrators address
conflict of interest.
. Reznick--Maryland law provides that interested director transactions, in
our case, interested shareholder transactions, are not void per se. The
fact of the common interest must be disclosed or known by the
stockholders entitled to vote, and the contract or transaction needs to
be approved or ratified by a majority of the votes cast by stockholders
entitled to vote other than the votes of shares owned by the interested
director or shareholder. The Reznick shareholders' agreement provides
that each key employee agrees to devote his best efforts and full
business time to rendering professional services in the corporation's
certified public accounting and business consulting practice on behalf of
the corporation.
. Driver--Delaware law provides that certain contracts or transactions in
which one or more of a corporation's directors has an interest are not
void or voidable because of such interest, provided that conditions, such
as obtaining the required approval and fulfilling the requirements of
good faith and full disclosure are met. Delaware law requires that the
shareholders or the disinterested directors must approve any such
contract or transaction after the full disclosure of material facts, and
the contract or transaction must have been fair as to the corporation at
the time it was approved. Also under Delaware law, if board approval is
sought, the contract or transactions must be approved by a majority of
the disinterested directors, even though less than a quorum. The
certificate of incorporation and bylaws of Driver do not address conflict
of interest.
. Simione--The operating agreement of Simione provides that each member
must devote such member's full professional time and best efforts to
serving the company and its clients in a professional manner.
No member may, while a member of the company, directly or indirectly engage
in activities which are competitive with the business and affairs of the
company. Except upon the prior written approval of the company, no member
may, while a member of the company, directly or indirectly engage in any
commercial duties or pursuits, other than as a member of the company;
provided, however, that no member shall be prohibited from trading in and
or passively holding stocks, bonds, securities, real estate, commodities,
or other forms of investment so long as such investment will not require
the rendition of any services by such member.
135
<PAGE>
. Urbach--The Urbach master agreement provides that each shareholder shall
devote his entire professional time to the practice of accountancy for
Urbach.
As a Centerprise Stockholder:
The Centerprise bylaws provide that no contract entered into between
Centerprise and one or more of its directors or officers or between Centerprise
and any other organization in which one or more of its directors or officers
are directors or officers, or have a financial interest, shall be void or
voidable solely because the director or officer is present or participates in a
meeting which authorizes the contractor or transaction, or solely because his
or her votes are counted for such purpose, if:
(a) the director or officer's relationship or interest in the contract
or transaction is disclosed to the disinterested directors, and the
disinterested directors authorize the contract or transaction in good
faith;
(b) the material facts as to the director or officer's relationship or
interest in the contract are disclosed to the stockholders then entitled to
vote, and the contract is approved in good faith by the vote of the
stockholders; or
(c) the contract is fair to the corporation as of the time it is
authorized by the board of directors or by the stockholders.
Business Combinations Involving Interested Shareholders
As a Founding Company Security Holder:
. Berry Dunn--Maine law provides, except in situations where (a) a domestic
corporation's stock is not registered with the SEC, or (b) the business
combination involves a domestic corporation who has no interested
stockholders other than a stockholder who was interested before April 6,
1988 or who became interested inadvertently, and as soon as practicable
divests a sufficient amount of stock so that such stockholder owns less
than 25% of the corporation and has not been an interested stockholder at
any time within the preceding 5 years, no domestic corporation may engage
in any business combination, generally, any merger, consolidation, sale,
lease or other such transaction involving the interested shareholder or
an affiliate or associate thereof, as the other party, for a period of
five years following an interested stockholder's stock acquisition date
unless that business combination is:
(a) approved by the board of directors of that domestic corporation prior
to that interested stockholder's stock acquisition date; or
(b) approved subsequent to that interested stockholder's stock
acquisition date, by the board of directors of the corporation and
authorized by the affirmative vote, at a stockholders meeting, of at
least a majority of the outstanding voting stock not beneficially
owned by that interested stockholder or any associate of that
interested stockholder or by persons who are either directors or
officers and also employees of that domestic corporation.
. Follmer--Business combinations involving interested shareholders are not
addressed under Michigan law.
. Grace--Business combinations involving interested shareholders are not
addressed under Missouri law.
. Holthouse--Antitakeover provisions are not addressed under California
partnership law.
. IDA--New Jersey law provides that under New Jersey law no resident
domestic corporation shall engage in any business combination with any
interested stockholder of that resident domestic stock corporation for
five years following that interested stockholder's stock acquisition date
unless the business combination is approved by the board prior to that
interested stockholder's stock acquisition date. In addition, no resident
domestic corporation shall engage in any business combination with any
interested stockholder of that corporation other than:
136
<PAGE>
a. a business combination approved by the board prior to the interested
stockholder's stock acquisition date;
b. a business combination approved by the affirmative vote of the holders
of two-thirds of the voting stock not beneficially owned by that
interested stockholder at a meeting called for such purpose; or
c. a business combination that has a minimum consideration value,
provides the same consideration to all security holders as the
interested stockholder used to acquire the largest number of shares
previously acquired and the interested stockholder has not
beneficially acquired additional stock.
Unless the certificate of incorporation provides otherwise, the provisions
of the act shall not apply to any business combination of a resident domestic
corporation with an interested stockholder if the corporation did not have a
class of voting stock registered or traded on a national securities exchange or
registered with the SEC on that interested stockholder's stock acquisition
date. The organizational documents of IDA do not contain antitakeover
provisions.
. Mann Frankfort--Business combinations involving interested shareholders
are not addressed under Texas law.
. Reppond--Washington corporations law imposes restrictions on certain
transactions between a corporation and certain significant shareholders.
Washington corporations law prohibits a "target corporation" from
engaging in certain "significant business transactions" with a person or
group of persons that beneficially owns 10% or more of the voting
securities of a target corporation for a period of five years after the
acquisition of such securities. This prohibition does not apply if
transaction or acquisition of shares is approved by a majority of the
members of the target corporation's board of directors prior to the date
of the acquisition. Significant business transactions with an acquiring
person includes among other things, a merger or consolidation,
disposition of assets or issuance or redemption of stock. Neither
Washington limited liability company law nor the organizational documents
of Reppond Company, VeraSource and Reppond Administrators contain
antitakeover provisions.
. Reznick--There are no provisions of Maryland law regarding business
combinations involving interested shareholders which are applicable to
Reznick.
. Driver--Delaware law prohibits, in general, a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date of the transaction
in which the person becomes an interested stockholder, unless either:
(a) prior to the date at which the person becomes an interested
stockholder, the board of directors approves the transaction or
business combination which results in the stockholder becoming an
interested stockholder;
(b) upon consummation of the transaction which results in the stockholder
becoming an interested stockholder, the stockholder acquires more
than eighty five percent (85%) of the outstanding shares of voting
capital stock of the corporation, excluding shares held by directors
who are officers or held in certain employee stock plans; or
(c) the business combination is approved by the board of directors and by
holders of two-thirds of the outstanding voting capital stock of the
corporation, excluding shares held by the interested stockholder, at
a meeting of stockholders.
The articles of incorporation and bylaws of Driver do not contain any
provisions which modify Delaware law.
. Simione--Business combinations involving interested shareholders are not
addressed under Connecticut law.
137
<PAGE>
. Urbach--New York law prohibits a domestic corporation from engaging in
any business combination with any interested shareholder of such
corporation for a period of five years following such interested
shareholder's stock acquisition date unless such business combination or
the purchase of stock made by such interested shareholder on such
interested shareholder's acquisition date is approved by the board of
directors of such corporation prior to such interested shareholder's
stock acquisition date. New York law further prohibits a domestic
corporation from engaging at any time in any business combination with
any interested shareholder other than a business combination specified as
follows:
(1) a business combination approved by the board of directors of such
corporation prior to such interested shareholder's stock acquisition
date, or where the purchase of stock made by such interested
shareholder on such interested shareholder's stock acquisition date
had been approved by the board of directors of such corporation prior
to such interested shareholder's stock acquisition date;
(2) a business combination approved by the affirmative vote of the
holders of a majority of the outstanding voting stock not
beneficially owned by such interested shareholder or any associate of
such interested shareholder at a meeting called for such purpose no
earlier than five years after such interested shareholder's stock
acquisition date; and
(3) a business combination that meets specific market value criteria.
As a Centerprise Stockholder:
Delaware law generally prohibits a publicly held corporation from engaging
in a business combination with an interested stockholder for three years after
the date the person becomes an interested stockholder, unless either:
(a) prior to the date at which the person becomes an interested
stockholder, the board of directors approves the transaction or business
combination which results in the stockholder becoming an interested
stockholder;
(b) upon consummation of the transaction which results in the
stockholder becoming an interested stockholder, the stockholder acquires
more than 85% of the outstanding shares of voting capital stock of the
corporation, excluding shares held by directors who are officers or held in
certain employee stock plans; or
(c) the business combination is approved by the board of directors and
by holders of two-thirds of the outstanding voting capital stock of the
corporation, excluding shares held by the interested stockholder, at a
meeting of stockholders.
An "interested stockholder" is a person, other than the corporation or a
majority-owned subsidiary of the corporation, who, together with affiliates and
associates, owns, or at any time within the prior three years did own, 15% or
more of the corporation's outstanding voting capital stock, subject to certain
exceptions. Section 203 of the Delaware law defines a "business combination" to
include, without limitation, mergers, consolidations, stock sales and asset-
based transactions and other transactions resulting in a financial benefit to
the interested stockholder.
Neither the Centerprise charter nor bylaws contain any provision that
modifies Delaware law.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND
PRINCIPAL STOCKHOLDERS OF CENTERPRISE
The following lists information with respect to the beneficial ownership of
Centerprise's common stock by (1) each person known by Centerprise to own
beneficially more than 5% of the outstanding shares of common stock; (2) each
director and person who will become a director upon completion of the IPO; (3)
Centerprise's executive officers and (4) all executive officers and directors
as a group. The information in the following table assumes the mergers have
been completed.
<TABLE>
<CAPTION>
Percentage owned
Name and address of beneficial ------------------------------
owners(1) Shares Before offering After offering
- ------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
CPA Holdings LLC(2).................. 2,764,738 16.8 10.3
Reznick, Fedder & Silverman, C.P.A.s,
L.L.C.(3)........................... 1,948,790 11.9 7.2
FRF Holdings, LLC(4)................. 1,457,143 8.9 5.4
Robert C. Basten..................... 639,650 3.9 2.4
DeAnn L. Brunts...................... 221,179 1.3 *
Rondol E. Eagle...................... 73,653 * *
Dennis W. Bikun...................... 33,177 * *
David Reznick(5)..................... 108,973 * *
Thomas W. Corbett.................... 509,388 3.1 1.9
Richard H. Stein(6).................. 685,076 4.2 2.5
Anthony P. Frabotta(7)............... 1,457,143 8.9 5.4
Charles H. Roscoe(8)................. 931,357 5.7 3.5
Steven N. Fischer.................... 79,031 * *
Robert F. Gallo...................... 497,991 3.0 1.8
Wayne J. Grace(9).................... 304,286 1.9 1.1
Philip J. Holthouse.................. 145,714 * *
Anthony P. Scillia(10)............... 408,000 2.5 1.5
Scott H. Lang(2)(11)(12)............. 2,779,738 16.9 10.3
Louis C. Fornetti(12)................ 15,000 * *
William J. Lynch(12)................. 15,000 * *
John M. Cook(12)..................... 15,000 * *
All directors and executive officers
as a group
(18
persons)(5)(6)(7)(8)(9)(10)(11)(13).. 8,919,356 54.1 33.0
</TABLE>
- --------
*Less than 1.0%.
(1) Unless otherwise indicated, the address of the beneficial owners is c/o
Centerprise Advisors, Inc., 225 W. Washington Street, 16th Floor, Chicago,
Illinois 60606.
(2) The address of each of CPA Holdings and Mr. Lang is 225 W. Washington
Street, 16th Floor, Chicago, Illinois 60606.
(3) Reznick LLC was created by the owners of Reznick and will hold the shares
of common stock to be issued to them in connection with the merger and
Reznick's role as a co-sponsor of Centerprise. The address of Reznick LLC
is 4520 East West Highway, Bethesda, Maryland 20814.
(4) FRF Holdings was created by the owners of Follmer and will hold the shares
of common stock to be issued to them in connection with the merger. The
address of FRF Holdings is 26200 American Drive, Southfield, Michigan
48086.
(5) These shares are held by Reznick LLC and Mr. Reznick has sole voting and
investment power with respect to such shares.
(6) Includes 378,928 shares of common stock held by MFSL Investments. MFSL
Investments was created by Mann Frankfort's shareholders and employees to
hold its co-sponsor interest. By virtue of his equity interests in
partners of MFSL Investments, Mr. Stein shares voting and investment power
with respect to such shares. Mr. Stein disclaims beneficial ownership of
the shares held by MFSL Investments except to the extent of his pecuniary
interest therein.
139
<PAGE>
(7) Includes 1,457,143 shares owned by FRF Holdings, LLC. As a member of FRF
Holdings, LLC, Mr. Frabotta shares voting and investment power with
respect to such shares. Mr. Frabotta disclaims beneficial ownership of the
shares held by FRF Holdings, LLC except to the extent of his pecuniary
interest therein.
(8) These shares are held by BDM&P Holdings, LLC. As a member of BDM&P
Holdings, LLC, Mr. Roscoe shares voting and investment power with respect
to such shares. Mr. Roscoe disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest.
(9) These shares are held by Grace Capital LLP. As a member of Grace Capital
LLP, Mr. Grace shares voting and investment power with respect to such
shares. Mr. Grace disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest.
(10) Includes 408,000 shares owned by Simione, Scillia, Larrow & Dowling LLC.
As one of the managers of Simione, Scillia, Larrow & Dowling LLC, Mr.
Scillia shares voting and investment power with respect to such shares.
Mr. Scillia disclaims beneficial ownership of these shares held by Simione
except to the extent of his pecuniary interest.
(11) Includes 2,764,738 shares held by CPA Holdings. As a managing member of
BGL Management Company, which is the managing member of BGL Capital, which
is the managing member of CPA Holdings, Mr. Lang shares voting and
investment power with respect to such shares. CPA Holdings intends to
distribute its shares of common stock to its members following the
completion of the offering. Mr. Lang disclaims beneficial ownership of the
shares held by CPA Holdings except to the extent of his pecuniary interest
therein.
(12) Includes 15,000 shares of common stock issuable upon the exercise of
options which will be granted and vest upon completion of the IPO.
(13) Includes 60,000 shares of common stock issuable upon the exercise of
options which will be granted and vest upon completion of the IPO.
140
<PAGE>
EXPERTS
The following financial statements included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting:
. the financial statements of Centerprise Advisors, Inc. as of December 31,
1998 and for the period from November 9, 1998 (inception date) through
December 31, 1998;
. the consolidated financial statements of Reznick Fedder & Silverman, P.C.
as of September 30, 1997 and 1998 and for each of the three years in the
period ended September 30, 1998;
. the consolidated financial statements of Robert F. Driver Co., Inc. as of
July 31, 1998 and for the year ended July 31, 1998;
. the financial statements of Mann Frankfort Stein & Lipp, P.C. as of
December 31, 1997 and 1998 and for each of the three years in the period
ended December 31, 1998;
. the consolidated financial statements of Follmer, Rudzewicz & Company,
P.C. as of May 31, 1998 and 1999 and for each of the three years in the
period ended May 31, 1999;
. the consolidated financial statements of Berry, Dunn, McNeil & Parker,
Chartered as of June 30, 1997 and 1998 and for each of the three years in
the period ended June 30, 1998;
. the financial statements of Urbach Kahn & Werlin PC as of October 31,
1997 and 1998 and for each of the two years in the period ended October
31, 1998;
. the financial statements of Self Funded Benefits, Inc. (d/b/a Insurance
Design Administrators) as of December 31, 1997 and 1998 and for each of
the two years in the period ended December 31, 1998;
. the financial statements of Grace & Company, P.C. as of December 31, 1998
and for the year ended December 31, 1998;
. the financial statements of Holthouse Carlin & Van Trigt LLP as of
December 31, 1997 and 1998 and for each of the two years in the period
ended December 31, 1998;
. the combined financial statements of the Reppond Companies as of December
31, 1998 and for the year ended December 31, 1998; and
. the financial statements of Simione, Scillia, Larrow & Dowling LLC, as of
December 31, 1998 and for the year ended December 31, 1998.
The consolidated financial statements of Robert F. Driver Co., Inc., as of
July 31, 1997 and for each of the years in the two-year period ended July 31,
1997 have been included herein and in the registration statement in reliance on
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
LEGAL MATTERS
The legality of the shares of common stock offered by this prospectus and
certain federal income tax and other matters relating to the mergers will be
passed upon for Centerprise by Katten Muchin & Zavis, Chicago, Illinois.
Partners of Katten Muchin & Zavis are investors in BGL Capital, which is an
initial investor in Centerprise. BGL Capital intends to distribute its shares
of Centerprise stock to its investors after the offering; following the
distribution, the partners of Katten Muchin & Zavis will in the aggregate own
less than one percent of the shares of common stock then outstanding.
141
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Centerprise has filed a registration statement on Form S-4 with the SEC
concerning the common stock offered by this joint information
statement/prospectus. This joint information statement/prospectus does not
contain all information set forth in the registration statement and exhibits
thereto. The material terms of each contract or other document are described in
this document. Reference is made to the copies of contracts and documents filed
as an exhibit to the registration statement. For further information concerning
Centerprise, please refer to the registration statement and its exhibits.
You may read and copy all or any portion of the registration statement or
any other information Centerprise files at the SEC's public reference room in
Washington, D.C. You can request copies of these documents, upon payment of a
duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference rooms.
Centerprise SEC filings are also available to you on the SEC Internet site
(http://www.sec.gov).
All information in this joint information statement/prospectus concerning
Centerprise and its affiliates has been furnished by Centerprise. All
information in this joint information statement/prospectus concerning a
Centerprise Company has been furnished by that Centerprise company.
You should rely only on the information contained in this joint information
statement/prospectus. Centerprise has not, and the Centerprise companies have
not, authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. Centerprise is not, and the Centerprise companies are not, making
an offer to sell these securities in any jurisdiction where the offer or sale
is not permitted. You should assume that the information appearing in this
joint information statement/prospectus is accurate as of the date on the front
cover of this joint information statement/prospectus only. The business,
financial condition, results of operations and prospects of Centerprise and the
Centerprise companies may have changed since that date.
142
<PAGE>
CENTERPRISE ADVISORS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Centerprise Advisors, Inc.
Unaudited Pro Forma Combined Financial Statements
Introduction to Unaudited Pro Forma Combined Financial Statements...... F- 3
Unaudited Pro Forma Combined Balance Sheet............................. F- 4
Unaudited Pro Forma Combined Statements of Operations.................. F- 6
Notes to Unaudited Pro Forma Combined Financial Statements............. F- 9
Historical Financial Statements
Report of Independent Accountants...................................... F-17
Balance Sheet.......................................................... F-18
Statement of Operations................................................ F-19
Statement of Cash Flows................................................ F-20
Notes to Financial Statements.......................................... F-21
CENTERPRISE COMPANIES
Reznick Fedder & Silverman, P.C.
Report of Independent Accountants........................................ F-25
Consolidated Balance Sheet............................................... F-26
Consolidated Statement of Income......................................... F-27
Consolidated Statement of Stockholders' Equity........................... F-28
Consolidated Statement of Cash Flows..................................... F-29
Notes to Consolidated Financial Statements............................... F-30
Robert F. Driver Co., Inc.
Report of Independent Accountants........................................ F-39
Consolidated Balance Sheet............................................... F-41
Consolidated Statement of Income......................................... F-42
Consolidated Statement of Stockholders' Equity........................... F-43
Consolidated Statement of Cash Flows..................................... F-44
Notes to Consolidated Financial Statements............................... F-46
Mann Frankfort Stein & Lipp, P.C.
Report of Independent Accountants........................................ F-58
Balance Sheet............................................................ F-59
Statement of Income...................................................... F-60
Statement of Shareholders' Equity........................................ F-61
Statement of Cash Flows.................................................. F-62
Notes to Financial Statements............................................ F-63
Follmer, Rudzewicz & Company, P.C.
Report of Independent Accountants........................................ F-68
Consolidated Balance Sheet............................................... F-69
Consolidated Statement of Operations..................................... F-70
Consolidated Statement of Stockholder's Equity........................... F-71
Consolidated Statement of Cash Flows..................................... F-72
Notes to Consolidated Financial Statements............................... F-73
Berry, Dunn, McNeil & Parker, Chartered
Report of Independent Accountants........................................ F-81
Consolidated Balance Sheet............................................... F-82
Consolidated Statement of Income......................................... F-83
Consolidated Statement of Shareholders' Equity........................... F-84
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Consolidated Statement of Cash Flows.................................... F- 85
Notes to Consolidated Financial Statements.............................. F- 86
Urbach Kahn & Werlin P.C.
Report of Independent Accountants....................................... F- 93
Balance Sheet........................................................... F- 94
Statement of Income..................................................... F- 95
Statement of Shareholders' Equity....................................... F- 96
Statement of Cash Flows................................................. F- 97
Notes to Financial Statements........................................... F- 98
Self Funded Benefits, Inc. d/b/a Insurance Design Administrators
Report of Independent Accountants....................................... F-107
Balance Sheet........................................................... F-108
Statement of Income..................................................... F-109
Statement of Shareholders' Equity....................................... F-110
Statement of Cash Flows................................................. F-111
Notes to Financial Statements........................................... F-112
Grace & Company, P.C.
Report of Independent Accountants....................................... F-117
Balance Sheet........................................................... F-118
Statement of Income..................................................... F-119
Statement of Shareholders' Equity....................................... F-120
Statement of Cash Flows................................................. F-121
Notes to Financial Statements........................................... F-122
Holthouse Carlin & Van Trigt LLP
Report of Independent Accountants....................................... F-128
Balance Sheet........................................................... F-129
Statement of Income..................................................... F-130
Statement of Partners' Equity........................................... F-131
Statement of Cash Flows................................................. F-132
Notes to Financial Statements........................................... F-133
The Reppond Companies
Report of Independent Accountants....................................... F-138
Combined Balance Sheet.................................................. F-139
Combined Statement of Income............................................ F-140
Combined Statement of Shareholders' Equity.............................. F-141
Combined Statement of Cash Flows........................................ F-142
Notes to Combined Financial Statements.................................. F-143
Simione, Scillia, Larrow & Dowling LLC
Report of Independent Accountants....................................... F-149
Balance Sheet........................................................... F-150
Statement of Income..................................................... F-151
Statement of Members' Equity............................................ F-152
Statement of Cash Flows................................................. F-153
Notes to Financial Statements........................................... F-154
</TABLE>
F-2
<PAGE>
CENTERPRISE ADVISORS, INC.
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Centerprise Advisors, Inc. ("Centerprise") of the
outstanding capital stock of: Reznick Fedder & Silverman, P.C. ("Reznick");
Robert F. Driver Co., Inc. ("Driver"); Mann Frankfort Stein & Lipp, P.C. ("Mann
Frankfort"); Follmer, Rudzewicz & Company, P.C. ("Follmer"); Berry, Dunn,
McNeil & Parker, Chartered ("Berry Dunn"); Urbach Kahn & Werlin PC ("Urbach");
Self Funded Benefits, Inc. d/b/a Insurance Design Administrators ("IDA"); Grace
& Company, P.C. ("Grace"); Holthouse Carlin & Van Trigt LLP ("Holthouse"); the
Reppond Companies ("Reppond"); and Simione, Scillia, Larrow & Dowling LLC
("Simione") (together, the "Centerprise Companies"). These acquisitions (the
"Mergers") will occur simultaneously with the closing of Centerprise's initial
public offering and will be accounted for using the purchase method of
accounting. In accordance with the provisions of Staff Accounting Bulletin No.
97, Centerprise is deemed to be the accounting acquiror as its stockholders
will receive the largest portion of the voting rights in the combined
corporation.
The unaudited pro forma combined balance sheet gives effect to the Mergers
and the offering as if they had occurred on March 31, 1999. The unaudited pro
forma combined statement of operations gives effect to these transactions as if
they had occurred on January 1, 1998.
Pro forma adjustments have been made to reflect the "separate practice
format" under which Centerprise will only acquire the non-attest services of
the Centerprise Companies and will provide under non-exclusive services
agreements, for a fee, the professional and certain other services necessary
for the operation of the Attest firms. Due to the non-exclusive nature of the
services agreements, the amounts reflected in the unaudited pro forma combined
statements of operations as "services agreements" fees may not be
representative of future ongoing operations of Centerprise.
Centerprise has preliminarily analyzed the savings that it expects to
realize from changes in salaries and certain benefits to the Centerprise
Companies' former owners. To the extent these individuals have contractually
agreed prospectively to changes in salaries, bonuses, and benefits, these
changes have been reflected in the pro forma combined statement of operations.
With respect to other potential cost savings, Centerprise has not and cannot
quantify these savings at this time. It is anticipated that Centerprise will
incur costs related to its new corporate management and costs associated with
being a public company. However, these costs, like the savings, cannot be
accurately quantified at this time. Except for prospective compensation payable
pursuant to employment agreements with management of Centerprise and savings
expected to be realized from changes in salaries and certain benefits to the
Centerprise Companies' former owners, neither the anticipated savings nor the
anticipated costs have been included in the pro forma financial information of
Centerprise.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma combined financial data do not purport to represent
what Centerprise's 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 Centerprise's financial position or results of
operations for any future period. Since the Centerprise Companies were not
under common control or management and were operating with different
compensation structures, historical pro forma combined results may not be
comparable to, or indicative of, future performance. The unaudited pro forma
combined financial statements should be read in conjunction with the historical
financial statements and notes thereto included elsewhere in this prospectus.
See "Risk Factors" included elsewhere herein.
F-3
<PAGE>
CENTERPRISE ADVISORS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
March 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Merger
Center- Mann Berry Adjustments
ASSETS prise Reznick Driver Frankfort Follmer Dunn Urbach IDA Grace Holthouse Reppond Simione (See Note 3)
- ------ ------- ------- ------- --------- ------- ------- ------- ------ ------ --------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents....... $ 30 $ 1,804 $ 2,372 $ 1,604 $ 277 $ 36 $ 1,553 $1,006 $ 191 $ 129 $ 174 $ 235 $ (7,291)
Funds held for
customers......... -- -- 12,028 -- 70 -- -- 499 -- -- -- -- --
Investments....... -- -- -- -- -- -- -- -- -- 287 -- -- (287)
Receivables,
net............... -- 24,207 11,059 6,532 4,954 3,964 9,992 969 2,003 2,469 885 2,265 (51,408)
Unbilled fees at
net realizable
value............. -- 3,749 -- 1,186 3,970 2,943 827 -- 2,085 1,365 -- 487 (6,179)
Notes
receivable........ -- -- -- -- -- -- -- -- -- -- -- 12 (12)
Due from related
parties and
stockholders...... -- -- -- 18 -- -- 443 -- -- -- -- -- (461)
Prepaid expenses
and other current
assets............ -- 185 1,386 143 131 129 497 67 264 78 94 75 (105)
Deferred offering
costs............. 4,286 -- -- -- -- -- -- -- -- -- -- -- --
Deferred income
taxes............. -- 1,648 -- -- -- -- -- -- -- -- -- -- (1,260)
------ ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ --------
Total current
assets.......... 4,316 31,593 26,845 9,483 9,402 7,072 13,312 2,541 4,543 4,328 1,153 3,074 (67,003)
Property and
equipment, net..... -- 2,534 1,327 1,174 1,306 2,023 984 747 501 318 837 125 (937)
Goodwill and other
intangible assets,
net................ -- 395 28,905 -- -- 1,231 -- -- -- -- -- -- 216,632
Long-term
investments........ -- -- -- -- -- -- 914 -- -- -- -- -- (831)
Deferred income
taxes.............. -- 1,379 103 -- 1,424 423 2,264 -- 11 -- 7 -- (4,451)
Other assets....... -- 558 606 6 3,229 25 345 38 1,029 44 30 89 (5,195)
------ ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ --------
Total assets.... $4,316 $36,459 $57,786 $10,663 $15,361 $10,774 $17,819 $3,326 $6,084 $4,690 $2,027 $3,288 $138,215
====== ======= ======= ======= ======= ======= ======= ====== ====== ====== ====== ====== ========
<CAPTION>
Pro Offering
Forma Adjustments As
ASSETS Combined (See Note 3) Adjusted
- ------ -------- ------------ --------
<S> <C> <C> <C>
Current assets:
Cash and cash
equivalents....... $ 2,120 $ 6,937 $ 9,057
Funds held for
customers......... 12,597 -- 12,597
Investments....... -- -- --
Receivables,
net............... 17,891 -- 17,891
Unbilled fees at
net realizable
value............. 10,433 -- 10,433
Notes
receivable........ -- -- --
Due from related
parties and
stockholders...... -- -- --
Prepaid expenses
and other current
assets............ 2,944 -- 2,944
Deferred offering
costs............. 4,286 (4,286) --
Deferred income
taxes............. 388 -- 388
-------- ------------ --------
Total current
assets.......... 50,659 2,651 53,310
Property and
equipment, net..... 10,939 -- 10,939
Goodwill and other
intangible assets,
net................ 247,163 -- 247,163
Long-term
investments........ 83 -- 83
Deferred income
taxes.............. 1,160 -- 1,160
Other assets....... 804 -- 804
-------- ------------ --------
Total assets.... $310,808 $ 2,651 $313,459
======== ============ ========
</TABLE>
F-4
<PAGE>
CENTERPRISE ADVISORS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
March 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' Center- Mann Berry
EQUITY prise Reznick Driver Frankfort Follmer Dunn Urbach IDA Grace Holthouse Reppond Simione
- --------------- -------- ------- ------- --------- ------- ------- ------- ------ ------ --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current
liabilities:
Short-term debt,
including current
maturities of
long-term debt.... $ -- $ 2,780 $ 6,281 $ 851 $ 350 $ 1,561 $ 1,546 $ 138 $1,497 $ -- $ 673 $1,171
Accounts
payable........... -- 1,026 4,667 374 178 817 434 129 163 36 229 216
Insurance
premiums
payable........... -- -- 19,620 -- -- -- -- -- -- -- -- --
Accrued
compensation and
related costs..... -- 24,081 -- 1,292 7,580 597 3,629 70 949 56 148 --
Deferred
compensation...... -- 91 -- -- -- 541 252 -- -- -- -- --
Income taxes
payable........... -- -- -- (4) 575 -- -- -- -- -- 20 --
Deferred income
taxes............. -- -- -- 2,491 561 653 2,727 -- 1,142 -- 107 --
Current portion
of customer
deposits.......... -- -- -- -- -- -- -- 499 -- -- -- --
Due to related
parties........... 1,145 -- -- -- 293 5,127 -- -- 473 -- -- 208
Other accrued
liabilities....... 4,614 -- -- -- -- 197 533 372 91 112 -- 139
-------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total current
liabilities..... 5,759 27,978 30,568 5,004 9,537 9,493 9,121 1,208 4,315 204 1,177 1,734
Long-term debt, net
of current
maturities......... -- 2,439 15,957 799 -- -- 1,401 125 413 -- 84 120
Deferred
compensation....... -- 765 26 -- 3,953 517 4,986 -- -- -- -- --
Deferred income
taxes.............. -- -- -- 95 -- -- -- -- -- -- -- --
Other long-term
liabilities........ -- 2,474 -- -- -- 56 149 -- -- -- -- 115
-------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total
liabilities..... 5,759 33,656 46,551 5,898 13,490 10,066 15,657 1,333 4,728 204 1,261 1,969
Redeemable
preferred stock of
subsidiary......... -- -- 4,000 -- -- -- -- -- -- -- -- --
Stockholders'
equity:
Members' equity... -- -- -- -- -- -- -- -- -- 4,486 13 1,319
Common stock...... 39 -- 10 2 10 1,358 -- -- 17 -- 1 --
Additional paid-
in capital........ 21,186 1,422 10,058 61 1,210 -- 3,336 208 350 -- 56 --
Retained earnings
(deficit)......... (22,668) 1,381 (1,993) 4,702 791 (216) (1,174) 1,949 1,078 -- 724 --
Note receivable
from
shareholder....... -- -- (840) -- -- (230) -- -- -- -- (28) --
Treasury stock.... -- -- -- -- (140) (204) -- (164) (89) -- -- --
-------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total
stockholders'
equity.......... (1,443) 2,803 7,235 4,765 1,871 708 2,162 1,993 1,356 4,486 766 1,319
-------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total liabilities
and stockholders'
equity............. $4,316 $36,459 $57,786 $10,663 $15,361 $10,774 $17,819 $3,326 $6,084 $4,690 $2,027 $3,288
======== ======= ======= ======= ======= ======= ======= ====== ====== ====== ====== ======
<CAPTION>
LIABILITIES AND Merger Pro Offering
STOCKHOLDERS' Adjustments Forma Adjustments As
EQUITY (See Note 3) Combined (See Note 3) Adjusted
- --------------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Current
liabilities:
Short-term debt,
including current
maturities of
long-term debt.... $ (1,171) $ 15,677 $ (2,001) $ 13,676
Accounts
payable........... -- 8,269 -- 8,269
Insurance
premiums
payable........... -- 19,620 -- 19,620
Accrued
compensation and
related costs..... (28,975) 9,427 -- 9,427
Deferred
compensation...... (91) 793 -- 793
Income taxes
payable........... -- 591 -- 591
Deferred income
taxes............. (6,482) 1,199 -- 1,199
Current portion
of customer
deposits.......... -- 499 -- 499
Due to related
parties........... 77,817 85,063 (85,063) --
Other accrued
liabilities....... 250 6,308 (4,864) 1,444
------------ --------- ------------ ---------
Total current
liabilities..... 41,348 147,446 (91,928) 55,518
Long-term debt, net
of current
maturities......... 3,599 24,937 (15,957) 8,980
Deferred
compensation....... (8,482) 1,765 -- 1,765
Deferred income
taxes.............. 138 233 -- 233
Other long-term
liabilities........ (2,474) 320 -- 320
------------ --------- ------------ ---------
Total
liabilities..... 34,129 174,701 (107,885) 66,816
Redeemable
preferred stock of
subsidiary......... -- 4,000 (4,000) --
Stockholders'
equity:
Members' equity... (5,818) -- -- --
Common stock...... (1,272) 165 105 270
Additional paid-
in capital........ 116,723 154,610 114,431 269,041
Retained earnings
(deficit)......... (7,242) (22,668) -- (22,668)
Note receivable
from
shareholder....... 1,098 -- -- --
Treasury stock.... 597 -- -- --
------------ --------- ------------ ---------
Total
stockholders'
equity.......... 104,086 132,107 114,536 246,643
------------ --------- ------------ ---------
Total liabilities
and stockholders'
equity............. $138,215 $310,808 $ 2,651 $313,459
============ ========= ============ =========
</TABLE>
F-5
<PAGE>
CENTERPRISE ADVISORS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Mann Berry
Centerprise Reznick Driver Frankfort Follmer Dunn Urbach IDA Grace Holthouse Reppond Simione
----------- ------- ------- --------- ------- ------- ------- ------- ------ --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Professional
services........ $ -- $48,387 $ -- $21,631 $20,564 $18,662 $17,753 $ -- $9,691 $9,446 $ -- $6,217
Services
agreements...... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Total
professional
services........ -- 48,387 -- 21,631 20,564 18,662 17,753 -- 9,691 9,446 -- 6,217
Business and
financial
services........ -- -- 34,303 -- -- -- -- 10,933 -- -- 7,892 --
--------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Total revenues.. -- 48,387 34,303 21,631 20,564 18,662 17,753 10,933 9,691 9,446 7,892 6,217
Expenses:
Professional
services
compensation and
related costs... -- 39,825 -- 17,750 16,629 13,722 12,612 -- 7,784 3,089 -- 4,396
Business and
financial
services
compensation and
related costs... -- -- 25,470 -- -- -- -- 6,361 -- -- 5,067 --
Other operating
expenses........ 1,232 7,575 6,060 3,081 3,711 3,753 4,510 2,808 1,190 1,505 1,982 1,333
Non-cash stock
compensation.... 18,375 -- -- -- -- -- -- -- -- -- -- --
Amortization of
goodwill........ -- 11 590 -- -- 65 -- -- -- -- -- --
Depreciation.... -- 965 1,074 266 539 935 280 242 190 73 332 31
--------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Income (loss)
from
operations...... (19,607) 11 1,109 534 (315) 187 351 1,522 527 4,779 511 457
Other (income)
expense: --
Interest
expense......... -- 532 1,039 58 109 299 664 32 122 -- 72 130
Interest
income.......... -- (43) (852) (69) (48) (238) (109) (77) (23) (25) (43) --
Other, net...... -- (143) (417) (26) 14 126 (486) 82 (95) -- 22 50
--------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Income (loss)
before income
taxes............ (19,607) (335) 1,339 571 (390) -- 282 1,485 523 4,804 460 277
Provision
(benefit) for
income taxes..... -- (109) 688 213 165 -- 176 25 232 -- 113 --
--------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Net income
(loss)........... $ (19,607) $ (226) $ 651 $ 358 $ (555) $ -- $ 106 $ 1,460 $ 291 $4,804 $ 347 $ 277
========= ======= ======= ======= ======= ======= ======= ======= ====== ====== ====== ======
Net loss per
share:
Basic........... $ (29.57)
=========
Diluted......... $ (5.55)
=========
Shares used in
computing net
loss per share
(see Note 5):
Basic........... 663,157
=========
Diluted......... 3,534,874
=========
<CAPTION>
Pro Forma
Adjustments
(See Note Pro Forma
4) Combined
------------------ -----------
<S> <C> <C>
Revenues:
Professional
services........ $(66,040)(A) $ 86,311
Services
agreements...... 63,785 (A) 63,785
------------------ -----------
Total
professional
services........ (2,255) 150,096
Business and
financial
services........ -- 53,128
------------------ -----------
Total revenues.. (2,255) 203,224
Expenses:
Professional
services
compensation and
related costs... (20,440)(B) 95,367
Business and
financial
services
compensation and
related costs... (1,540)(B) 35,358
Other operating
expenses........ (1,800)(A),(C) 36,940
Non-cash stock
compensation.... -- 18,375
Amortization of
goodwill........ 15,812 16,478
Depreciation.... -- 4,927
------------------ -----------
Income (loss)
from
operations...... 5,713 (4,221)
Other (income)
expense:
Interest
expense......... (939)(E) 2,118
Interest
income.......... 156 (F) (1,371)
Other, net...... -- (873)
------------------ -----------
Income (loss)
before income
taxes............ 6,496 (4,095)
Provision
(benefit) for
income taxes..... 3,450 (G) 4,953
------------------ -----------
Net income
(loss)........... $ 3,046 $ (9,048)
================== ===========
Net loss per
share:
Basic...........
Diluted......... $ (0.34)
===========
Shares used in
computing net
loss per share
(see Note 5):
Basic...........
Diluted......... 26,343,290
===========
</TABLE>
F-6
<PAGE>
CENTERPRISE ADVISORS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the three months ended March 31, 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Center- Mann Berry
prise Reznick Driver Frankfort Follmer Dunn Urbach IDA Grace Holthouse Reppond Simione
------- ------- ------ --------- ------- ------ ------ ------ ------ --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Professional
services........ $ -- $18,549 $ -- $5,889 $5,518 $6,972 $5,993 $ -- $3,380 $2,848 $ -- $1,933
Services
agreements...... -- -- -- -- -- -- -- -- -- -- -- --
----- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
professional
services........ -- 18,549 -- 5,889 5,518 6,972 5,993 -- 3,380 2,848 -- 1,933
Business and
financial
services........ -- -- 8,003 -- -- -- -- 2,902 -- -- 1,909 --
----- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues.. -- 18,549 8,003 5,889 5,518 6,972 5,993 2,902 3,380 2,848 1,909 1,933
Expenses:
Professional
services
compensation and
related costs... -- 16,359 -- 3,586 4,210 5,674 4,475 -- 2,156 745 -- 1,108
Business and
financial
services
compensation and
related costs... -- -- 5,787 -- -- -- -- 1,394 -- -- 1,221 --
Other operating
expenses........ -- 1,867 1,313 960 979 1,064 1,161 1,020 338 398 402 319
Amortization of
goodwill........ -- -- 28 -- -- 28 -- -- -- -- -- --
Depreciation ... -- 317 158 51 87 102 61 53 47 18 76 8
----- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
operations...... -- 6 717 1,292 242 104 296 435 839 1,687 210 498
Other (income)
expense: --
Interest
expense......... -- 116 13 18 18 116 190 9 38 -- 23 30
Interest
income.......... -- (5) (145) (3) (6) (18) (12) (17) (3) (9) -- --
Other, net...... -- (22) (6) 9 (21) 6 (82) -- (5) -- 7 --
----- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
before income
taxes............ -- (83) 855 1,268 251 -- 200 443 809 1,696 180 468
Provision
(benefit) for
income taxes..... -- (28) 347 469 118 -- 98 11 356 -- 45 --
----- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income
(loss)........... $ -- $ (55) $ 508 $ 799 $ 133 $ -- $ 102 $ 432 $ 453 $1,696 $ 135 $ 468
===== ======= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net income per
share, basic and
diluted..........
Shares used in
computing pro
forma net income
per share
(see Note 5).....
<CAPTION>
Pro Forma
Adjustments
(See Note Pro Forma
4) Combined
------------------ -----------
<S> <C> <C>
Revenues:
Professional
services........ $(24,694)(A) $ 26,388
Services
agreements...... 23,912 (A) 23,912
------------------ -----------
Total
professional
services........ (782) 50,300
Business and
financial
services........ -- 12,814
------------------ -----------
Total revenues.. (782) 63,114
Expenses:
Professional
services
compensation and
related costs... (8,390)(B) 29,923
Business and
financial
services
compensation and
related costs... (796)(B) 7,606
Other operating
expenses........ (639)(A),(C) 9,182
Amortization of
goodwill........ 4,063 (D) 4,119
Depreciation ... -- 978
------------------ -----------
Income from
operations...... 4,980 11,306
Other (income)
expense:
Interest
expense......... (11)(E) 560
Interest
income.......... -- (F) (218)
Other, net...... -- (114)
------------------ -----------
Income (loss)
before income
taxes............ 4,991 11,078
Provision
(benefit) for
income taxes..... 4,663 (F) 6,079
------------------ -----------
Net income
(loss)........... $ 328 $ 4,999
================== ===========
Net income per
share, basic and
diluted.......... $ 0.19
===========
Shares used in
computing pro
forma net income
per share
(see Note 5)..... 26,343,290
===========
</TABLE>
F-7
<PAGE>
CENTERPRISE ADVISORS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the three months ended March 31, 1999
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Center- Mann Berry
prise Reznick Driver Frankfort Follmer Dunn Urbach IDA Grace Holthouse Reppond Simione
---------- ------- ------- --------- ------- ------ ------ ------ ------ --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Professional
services........ $ -- $21,704 $ -- $8,324 $6,420 $6,717 $7,370 $ -- $3,687 $3,234 $ -- $2,478
Services
agreements...... -- -- -- -- -- -- -- -- -- -- -- --
---------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
professional
services........ -- 21,704 -- 8,324 6,420 6,717 7,370 -- 3,687 3,234 -- 2,478
Business and
financial
services........ -- -- 11,159 -- -- -- -- 2,978 -- -- 2,191 --
---------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues.. -- 21,704 11,159 8,324 6,420 6,717 7,370 2,978 3,687 3,234 2,191 2,478
Expenses:
Professional
services
compensation and
related costs... 19,235 -- 4,538 4,808 5,492 6,491 -- 2,275 839 -- 1,201
Business and
financial
services
compensation and
related costs... -- -- 7,532 -- -- -- -- 1,557 -- -- 1,320 --
Other operating
expenses........ 404 2,168 2,059 1,186 1,089 836 1,114 952 378 275 636 327
Non-cash stock
compensation.... 2,657 -- 785 -- -- -- -- -- -- -- -- --
Amortization of
goodwill........ -- -- 445 -- -- 37 -- -- -- -- -- --
Depreciation.... -- 298 162 68 117 258 79 50 52 14 76 8
---------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
operations...... (3,061) 3 176 2,532 406 94 (314) 419 982 2,106 159 942
Other (income)
expense:
Interest
expense......... -- 88 452 21 16 72 166 6 46 -- 10 35
Interest
income.......... -- (46) (176) (6) (6) (59) (137) (15) (2) (5) (1) --
Other, net...... -- 46 22 (2) -- 81 (443) -- -- 6 -- 28
---------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
before income
taxes............ (3,061) (85) (122) 2,519 396 -- 100 428 938 2,105 150 879
Provision
(benefit) for
income taxes..... -- (26) (196) 932 137 -- 46 6 376 -- 60 --
---------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income
(loss)........... $ (3,061) $ (59) $ (318) $1,587 $ 259 $ -- $ 54 $ 422 $ 562 $2,105 $ 90 $ 879
========== ======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Net income (loss)
per share:
Basic........... $ (1.17)
==========
Diluted......... $ (0.83)
==========
Shares used in
computing net
income (loss) per
share:
Basic........... 2,618,055
==========
Diluted......... 3,682,379
==========
<CAPTION>
Pro Forma
Adjustments
(See Note Pro Forma
4) Combined
------------------ ------------
<S> <C> <C>
Revenues:
Professional
services........ $(27,347) $ 32,587
Services
agreements...... 26,469 (A) 26,469
------------------ ------------
Total
professional
services........ (878) 59,056
Business and
financial
services........ -- 16,328
------------------ ------------
Total revenues.. (878) 75,384
Expenses:
Professional
services
compensation and
related costs... (6,661)(B) 38,218
Business and
financial
services
compensation and
related costs... (796)(B) 9,613
Other operating
expenses........ (713)(A),(C) 10,711
Non-cash stock
compensation.... -- 3,442
Amortization of
goodwill........ 3,637 4,119
Depreciation.... -- 1,182
------------------ ------------
Income from
operations...... 3,655 8,099
Other (income)
expense:
Interest
expense......... (425)(E) 487
Interest
income.......... -- (F) (453)
Other, net...... -- (262)
------------------ ------------
Income (loss)
before income
taxes............ 4,080 8,327
Provision
(benefit) for
income taxes..... 3,252 (G) 4,979
------------------ ------------
Net income
(loss)........... $ 828 $ 3,348
================== ============
Net income (loss)
per share:
Basic...........
Diluted......... $ 0.13
============
Shares used in
computing net
income (loss) per
share:
Basic...........
Diluted......... 26,343,290
============
</TABLE>
F-8
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1--General
Centerprise Advisors, Inc. ("Centerprise") was founded in 1998 to acquire
eleven professional, business and financial services firms ("Centerprise
Companies") and create a leading provider of professional, business and
financial services and products to middle-market clients.
The historical financial statements reflect the financial position and
results of operations of Centerprise and the Centerprise Companies and were
derived from the respective Centerprise Companies' financial statements. The
periods included in these financial statements for all of the individual
Centerprise Companies, with the exception of Driver, Follmer and Urbach, are as
of and for the year ended December 31, 1998. The financial statements for
Driver and Urbach are as of April 30, 1999 and for the year ended January 31,
1999 and the three month periods ended April 30, 1998 and 1999. The financial
statements for Follmer are as of February 28, 1999 and for the year ended
November 30, 1998 and the three month periods ended February 28, 1998 and 1999.
The audited historical financial statements included elsewhere herein have been
included in accordance with Staff Accounting Bulletin No. 80.
Note 2--Acquisition of Centerprise Companies
Concurrently with and as a condition to the closing of this offering,
Centerprise will acquire all of the outstanding common stock or partnership or
membership interests of the Centerprise Companies. The Mergers will be
accounted for using the purchase method of accounting with Centerprise being
treated as the accounting acquiror in accordance with Staff Accounting Bulletin
No. 97 and APB 16. The carrying value of intangible assets is periodically
reviewed by Centerprise based on the expected future undiscounted operating
cash flows of the related business unit. In the event Centerprise determines
that the balance of such intangible assets is not recoverable, Centerprise will
recognize an impairment loss in an amount necessary to write down the excess of
cost over fair value of net assets acquired to the fair value equal to the
corresponding undiscounted expected future cash flows.
The following table sets forth the consideration to be paid in cash, a
promissory note and shares of common stock to the stockholders of each of the
Centerprise Companies.
<TABLE>
<CAPTION>
Shares of
Promissory Common Value of Total
Cash Note (1) Stock Shares (2) Consideration (3)
------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Reznick................. $16,899 $ -- 1,810,553 $ 19,237 $ 36,136
Driver.................. 500 -- 2,944,445 31,285 31,785
Mann Frankfort.......... 16,503 -- 1,768,200 18,787 35,290
Follmer................. 13,600 -- 1,457,143 15,482 29,082
Berry Dunn.............. 6,821 -- 931,357 9,896 16,717
Urbach.................. 9,190 -- 1,023,943 10,879 20,069
IDA..................... 8,154 -- 873,669 9,283 17,437
Grace................... 2,840 -- 304,286 3,233 6,073
Holthouse............... 5,603 -- 600,343 6,379 11,982
Reppond................. -- 4,000 447,428 4,754 8,754
Simione................. 3,808 -- 408,000 4,335 8,143
------- ------ ---------- -------- --------
$83,918 $4,000 12,569,367 $133,550 $221,468
======= ====== ========== ======== ========
</TABLE>
F-9
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
- --------
(1) In addition to cash and shares of common stock, a promissory note will be
issued for the acquisition of Reppond. The interest rate on the note is 7%
with maturities from 2000 through 2004.
(2) For the computation of the estimated purchase price for accounting
purposes, the value of shares is based upon an assumed initial public
offering price of $12.50, less a 15% discount from the assumed offering
price due to restrictions on the transferability of the common stock to be
issued to owners and employees of Centerprise and the Centerprise
Companies. Under the terms of the Merger Agreements and a Stockholders'
Agreement, the former owners of the Centerprise Companies and the initial
investors and management of Centerprise have agreed, subject to limited
exceptions, not to sell, transfer or otherwise dispose of any shares for a
period of 18 months following the offering. Effective 18 months after the
offering, 20% of each stockholder's shares will be released from such
restrictions, and an additional 20% of the original number of restricted
shares will be released on the expiration of each six-month period
thereafter. Any requested waiver of the restrictions must be approved by a
majority of the members of the board of directors who are not subject to
transfer restrictions at the time of such proposed waiver. The owners of
the Centerprise shares will not be entitled to registration rights until
two years following the offering; thereafter the former owners of the
Centerprise Companies will have "piggyback" registration rights with
respect to shares that have been released from the contractual transfer
restrictions. Restrictions on transferability of the common stock issued to
the former owners of the Centerprise Companies equate, economically, to the
value of a put option on those shares.
(3) In addition to the consideration set forth in the table, the former
stockholders of Driver will be entitled to receive a contingent cash
payment equal to 6.75 times the amount, if any, by which Driver's adjusted
earnings before interest, taxes, depreciation and amortization ("EBITDA")
for 2000 exceed $11,600. The former stockholders of IDA will be entitled to
a contingent cash payment equal to the lesser of (a) $3,415 and (b) 6.75
times the amount, if any, by which IDA's adjusted EBITDA for 2000 exceeds
$3,290. The former stockholders of Reppond will be entitled to receive a
contingent cash payment which will be calculated with respect to a
specified twelve month period ending in 2003 and based on the amount by
which the adjusted EBITDA of Centerprise's employee benefits business
(excluding IDA) exceeds specified thresholds. One of Reppond's stockholders
will also be entitled to receive contingent cash payments with respect to
each of the first five twelve month periods following the closing of the
Mergers. Such payments will be based on the amount by which Reppond's
adjusted EBITDA for the applicable period exceeds specified thresholds.
The following table sets forth for each Centerprise Company (i) the total
consideration to be paid in the mergers, (ii) the allocation of the
consideration to net assets acquired and (iii) the resulting goodwill for the
companies acquired by Centerprise as the accounting acquirer. The purchase
price has been allocated to the assets and liabilities acquired based on their
respective carrying values, as those are deemed to represent fair market value
of such assets and liabilities. The allocation of the purchase price is
considered preliminary until such time as the closing of the transaction and
consummation of the Mergers. Centerprise does not anticipate that the final
allocation of the purchase price will differ materially from that presented.
<TABLE>
<CAPTION>
Total Net Assets
Consideration Acquired Goodwill
------------- ---------- --------
<S> <C> <C> <C>
Reznick.................................. $ 36,136 $ (2,012) $ 38,148
Driver................................... 31,785 (23,369) 55,154
Mann Frankfort........................... 35,290 (419) 35,709
Follmer.................................. 29,082 1,136 27,946
Berry Dunn............................... 16,717 152 16,565
Urbach................................... 20,069 (1,551) 21,620
IDA...................................... 17,437 457 16,980
Grace.................................... 6,073 (1,313) 7,386
Holthouse................................ 11,982 421 11,561
Reppond.................................. 8,754 766 7,988
Simione.................................. 8,143 37 8,106
-------- -------- --------
$221,468 $(25,695) $247,163
======== ======== ========
</TABLE>
F-10
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Note 3--Unaudited Pro Forma Combined Balance Sheet Adjustments
The following table summarizes unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
Offering
Merger Adjustments Total Adjustments Total
---------------------------- Merger ------------------- Offering
(A) (B) (C) Adjustments (D) (E) Adjustments
-------- -------- -------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $ (7,291) $ -- $ -- $ (7,291) $118,822 $(111,885) $ 6,937
Investments............. -- (287) -- (287) -- -- --
Receivables, net........ (50,352) (1,056) -- (51,408) -- -- --
Unbilled fees at net
realizable value....... (6,179) -- -- (6,179) -- -- --
Notes receivable........ -- (12) -- (12) -- -- --
Due from related
parties................ -- (461) -- (461) -- -- --
Prepaid expenses and
other current assets... -- (105) -- (105) -- -- --
Deferred offering
costs.................. -- -- -- -- (4,286) -- (4,286)
Deferred income taxes... -- (1,260) -- (1,260) -- -- --
-------- -------- -------- -------- -------- --------- ---------
Total current
assets.............. (63,822) (3,181) -- (67,003) 114,536 (111,885) 2,651
Property and equipment,
net.................... -- (937) -- (937) -- -- --
Goodwill, net........... -- (30,531) 247,163 216,632 -- -- --
Long-term investments... -- (831) -- (831) -- -- --
Deferred income taxes... -- (4,451) -- (4,451) -- -- --
Other assets............ -- (5,195) -- (5,195) -- -- --
-------- -------- -------- -------- -------- --------- ---------
Total assets......... $(63,822) $(45,126) $247,163 $138,215 $114,536 $(111,885) $ 2,651
======== ======== ======== ======== ======== ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Short-term debt,
including current
maturities of long-term
debt................... $ -- $ (1,171) $ -- $ (1,171) $ -- $ (2,001) $ (2,001)
Accrued compensation and
related costs.......... -- (28,975) -- (28,975) -- -- --
Deferred compensation... -- (91) -- (91) -- -- --
Deferred income taxes... -- (6,482) -- (6,482) -- -- --
Due to related parties.. -- (6,101) 83,918 77,817 -- (85,063) (85,063)
Other accrued
liabilities............ -- 250 -- 250 -- (4,864) (4,864)
-------- -------- -------- -------- -------- --------- ---------
Total current
liabilities......... -- (42,570) 83,918 41,348 -- (91,928) (91,928)
Long-term debt, net..... -- 3,599 -- 3,599 -- (15,957) (15,957)
Deferred compensation... -- (8,482) -- (8,482) -- -- --
Deferred income taxes... -- 138 -- 138 -- -- --
Other long-term
liabilities............ -- (2,474) -- (2,474) -- -- --
-------- -------- -------- -------- -------- --------- ---------
Total liabilities.... -- (49,789) 83,918 34,129 -- (107,885) (107,885)
-------- -------- -------- -------- -------- --------- ---------
Redeemable preferred
stock.................. -- -- -- -- -- (4,000) (4,000)
-------- -------- -------- -------- -------- --------- ---------
Stockholders' equity:
Members' equity........ (6,368) 1,021 (471) (5,818) -- -- --
Common stock........... -- -- (1,272) (1,272) 105 -- 105
Additional paid-in
capital................ -- (840) 117,563 116,723 114,431 -- 114,431
Retained earnings
(deficit).............. (57,454) 3,614 46,598 (7,242) -- -- --
Notes receivable from
shareholder............ -- 868 230 1,098 -- -- --
Treasury stock......... -- -- 597 597 -- -- --
-------- -------- -------- -------- -------- --------- ---------
Total stockholders'
equity.............. (63,822) 4,663 163,245 104,086 114,536 -- 114,536
-------- -------- -------- -------- -------- --------- ---------
Total liabilities and
stockholders'
equity.............. $(63,822) $(45,126) $247,163 $138,215 $114,536 $(111,885) $ 2,651
======== ======== ======== ======== ======== ========= =========
</TABLE>
F-11
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
- --------
(A) Reflects the contractual distributions to the owners of the Centerprise
Companies of excess working capital, as defined in the merger agreements,
calculated as accounts receivable and work in process in excess of: (i)
accounts payable and accrued expenses; less (ii) prepaid expenses; plus
(iii) 1% of trailing twelve months' revenues.
(B) Reflects the contractual distribution of certain assets and liabilities to
the owners of the Centerprise Companies in connection with the mergers and
the establishment of deferred tax balances to be established upon the
conversion of IDA, Holthouse, and Simione from S Corporation or partnership
status to C Corporation status.
(C) Reflects purchase accounting for the acquisitions of the Centerprise
Companies for consideration consisting of $83,918 in cash and 12,569,367
shares of common stock valued at $12.50 per share (or a total of $133,550)
for a total estimated purchase price of $221,468, resulting in an excess
purchase price over the fair value of assets acquired of $247,163. See Note
2 for discussion of valuation of stock. The adjustment to retained earnings
(deficit) reflects the elimination of the existing retained deficit of the
companies being acquired by Centerprise (as accounting acquiror) after
entries (A) and (B) above have been reflected.
(D) Reflects the cash proceeds from the issuance of 10,500,000 shares of common
stock net of estimated expenses of the offering (based on an estimated
initial public offering price of $12.50 per share). Expenses of the
offering include amounts advanced by BGL Capital and CCP and primarily
consist of the underwriting discount, accounting fees, legal fees, printing
expenses, consulting fees and signing bonuses.
(E) Reflects the use of offering proceeds to: (i) fund the cash portion of the
consideration due to the owners of the Centerprise Companies in connection
with the Mergers (excluding certain contingent payments described in Note
2); (ii) fund the redemption by Driver of its redeemable preferred stock of
$4,000; (iii) repay $17,958 of indebtedness of Driver; and (iv) pay $250
for settlement of a consulting agreement of Driver.
F-12
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Note 4--Unaudited Pro Forma Combined Statements of Operations Adjustments
(A) See Note 6 below for a discussion of the "separate practice format" and
the non-exclusive services agreements which Centerprise will enter into with
each of the Attest Firms. Following the Mergers, attest services will continue
to be performed by the CPAs who currently own the Centerprise Companies.
Centerprise will enter into 40-year non-exclusive services agreements to
provide professional and other personnel, equipment, office space and business
and administration services necessary for the operation of the Attest Firms.
One or more Attest Firms could choose to contract with entities other than
Centerprise for some or all of these services. However, in connection with the
Mergers, each of the Attest Firms will enter into a binding commitment to use
Centerprise to provide for budgeted levels of these services, including
professional and other personnel, for a period of one year. This binding
commitment will continue throughout the 40-year term of the services agreements
until and unless an Attest Firm provides Centerprise with a twelve month
advance notice of its intention to obtain one or more of the services
previously provided by Centerprise from another source.
Management has concluded that under the billing mechanisms provided for in
the services agreements as well as the compensation agreements entered into,
materially all attest services revenues earned by the Attest Firms would have
been payable to Centerprise under the services agreements. Estimated total
Attest Firm revenues from partners and owners that would not have flowed
through to Centerprise would have been $2,255 in the year ended December 31,
1998 and $782 and $878 in the three months ended March 31, 1998 and 1999,
respectively. Additionally, the Company believes that were the agreements in
place for the entire period, the profits recognized by Centerprise would have
materially approximated the profits derived from attest services. The
accompanying unaudited pro forma combined statements of income include pro
forma adjustments to reflect the nature of the services agreements. The table
below summarizes the entries needed to reflect the elimination of attest
revenues, the billing of services agreement fees and the elimination of certain
other operating expenses that would have been borne directly by the Attest
Firms, all as if the Mergers had been consummated on January 1, 1998. Other
operating expenses include expenditures for direct costs that would have been
borne directly by the Attest Firms such as errors and omissions insurance, peer
review, training, dues and subscriptions. (See Note 6.)
<TABLE>
<CAPTION>
Year Ended Three Months Ended Three Months Ended
December 31, 1998 March 31, 1998 March 31, 1999
------------------- ------------------ ------------------
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
------------------- ------------------ ------------------
<S> <C> <C> <C>
Professional services
revenues(1)............ $(66,040) $(24,694) $(27,347)
-------- -------- --------
Services agreement
fees................... 63,785 23,912 26,469
-------- -------- --------
Other operating
expenses............... (1,800) (639) (713)
-------- -------- --------
</TABLE>
- --------
(1) Some estimates were used by the Centerprise Companies in developing attest
services revenues. Additionally, because the legal definition of "attest
services" varies from state to state, the Centerprise Companies assumed
that the attest services definition that applies in their home state also
applied in all states in which it provided services.
As a result of the minimum contribution commitment that each of the acquired
professional services firms has made to Centerprise, the relatively immaterial
reduction to Centerprise pro forma results of operations stemming from the
above entries was effectively offset by a reduction of compensation expense.
See Note 4(B) below for additional information.
F-13
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
As discussed above and under the risk factor "Regulation of the accounting
profession will constrain Centerprise's operations and impact its structure and
could impair its ability to provide services to some clients, including the
Attest Firms," the services agreements are non-exclusive and, with twelve
months notice, staffing and other services requirements may be significantly
changed by the Attest Firms. Accordingly, the amounts reflected in the
unaudited pro forma combined statements of income as "Services agreements" fees
are based on estimates and are not necessarily representative of Centerprise's
results of operations for any future period. Failure by one or more Attest
Firms to use Centerprise's services could have a material adverse effect on
Centerprise's revenue production capabilities.
(B) Reflects the reduction in compensation and benefits to the owners of the
Centerprise Companies to which they have agreed prospectively in incentive
compensation and employment agreements to be effective upon completion of the
offering, net of compensation to management of Centerprise as follows:
<TABLE>
<CAPTION>
Three Months
Ended March
Year Ended 31,
December 31, --------------
1998 1998 1999
------------ ------ ------
<S> <C> <C> <C>
Professional Services:
Reznick.................................... $ 6,110 $4,356 $4,388
Mann Frankfort............................. 5,566 729 (536)
Follmer.................................... 4,816 1,875 1,681
Berry Dunn................................. 2,079 1,439 1,314
Urbach..................................... 3,082 1,183 1,947
Grace...................................... 576 (256) (415)
Holthouse.................................. (2,729) (955) (1,362)
Simione.................................... 940 19 (356)
------- ------ ------
$20,440 $8,390 $6,661
======= ====== ======
Business and Financial Services:
Driver..................................... $ (100) $ (25) $ (25)
IDA........................................ 1,092 273 273
Reppond.................................... 548 548 548
------- ------ ------
$ 1,540 $ 796 $ 796
======= ====== ======
</TABLE>
The senior professionals of each professional services firm will enter firm-
specific incentive compensation agreements with Centerprise.
On an annual basis, Centerprise will retain a specified fixed dollar amount
of earnings before any compensation is paid to a firm's participants. The
amount retained by Centerprise is referred to as "Centerprise Base Earnings."
The amount of Centerprise Base Earnings has been negotiated with each
professional services firm and varies from firm to firm. The amount allocated
to each professional services firm for compensation of participants is referred
to as "Subsidiary Base Compensation." Subsidiary Base Compensation equals
Initial Operating Earnings for the period less Centerprise Base Earnings.
In addition to Subsidiary Base Compensation, each professional services firm
has agreed to a 40%/60% split of any amount by which future Subsidiary
Operating Earnings exceed Initial Operating Earnings, with 40% to be retained
by Centerprise and 60% to be allocated to participants (the "Bonus").
The compensation adjustment has been calculated as the difference between
(x) operating income adjusted to add back depreciation and amortization and
member compensation less the "Centerprise Base Earnings" and (y) the
compensation and related costs of any senior professional recorded in the
historical accounts. See "Business of Centerprise after the Mergers--
Professional Services" for further explanation of the incentive compensation
agreements.
F-14
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
As described above, participants will only be paid a bonus to the extent
Initial Operating Earnings exceed Centerprise Base Earnings.
(C) Reflects the non-cash amortization charge over 15 years related to
$247,143 of goodwill to be recorded as a result of the Mergers net of
amortization expense already recorded in the accounts of the Centerprise
Companies of $666 in the year ended December 31, 1998, resulting in a net
adjustment of $15,812. Elimination of amortization expense already recorded in
the accounts of the Centerprise Companies of $56 and $482 for the three months
ended March 31, 1998 and 1999 resulted in net adjustments of $4,063 and $3,637,
respectively.
(D) Reflects the net reduction in interest expense associated with debt at
Driver to be paid in conjunction with the closing of this transaction of $935,
$11 and $425 for the year ended December 31, 1998 and the three months ended
March 31, 1998 and 1999, respectively.
(E) Reflects the net reduction in interest income of $119 at Grace for the
year ended December 31, 1998 associated with the elimination of certain assets
retained in conjunction with the closing of the Mergers.
(F) Reflects the incremental provision for federal and state income taxes at
a rate of 40% assuming all entities were subject to federal and state income
tax. The adjustment relates primarily to other statements of operations'
adjustments and income taxes on partnership and S Corporation income.
Note 5--Net Income Per Share
The shares used in computing net income per share includes: (i) 3,870,633
shares issued to the initial investors in and management of Centerprise; (ii)
12,569,367 shares to be issued to the owners of the Centerprise Companies in
connection with the Mergers; and (iii) 9,903,290 shares representing the number
of shares sold in this offering, net of the underwriting discount necessary to
pay the $83,918 cash portion of the consideration for the Mergers (excluding
certain contingent payments described in Note 2), to repay certain indebtedness
of $17,958 of Driver, to repay other obligations of $4,250 and to pay estimated
expenses of the offering.
Note 6--Attest Services
Centerprise is adopting the "separate practice format" under which it will
only acquire those aspects of the practices of the professional services firms
which do not fall within the monopoly granted to CPAs under the accountancy
laws of the various states, i.e., the non-attest services. Attest services will
continue to be provided by the CPAs who currently own the professional services
firms via the licensed Attest Firms in which Centerprise will have no ownership
interest. Pursuant to non-exclusive services agreements, Centerprise will
provide, for a fee, the professional and other personnel, equipment, office
space and business and administration services necessary for the operation of
the Attest Firms. Therefore, Centerprise will be earning revenues from non-
attest clients and from the separate Attest Firms. Centerprise does not believe
that these separate revenue streams possess significantly different risks.
Following the Mergers, Centerprise's consolidated financial statements will not
include the Attest Firms because the services agreements will not provide
Centerprise with a controlling financial interest in the Attest Firms. Based on
the form of the services agreements expected to be executed at the time of the
Mergers, the Company believes that the profit which would have been recognized
by Centerprise under the services agreements would have materially approximated
the profits derived from attest services in the periods presented.
F-15
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Centerprise and each of the Attest Firms have agreed to a billing process
that identifies the following key components of the fees to be paid to
Centerprise under the services agreements:
. Charges for professional staff performing work on attest
engagements. Time spent by Centerprise's employees on attest
engagements will be recorded in the time and billing system and
billed at hourly rates negotiated by Centerprise and the Attest
Firm.
. Charges for administrative and other support staff, premises
occupancy, equipment, utilities and similar items provided by
Centerprise and used by the owners of the Attest Firms in
performing attest services. These charges will be billed at a rate
per hour negotiated annually during the budget and planning
process.
. Reimbursement of costs incurred by Centerprise on behalf of the
Attest Firm that are directly attributable to the Attest Firm or
its owners. Such charges will be submitted for reimbursement at
incurred cost.
. A charge through which Centerprise recovers the costs of
administering its relationship with the Attest Firm. Time incurred
by Centerprise management to administer the client relationship
will be recorded in the time and billing system and billed at
hourly rates negotiated by Centerprise and the Attest Firm.
Centerprise will bill the Attest Firm for these charges on a monthly basis.
Bills will be due upon presentation and will be subject to a carrying cost
interest charge. Centerprise will reserve the right to suspend its services if
payments are delinquent, and each Attest Firm will have the right to challenge
the quality and timeliness of the services provided.
The Attest Firms will be responsible for the billing preparation and
collection process for the attest services provided to their clients and will
retain ownership of the accounts receivable from the client related to the
attest services. Bills will be generated based on the time and expenses charged
to the engagement by the partners who own the Attest Firms and Centerprise's
staff. Centerprise's billing and accounts receivable personnel will be
responsible for performing the administrative tasks of preparing the invoices
on the Attest Firm's stationery, recording the accounts receivable on the
Attest Firm's ledgers, processing and recording the cash receipts and
depositing checks received for the payment of attest services into an operating
account established in the name of and legally owned by the Attest Firm. Funds
owned by the Attest Firms will not be commingled with Centerprise's funds.
Centerprise will record as accounts receivable amounts owed by the separate
attest firms.
Expenditures incurred by the Attest Firms for direct costs such as errors
and omissions insurance, peer review, training, dues and subscriptions will be
paid by the Attest Firm using checks drawn on its operating account.
Centerprise's accounts payable personnel will be responsible for recording the
liability on the Attest Firm's ledgers, processing the Attest Firm's invoices
for payment, issuing the Attest Firm's check and mailing it to the appropriate
vendor.
Excess cash will be invested on behalf of the Attest Firm by Centerprise's
treasury personnel in investment vehicles approved by the governing body of the
Attest Firm. Investment earnings will be deposited directly into the Attest
Firm's operating accounts.
The contractual distribution of excess working capital pursuant to the
merger agreements as reflected in the merger adjustments to the unaudited pro
forma combined balance sheet, effectively eliminates Attest Firm accounts
receivable from the pro forma combined balances. Subsequent to the mergers,
Centerprise will reflect in its balance sheet the accounts receivable from the
Attest Firms for amounts billed under the services agreements.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Centerprise Advisors, Inc.
The stock split described in Note 1 to the financial statements has not been
consummated at August 9, 1999. When it has been consummated, we will be in
position to furnish the following report:
"In our opinion, the accompanying balance sheet and the related
statement of operations present fairly, in all material respects, the
financial position of Centerprise Advisors, Inc. at December 31, 1998, and
the results of its operations for the period from November 9, 1998
(inception date) through December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally
accepted auditing standards which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for the opinion expressed above."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 9, 1999
F-17
<PAGE>
CENTERPRISE ADVISORS, INC.
BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash.................................................. $ -- $ 30
Deferred offering costs............................... 800 4,286
-------- --------
Total assets...................................... $ 800 $ 4,316
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities................................... $ 1,107 $ 4,614
Payable to related parties............................ 892 1,145
-------- --------
Total liabilities................................. 1,999 5,759
-------- --------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 3,616,278 and 3,870,633 (unaudited)
shares issued and outstanding at December 31, 1998
and March 31, 1999, respectively................... 36 39
Additional paid-in capital.......................... 18,486 21,186
Retained deficit.................................... (19,607) (22,668)
Stock subscriptions receivable...................... (114) --
-------- --------
Total stockholders' equity........................ (1,199) (1,443)
-------- --------
Total liabilities and stockholders' equity........ $ 800 $ 4,316
======== ========
</TABLE>
F-18
<PAGE>
CENTERPRISE ADVISORS, INC.
STATEMENT OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Period from
November 9, 1998 Three Months
(inception date) Ended
through December March 31,
31, 1998 1999
---------------- ------------
(Unaudited)
<S> <C> <C> <C>
Total revenues.............................. $ -- $ --
---------- ----------
Operating expenses.......................... 19,607 3,061
---------- ----------
Loss before income taxes.................... (19,607) (3,061)
Provision for income taxes.................. -- --
---------- ----------
Net loss.................................... $ (19,607) $ (3,061)
========== ==========
Net loss per share:
Basic..................................... $ (29.57) $ (1.17)
========== ==========
Diluted................................... $ (5.55) $ (0.83)
========== ==========
Shares used in computing net loss per share
(see Note 2):
Basic..................................... 663,157 2,618,055
========== ==========
Diluted................................... 3,534,874 3,682,379
========== ==========
</TABLE>
F-19
<PAGE>
CENTERPRISE ADVISORS, INC.
STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Period from
November 9, 1998
(inception date) Three Months
through Ended
December 31, March 31,
1998 1999
---------------- ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(19,607) $(3,061)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash compensation charge on stock
issuance.................................... 18,375 2,657
Increase in deferred offering costs.......... (800) (3,486)
Accrued expenses............................. 1,107 3,507
-------- -------
Net cash used in operating activities........ (925) (383)
Cash flows from financing activities:
Proceeds from issuance of common stock......... -- 114
Proceeds from notes payable.................... 925 299
-------- -------
Net cash provided by financing activities.... 925 413
-------- -------
Net change in cash........................... 0 30
Cash, beginning of period.................... -- --
-------- -------
Cash, end of period.......................... $ 0 $ 30
======== =======
</TABLE>
F-20
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1--Business and Organization
Centerprise Advisors, Inc. ("Centerprise" or the "Company") was founded in
1998 to create a leading provider of professional, business and financial
services and products to middle-market clients. Centerprise intends to acquire
eleven companies (the "Mergers") upon consummation of an initial public
offering of its common stock (the "Offering").
Centerprise has not conducted any operations, and all activities to date
have related to the Offering and the Mergers. Centerprise is dependent upon the
Offering to execute the pending Mergers. There is no assurance that the pending
Mergers discussed will be completed or that Centerprise will be able to
generate future operating revenues.
In connection with the organization and initial capitalization of
Centerprise, 3,542,625 shares of the Company's common stock were subscribed by
sponsoring parties for total consideration of $143. Of this amount, $29 had
been received as of December 31, 1998. In addition, at the time of organization
the Company agreed to issue warrants to the CCP Group to purchase a total of
100,000 shares of the Company's common stock at the initial public offering
price.
On , the Board of Directors approved several actions in
connection with the Offering. These actions included a 221.17903 stock split
which will occur prior to the effectiveness of the Company's Registration
Statement. All common stock related information included in the financial
statements has been adjusted to reflect this split.
Note 2--Significant Accounting Policies
Stock-Based Compensation:
Centerprise will measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method. Following the issuance of
any options the Company will be required to make pro forma disclosures of net
income and earnings per share as if the fair value method of accounting had
been applied.
Earnings Per Share:
Following the Offering, the Company will adopt Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No.
128 requires a presentation of basic earnings per share ("basic EPS") and
diluted earnings per share ("diluted EPS"). Basic EPS excludes dilution and is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
Income Taxes:
Income taxes have been computed using the asset and liability approach.
Under this approach deferred income tax assets and liabilities are determined
based on the differences between the financial statement and
F-21
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
tax basis of assets and liabilities using currently enacted tax rates in effect
for the years in which the differences are expected to reverse. For the period
from November 9, 1998 (inception date) to December 31, 1998, no income tax
benefit was recorded associated with the pre-tax loss because such realization
could not be construed to be more likely than not.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements. While management believes that the
estimates and related assumptions used in the preparation of the financial
statements are appropriate, actual results could differ from those estimates.
Estimates are made when accounting for the income taxes.
Unaudited Interim Financial Statements:
In the opinion of management, the Company has made all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the financial position of the Company at March 31, 1999 and the results of
its operations and its cash flows for the three months ended March 31, 1999 as
presented in the accompanying unaudited interim financial statements.
Note 3--Stockholders' Equity
Issuance of Common Stock to Persons Who Are or Will Become Employees of
Centerprise:
During the period from November 9, 1998 (inception date) to December 31,
1998, 1,662,603 shares were issued to initial investors who are or will become
employees of Centerprise for $69 of consideration. In addition, 73,653 shares
were issued to Rondol E. Eagle, Chief Integration Officer, for $3 of
consideration. During the quarter ended March 31, 1999, 33,177 shares
(unaudited) were issued to Dennis Bikun, chief accounting officer for $6
(unaudited) consideration, and 221,179 shares (unaudited) were issued to DeAnn
Brunts, chief financial officer. For accounting purposes, compensation expense
of $16,205 and $2,339 (unaudited) has been reflected in the accompanying
Statement of Operations during the period from November 9, 1998 (inception
date) to December 31, 1998 and the quarter ended March 31, 1999, respectively.
Employee Incentive Compensation Plan:
Prior to the offering, the Company's Board of Directors and stockholders
will adopt the Company's Employee Incentive Compensation Plan (the "Incentive
Plan"). Awards under this plan may take the form of: (1) incentive stock
options or non-qualified stock options; (2) stock appreciation rights; (3)
restricted or deferred stock; (4) dividend equivalents; and (5) cash awards or
other awards not otherwise provided for, the value of which is based in whole
or in part upon the value of the common stock. Centerprise's compensation
committee will administer the plan and generally select the individuals who
will receive awards as well as determine the terms and conditions of those
awards.
Upon adopting the Incentive Plan, Centerprise will reserve shares of common
stock for use in connection with the plan. The number of shares available for
use under the plan at any given time will not exceed fifteen percent of the
total number of shares of common stock outstanding at that time. Shares
attributable to awards which have expired, terminated, canceled or forfeited
are available for issuance for future awards.
Upon completion of the Offering, non-qualified stock options to purchase an
aggregate number of shares up to 7.5 percent of the total shares then
outstanding (less 75,000 shares issuable to non-employee directors as described
below) will be granted. Such options will be allocated among management of
Centerprise and the employees of the Centerprise Companies. The grants will be
effective as of the date of the offering and each
F-22
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
option will have an exercise price equal to the initial public offering price.
These options will vest over periods ranging from three to five years and will
expire ten years from the date of grant or earlier if there is a termination of
employment.
The plan also provides for: (a) the automatic grant to each non-employee
director serving at the closing of the offering of an option to purchase 15,000
shares of common stock; and (b) after the offering, the automatic grant to each
non-employee director of an option to purchase 15,000 shares when the director
is initially elected. In addition, the plan provides for an automatic annual
grant to each non-employee director of an option to purchase 7,500 shares at
each annual meeting of stockholders following the offering. However, if the
first annual meeting of stockholders following a non-employee director's
initial election is within three months of the date of the election or
appointment, the non-employee director will not be granted an option at the
annual meeting. These options will have an exercise price per share equal to
the fair market value of a share at the date of grant, will expire at the
earlier of ten years from the date of grant or one year after termination of
service as a director, and will be immediately exercisable upon grant.
The Company intends to file a registration statement on Form S-8 under the
Securities Act registering the issuance of shares upon exercise of options
granted under the Incentive Plan.
Employee Stock Purchase Plan
Prior to the closing of the Offering, Centerprise plans to adopt an employee
stock purchase plan. For purposes of such plan, generally the first day of each
quarter will be the grant date and the last day of each quarter will be the
exercise date. On each exercise date, payroll deductions credited to
participants' accounts will be automatically applied to the purchase price of
Common Stock at a price per share equal to 85 percent of the fair market value
of the Common Stock on the grant or exercise date, whichever is less. This will
be accounted for as a noncompensatory plan in accordance with APB 25.
Note 4--Related Party Transactions
As of December 31, 1998 and March 31, 1999, Centerprise has outstanding
payables to related parties of $892 and $1,060 (unaudited), respectively, due
to BGL Capital and CCP Group, initial investors in the Company. These payables
represent consulting expenses, out-of-pocket expenses and legal and accounting
fees, of which $42 has been capitalized to date as deferred offering costs and
all remaining amounts have been expensed in the Statement of Operations in the
periods from November 9 (inception date) through December 31, 1998 and the
three months ended March 31, 1999. Of these payables, $547 and $715 (unaudited)
were funded by BGL Capital as of December 31, 1998 and March 31, 1999,
respectively.
Note 5--Subsequent Events
Centerprise has signed definitive agreements to acquire all of the
outstanding common stock of eleven companies ("Centerprise Companies") to be
consummated contemporaneously with this Offering. The Centerprise Companies are
Reznick Fedder & Silverman, P.C. ("Reznick"); Robert F. Driver Co., Inc.
("Driver"); Mann Frankfort Stein & Lipp, P.C. ("Mann Frankfort"); Follmer
Rudzewicz & Company, P.C. ("Follmer"); Berry, Dunn, McNeil & Parker, Chartered
("Berry Dunn"); Urbach Kahn & Werlin, P.C. ("Urbach"); Self Funded Benefits,
Inc. D/B/A Insurance Design Administrators ("IDA"); Grace & Company, P.C.
("Grace"); Holthouse Carlin & Van Trigt LLP ("Holthouse"); the Reppond
Companies ("Reppond"); and Simione, Scillia, Larrow & Dowling LLC ("Simione").
Concurrently with and as a condition to closing of the Offering, Centerprise
will acquire all of the outstanding common stock of the Centerprise Companies.
The Mergers will be accounted for using the purchase method of accounting with
Centerprise being treated as the accounting acquiror in accordance with Staff
Accounting Bulletin No. 97 and APB 16.
F-23
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
The following table reflects the consideration to be paid in cash,
promissory note and shares of Common Stock:
<TABLE>
<CAPTION>
Promissory Shares of
Cash(1) Note Common Stock
------- ---------- ------------
<S> <C> <C> <C>
Reznick.................................... $16,899 $ -- 1,810,553
Driver..................................... 500 -- 2,944,445
Mann Frankfort............................. 16,503 -- 1,768,200
Follmer.................................... 13,600 -- 1,457,143
Berry Dunn................................. 6,821 -- 931,357
Urbach Kahn................................ 9,190 -- 1,023,943
IDA........................................ 8,154 -- 873,669
Grace...................................... 2,840 -- 304,286
Holthouse.................................. 5,603 -- 600,343
Reppond.................................... -- 4,000 447,428
Simione.................................... 3,808 -- 408,000
------- ------ ----------
Total.................................. $83,918 $4,000 12,569,367
======= ====== ==========
</TABLE>
- --------
(1) In addition to the consideration set forth in the table, the former
stockholders of Driver will be entitled to receive a contingent cash
payment equal to 6.75 times the amount, if any, by which Driver's adjusted
earnings before interest, taxes, depreciation and amortization ("EBITDA")
for 2000 exceed $11,600. The former stockholders of IDA will be entitled to
a contingent cash payment equal to the lesser of (a) $3,415 and (b) 6.75
times the amount, if any, by which IDA's adjusted EBITDA for 2000 exceeds
$3,290. The former stockholders of Reppond will be entitled to receive a
contingent cash payment which will be calculated with respect to a
specified twelve month period ending in 2003 and based on the amount by
which the adjusted EBITDA of Centerprise's employee benefits business
(excluding IDA) exceeds specified thresholds. One of Reppond's stockholders
will also be entitled to receive contingent cash payments with respect to
each of the first five twelve month periods following the closing of the
Mergers. Such payments will be based on the amount by which Reppond's
adjusted EBITDA for the applicable period exceeds specified thresholds.
In order to comply with standards of the accounting profession and
applicable state regulations governing the profession, Centerprise is requiring
that the Centerprise Companies cease providing attest services prior to the
closing of the acquisition, if applicable. Following the closing, all attest
services formerly provided by the Centerprise Companies will be provided by
newly created separate legal entities (the Attest Firms) which will be owned by
former owners of the Centerprise Companies who are certified public
accountants. Pursuant to services agreements, Centerprise will provide
professional and other personnel, equipment, office space and business and
administrative services necessary to operate the Attest Firms.
On April 7, 1999, Centerprise filed a registration statement on Form S-1 for
this Offering.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Reznick Fedder & Silverman, P.C.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Reznick
Fedder & Silverman, P.C. (the Company) and its subsidiaries at September 30,
1997 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 1998, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 29, 1999
F-25
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30,
--------------- March 31,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 3,962 $ 5,774 $ 1,804
Fees receivable, net of allowance for doubtful
accounts of $3,036, $3,526 and $5,726 (unau-
dited), respectively............................ 11,934 14,528 24,207
Unbilled fees, at net realizable value........... 1,932 2,542 3,749
Deferred income taxes............................ 2,035 1,752 1,648
Prepaid expenses and other current assets........ 242 244 185
------- ------- -------
Total current assets........................... 20,105 24,840 31,593
Property and equipment, net........................ 2,389 2,863 2,534
Cash surrender value of life insurance............. 580 558 558
Intangible assets, net............................. 414 403 395
Deferred income taxes.............................. 1,147 1,327 1,379
------- ------- -------
Total assets................................... $24,635 $29,991 $36,459
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt.................................. $ -- $ -- $ 1,400
Current portion of long-term debt................ 1,201 1,063 1,380
Accounts payable and accrued expenses............ 1,347 1,217 1,026
Accrued compensation and related costs to
employees....................................... 1,384 2,274 1,635
Accrued compensation and related costs to
shareholders.................................... 13,252 18,214 22,446
Deferred compensation due to former shareholders
and shareholder................................. 106 91 91
------- ------- -------
Total current liabilities...................... 17,290 22,859 27,978
Long-term debt..................................... 1,150 999 2,439
Deferred compensation due to former shareholders... 963 865 765
Accrued bonus...................................... 2,090 2,347 2,474
------- ------- -------
Total liabilities.............................. 21,493 27,070 33,656
------- ------- -------
Shareholders' equity:
Common stock, no par value; 10,000 shares
authorized;
2,900 shares issued and outstanding............. -- -- --
Additional paid-in capital....................... 1,422 1,422 1,422
Retained earnings................................ 1,720 1,499 1,381
------- ------- -------
Total shareholders' equity..................... 3,142 2,921 2,803
------- ------- -------
Total liabilities and shareholders' equity..... $24,635 $29,991 $36,459
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-26
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
CONSOLIDATED STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Six Months
Ended September 30, Ended March 31,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Professional services........... $31,483 $35,103 $47,877 $27,887 $31,552
------- ------- ------- ------- -------
Expenses:
Shareholder and officer
compensation and related
costs.......................... 7,784 8,170 13,516 10,782 11,528
Employee compensation and
related costs.................. 17,477 19,617 25,792 12,766 15,413
Occupancy costs................. 1,977 2,363 2,746 1,355 1,427
Office operating expenses....... 669 958 1,020 555 612
Depreciation and amortization... 732 869 984 571 544
Other selling, general and
administrative expenses........ 2,853 3,340 3,752 1,875 2,104
------- ------- ------- ------- -------
31,492 35,317 47,810 27,904 31,628
------- ------- ------- ------- -------
Operating income (loss)....... (9) (214) 67 (17) (76)
------- ------- ------- ------- -------
Other (income) expense:
Interest expense................ 399 430 543 185 146
Interest income................. (53) (242) (40) (18) (62)
Other........................... (125) (122) (112) (27) 10
------- ------- ------- ------- -------
221 66 391 140 94
------- ------- ------- ------- -------
Loss before benefit for income
taxes............................ (230) (280) (324) (157) (170)
Benefit for income taxes.......... (74) (81) (103) (48) (52)
------- ------- ------- ------- -------
Net loss.......................... $ (156) $ (199) $ (221) $ (109) $ (118)
======= ======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-27
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------- Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1995..... 2,000 $ -- $ 2 $2,946 $2,948
Issuance of common stock..... 100 -- -- -- --
Net loss..................... -- -- -- (156) (156)
----- ----- ------ ------ ------
Balance at September 30, 1996.. 2,100 -- 2 2,790 2,792
Issuance of common stock..... 100 -- -- -- --
Issuance of common stock
for acquisition............. 500 -- 1,420 -- 1,420
Declaration of deferred com-
pensation to
shareholder................. -- -- (449) (449)
Redemption of common stock... (100) -- -- (422) (422)
Net loss..................... -- -- -- (199) (199)
----- ----- ------ ------ ------
Balance at September 30, 1997.. 2,600 -- 1,422 1,720 3,142
Issuance of common stock..... 300 -- -- -- --
Net loss..................... -- -- -- (221) (221)
----- ----- ------ ------ ------
Balance at September 30, 1998.. 2,900 -- 1,422 1,499 2,921
Net loss (unaudited)......... -- -- -- (118) (118)
----- ----- ------ ------ ------
Balance at March 31, 1999
(unaudited)................... 2,900 $ -- $1,422 $1,381 $2,803
===== ===== ====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-28
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Six Months
Ended September 30, Ended March 31,
------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- -------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activi-
ties:
Net loss....................... $ (156) $ (199) $ (221) $ (109) $ (118)
Adjustments to reconcile net
income to net cash
provided by (used in) operat-
ing activities:
Depreciation and amortiza-
tion........................ 732 869 984 571 544
Changes in deferred income
taxes....................... 74 81 103 48 52
Changes in operating assets
and liabilities:
Fees receivable............ (1,273) (163) (2,594) 1,078 (9,679)
Unbilled fees.............. (234) 64 (610) (10,378) (1,207)
Prepaid expenses and other
assets.................... 81 (215) 20 168 59
Accounts payable and ac-
crued expenses............ (119) 219 (130) (8) (191)
Accrued compensation and
related costs............. 552 (138) 890 (106) (639)
Accrued compensation and
related costs to
shareholders.............. 1,572 929 4,962 5,606 4,232
Accrued bonus.............. 183 203 257 105 127
------- ------- ------- -------- -------
Net cash provided by
(used in) operating
activities.............. 1,412 1,650 3,661 (3,025) (6,820)
------- ------- ------- -------- -------
Cash flows from investing activi-
ties:
Purchase of property and equip-
ment.......................... (684) (1,317) (1,447) (1,029) (207)
Business acquisition (net of
cash acquired)................ -- 9 -- -- --
------- ------- ------- -------- -------
Net cash used in invest-
ing activities.......... (684) (1,308) (1,447) (1,029) (207)
------- ------- ------- -------- -------
Cash flows from financing activi-
ties:
Proceeds from the issuance of
long-term debt................ 1,343 3,336 3,425 1,084 1,430
Payments of long-term debt..... (1,421) (2,716) (3,714) (718) (568)
Borrowings under short-term
agreements.................... -- -- -- 1,000 1,400
Payments to former sharehold-
ers........................... (84) (111) (113) (119) (100)
Loan from shareholders......... 643 641 647 647 897
Payments to shareholders....... (643) (641) (647) (12) (2)
------- ------- ------- -------- -------
Net cash (used in) pro-
vided by financing
activities.............. (162) 509 (402) 1,882 3,057
------- ------- ------- -------- -------
Net increase (decrease) in cash
and cash equivalents............ 566 851 1,812 (2,172) (3,970)
Cash and cash equivalents at be-
ginning of period............... 2,545 3,111 3,962 3,962 5,774
------- ------- ------- -------- -------
Cash and cash equivalents at end
of period....................... $ 3,111 $ 3,962 $ 5,774 $ 1,790 $ 1,804
======= ======= ======= ======== =======
Supplemental disclosure of cash
flow information:
Cash paid during the period
for:
Interest..................... $ 268 $ 264 $ 209 $ 185 $ 146
Income taxes................. $ -- $ -- $ -- $ -- $ --
Noncash transactions:
Value of common stock issued
for acquisition............... $ -- $ 1,420 $ -- $ -- $ --
Reclassification of amounts due
to former shareholders and
shareholder from equity to li-
ability....................... $ -- $ 871 $ -- $ -- $ --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-29
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands)
NOTE 1--BACKGROUND AND BUSINESS DESCRIPTION
Reznick Fedder & Silverman, P.C. (the Company) is a Maryland professional
service corporation, with approximately 500 professional staff members, which
provide professional accounting services. The firm has offices in Bethesda,
Maryland; Baltimore, Maryland; Charlotte, North Carolina; Boston,
Massachusetts; and Atlanta, Georgia.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
and balances are eliminated in consolidation.
Revenue Recognition:
The Company recognizes revenue as the related services are provided. The
Company bills clients based upon actual hours incurred on client projects at
expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact of any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known. Outstanding fees receivable are evaluated each
period to assess the adequacy of the allowance for doubtful accounts.
Unbilled Fees:
Unbilled fees represent the anticipated net realizable value for hours
incurred by the Company's professional and administrative staff, plus out-of-
pocket expenses, on projects which had not yet been billed to clients as of
period end.
Cash and Cash Equivalents:
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives (shorter
of asset life or lease term for leasehold improvements), generally ranging from
5 to 27.5 years. Expenditures for maintenance and repairs and minor renewals
and betterments which do not improve or extend the life of the respective
assets are expensed. All other expenditures for renewals and betterments are
capitalized. The assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gain or loss included in
operations.
F-30
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. If an impairment is recognized the
carrying value of the impaired asset is reduced to its fair value. No
impairment has been recognized through September 30, 1998.
Intangible Assets:
Intangible assets consist of goodwill, which represents the excess of cost
over the fair value of assets acquired in business combinations accounted for
under the purchase method. Substantially all goodwill is amortized on a
straight-line basis over an estimated useful life of 40 years.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, fees receivable, accounts payable and accrued liabilities
and debt approximate fair value.
Income Taxes:
Income taxes have been computed using the asset and liability approach.
Under this approach, deferred income tax assets and liabilities are determined
based on the differences between the financial statement and tax basis of asset
and liabilities using currently enacted tax rates in effect for the years in
which the differences are expected to reverse.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of fees receivable. Receivables
arising from services provided to clients are not collateralized and, as a
result, management continually monitors the financial condition of its clients
to reduce the risk of loss.
Use of Estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amount of revenues
and expenses during the reporting period. While management believes that the
estimates and related assumptions used in the preparation of the consolidated
financial statements are appropriate, actual amounts could differ from those
estimates. Estimates are made when accounting for allowances for doubtful
accounts, depreciation and amortization, and income taxes.
Unaudited Interim Financial Statements:
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1999, and
the results of its operations and its cash flows for the six months ended March
31, 1998 and 1999, as presented in the accompanying unaudited interim
financial statements.
F-31
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 3--BUSINESS COMBINATION
Effective August 1, 1997, the Company issued 500 shares of its common stock
in exchange for all the outstanding common stock of Sacks, McGibney, Trotta &
Koppelman, P.A. (SMTK), a Maryland professional corporation engaged in
providing accounting, attestation, tax and consulting services principally to
clients in the healthcare industry. The merger has been accounted for using the
purchase method of accounting whereby the total acquisition cost has been
allocated to the consolidated assets and liabilities based upon their estimated
respective fair values. The total acquisition cost is allocated to the acquired
net assets as follows:
<TABLE>
<S> <C>
Cash.............................................................. $ 9
Accounts receivable............................................... 1,804
Property and equipment............................................ 133
Goodwill.......................................................... 414
Accrued expenses.................................................. (151)
Notes payable..................................................... (375)
Accrued bonus..................................................... (414)
------
Value of stock issued............................................. $1,420
======
</TABLE>
Unaudited pro forma results of operations of the Company for the years ended
September 30, 1996 and 1997 are included below. Such pro forma presentation has
been prepared assuming that the SMTK acquisition had occurred as of October 1,
1995 and 1996, respectively.
<TABLE>
<CAPTION>
September 30,
---------------
1996 1997
------- -------
<S> <C> <C>
Revenues.................................................. $38,849 $39,426
Net income................................................ 864 (536)
</TABLE>
F-32
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 4--SELECTED FINANCIAL STATEMENT INFORMATION
Additional information concerning consolidated financial accounts includes
the following:
<TABLE>
<CAPTION>
September 30,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Property and equipment, net:
Leasehold improvements................... $ 506 $ 589 $ 553
Furniture and fixtures................... 1,941 2,307 2,493
Land..................................... 67 67 67
Buildings................................ 460 445 445
Equipment................................ 2,712 3,322 2,590
------- ------- -------
5,686 6,730 6,148
Less accumulated depreciation and
amortization.............................. (3,297) (3,867) (3,614)
------- ------- -------
$ 2,389 $ 2,863 $ 2,534
======= ======= =======
Intangible assets, net:
Goodwill................................. $ 414 $ 414 $ 414
Less accumulated amortization............ -- (11) (19)
------- ------- -------
$ 414 $ 403 $ 395
======= ======= =======
Accounts payable and accrued liabilities:
Accrued insurance........................ $ 253 $ 353 $ 510
Accrued rent............................. 389 296 246
Accrued legal............................ 250 250 --
Other.................................... 455 318 270
------- ------- -------
$ 1,347 $ 1,217 $ 1,026
======= ======= =======
</TABLE>
NOTE 5--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for doubtful
accounts:
<TABLE>
<CAPTION>
Year Ended December 31, Six Months
------------------------- Ended March
1996 1997 1998 31, 1999
------- ------- ------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of period........... $ 1,923 $ 2,116 $ 3,036 $ 3,526
Additions to costs and expenses.......... 4,916 6,805 8,617 3,225
Write-offs............................... (4,723) (5,885) (8,127) (1,025)
------- ------- ------- -------
Balance at end of period................. $ 2,116 $ 3,036 $ 3,526 $ 5,726
======= ======= ======= =======
</TABLE>
NOTE 6--COMPENSATION--RELATED ACCRUALS
Accrued Bonus:
Upon termination or as otherwise determined by the Shareholders or the
Executive Committee, each shareholder or non-shareholder officer receives a
bonus (the "accrued bonus") which is calculated as follows:
F-33
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
(1) if the shareholder or non-shareholder officer held that position since
October 1, 1985 or earlier, $250, except for one individual for whom the amount
of accrued bonus is $500 or (2) if the shareholder or non -shareholder officer
has held that position after October 1, 1985, 10 percent of the total cash
compensation paid him during the time he has been a shareholder or non-
shareholder officer, provided that the individual has held the position of
shareholder or non-shareholder officer for at least two years as of the date
that the amount becomes payable, and in no event will the bonus exceed $100.
Net accrued bonus cost for the Company includes the following components:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
-----------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Service cost............................................ $ 17 $ 30 $ 49
Interest cost........................................... 114 121 156
Amortization of prior service cost...................... 53 53 53
----- ----- -----
Net deferred compensation cost.......................... $ 184 $ 204 $ 258
===== ===== =====
</TABLE>
Assumptions used in the development of pension data follow:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
---------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Discount rate........................................ 7.0% 7.0% 7.0%
</TABLE>
The Company's accrued bonus plan is currently not funded. The following
table presents the status of the Company's accrued bonus benefits:
<TABLE>
<CAPTION>
September 30,
----------------
1997 1998
------- -------
<S> <C> <C>
Projected benefit obligation............................ $ 2,595 $ 2,267
------- -------
Funded status........................................... (2,595) (2,267)
Unrecognized prior service cost......................... 210 158
Unrecognized (gain) loss................................ 295 (238)
------- -------
Accrued deferred compensation cost...................... $(2,090) $(2,347)
======= =======
</TABLE>
Amounts Due to Former Shareholders and Shareholder:
Annually, each shareholder is allocated accrued compensation (as defined in
the Shareholders' Agreement). Accrued compensation bears interest at 7 percent
per annum. To the extent that each shareholder's balance exceeds $200, interest
is expensed and paid to the shareholder. Unpaid interest is included in the
accrued compensation to shareholders account balance.
Upon termination or as otherwise determined by the shareholders or the
Executive Committee, the unpaid balance of accrued compensation and interest is
transferred to amounts due to former shareholders and shareholder and bears
interest at the rate of 10 percent, except in the case of voluntary
termination, in which case the interest rate is 7 percent. The unpaid portion
of the accrued compensation is paid in equal monthly
F-34
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
installments of principal and interest in an amount equal to one-quarter of the
individual's average monthly compensation for the last five years of
employment. The period of payment for the accrued compensation shall be the
shorter of the period resulting from the computation of payments or fifteen
years (and the amortization of payments shall be determined accordingly).
NOTE 7--CREDIT FACILITIES
Short-Term Debt:
The Company has a Short-Term Credit Agreement which allows for cash
borrowings at prime rate of up to $3,500. The Short-Term Credit Agreement
expires annually on May 31. Upon expiration, the Short-Term Credit Agreement
may be renewed, with the consent of the bank, annually. No cash borrowings were
outstanding under this agreement at September 30, 1997 or 1998. At March 31,
1999, $1,400 (unaudited) was outstanding under this agreement. This agreement
is fully collateralized through the Company's current accounts receivable.
Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Loans from bank.............................. $ 1,687 $ 1,719 $2,643
Mortgage loans............................... 289 281 281
Note payable................................. 125 62 --
Note payable to bank......................... 250 -- --
Loan from shareholders....................... -- -- 895
------- ------- ------
2,351 2,062 3,819
Less current portion......................... (1,201) (1,063) (1,380)
------- ------- ------
Total...................................... $ 1,150 $ 999 $2,439
======= ======= ======
</TABLE>
The loans from bank bear interest at variable and fixed rates ranging from
8.18 percent to 8.9 percent. The loans allow for borrowing to a specified limit
until a point in time. At that point in time, the loans are repaid in monthly
installments of principal and interest rates ranging from prime to prime plus 1
percent. The loan agreements include customary representations and restrictive
covenants.
Mortgage loans bear interest at fixed rates ranging from 7.75 percent to
9.25 percent. Principal and interest payments are paid monthly over a 30-year
period. Real property is pledged as collateral for these loans.
In connection with the SMTK acquisition (Note 3), the Company assumed a note
payable maturing on March 1, 1999. The total amount owed at the date of
acquisition was $125.
Assumed in the SMTK acquisition (Note 3), the note payable to the bank is a
$450 revolving credit facility that bears interest at the bank's prime rate
plus 1 percent. The balance is due upon demand. Interest is payable monthly.
The entire balance is collateralized by accounts receivable and equipment of
SMTK.
F-35
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
------------
<S> <C>
1999................................................................ $1,063
2000................................................................ 664
2001................................................................ 206
2002................................................................ 32
2003................................................................ 32
Thereafter.......................................................... 65
------
Total............................................................. $2,062
======
</TABLE>
Interest expense was $209, $264, $268, $146 (unaudited) and $185 (unaudited)
for the fiscal years ended September 30, 1996, 1997 and 1998 and the six months
ended March 31, 1998 and 1999, respectively.
NOTE 8--INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
Fiscal Year Six Months
Ended September Ended March
30, 31,
----------------- ------------
1996 1997 1998 1998 1999
---- ---- ----- ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Deferred tax expense:
Federal................................ $(64) $(71) $ (90) $ (42) $ (45)
State.................................. (10) (10) (13) (6) (7)
---- ---- ----- ----- -----
Total benefit for income taxes....... $(74) $(81) $(103) $ (48) $ (52)
==== ==== ===== ===== =====
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
September 30,
------------- March 31,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Accrual to cash adjustment..................... $2,035 $1,752 $1,648
Accrued bonuses................................ 836 939 991
Depreciation................................... 280 367 367
Net operating loss carryforwards............... 31 21 21
------ ------ ------
Net deferred tax assets.......................... $3,182 $3,079 $3,027
====== ====== ======
Net current deferred tax asset................... $2,035 $1,752 $1,648
Net long-term deferred tax asset................. 1,147 1,327 1,379
------ ------ ------
Net deferred tax asset........................... $3,182 $3,079 $3,027
====== ====== ======
</TABLE>
F-36
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
The Company's effective rate varied from the U.S. statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
Fiscal Year Six Months
Ended Ended March
September 30, 31,
------------------ --------------
1996 1997 1998 1998 1999
---- ---- ---- ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Statutory rate.......................... (35)% (35)% (35)% (35)% (35)%
Non-temporary differences:
State tax............................. (5) (5) (5) (5) (5)
Non-deductible items.................. 8 11 8 9 9
--- --- --- ----- -----
Total provision..................... (32)% (29)% (32)% (31)% (31)%
=== === === ===== =====
</TABLE>
NOTE 9--LEASE COMMITMENTS
The Company leases office space at five locations. The Company's main office
in Bethesda, Maryland is an eleven-year lease expiring on October 31, 2001 with
two five-year options to renew and a four-year sublease agreement expiring July
30, 2000. The Company's Baltimore, Maryland office is leased under a ten-year
lease expiring on October 31, 2007 with two five-year options to renew. The
Company's Charlotte, North Carolina office has exercised their second one-year
option to renew their original ten-year lease, extending the expiration to
September 30, 2000. The Company's Boston, Massachusetts office is a five-year
lease with one five-year option to renew. The Company's Atlanta, Georgia office
is leased under a seven-year lease expiring on November 30, 2004 with one five-
year option to renew. All leases are subject to future periodic adjustments to
reflect the increases in operating expenses incurred by the lessor. The Company
has entered into other lease agreements with unrelated parties with various
base rents and terms in connection with photocopiers utilized at the Company's
five offices.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Fiscal Year:
------------
<S> <C>
1999............................................................... $ 2,935
2000............................................................... 3,111
2001............................................................... 2,641
2002............................................................... 1,223
2003............................................................... 1,114
Thereafter......................................................... 3,020
-------
Total............................................................ $14,044
=======
</TABLE>
Rent expense for all operating leases for the fiscal years ended September
30, 1996, 1997 and 1998 and the six months ended March 31, 1998 and 1999 was
approximately $1,977, $2,363, $2,745, $1,355 (unaudited) and $1,427
(unaudited), respectively.
F-37
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 10--EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit sharing plan (Plan) for substantially all
employees. The amended and restated provisions of the Plan became effective in
July, 1997. The Company makes annual matching contributions to the savings plan
equaling 50 percent of the amount of salary reduction elected by the employee
which does not exceed 5 percent of the employee's annual compensation subject
to 20 percent vesting per year over a 5 year period based upon years of
service. The Company may amend or terminate the Plan at any time; however, no
such indication to terminate the Plan has been made.
Contributions by the Company for eligible employees to the Plan for the
years ended September 30, 1996, 1997 and 1998 and the six months ended March
31, 1998 and 1999 totaled $179, $254, $317, $184 (unaudited) and $288
(unaudited), respectively.
NOTE 11--COMMON STOCK
The Company has authorized capital stock consisting of 10,000 shares of
common stock with no par value. Each shareholder or non-shareholder officer
earns one vote per year at the beginning of each of his first six years as a
shareholder or non-shareholder officer. In no event shall a shareholder or non-
shareholder officer have more than six votes.
NOTE 12--COMMITMENTS AND CONTINGENCIES
Litigation:
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
NOTE 13--SUBSEQUENT EVENTS (UNAUDITED)
In March 1999, the Company and its shareholders entered into a definitive
agreement with Centerprise Advisors, Inc. (Centerprise) pursuant to which,
following the conversion of the Company from a professional corporation to a
business corporation, a wholly-owned subsidiary of Centerprise will merge with
and into the Company. All of the Company's outstanding shares will be exchanged
for cash and common stock of Centerprise concurrently with the consummation of
the initial public offering of the common stock of Centerprise.
In order to comply with standards of the accounting profession and
applicable state regulations governing the profession, Centerprise is requiring
that the Company cease providing attest services prior to the closing of the
acquisition. Following the closing, all attest services formerly provided by
the Company will be provided by a newly created separate legal entity (the
Attest Firm) which will be owned by former owners of the Company who are
certified public accountants. Pursuant to a services agreement, Centerprise
will provide professional and other personnel, equipment, office space and
business and administrative services necessary to operate the Attest Firm.
F-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Robert F. Driver Co., Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Robert F.
Driver Co., Inc. and its subsidiaries at July 31, 1998, and the results of
their operations and their cash flows for the periods from August 1, 1997
through May 31, 1998 (date of acquisition of the predecessor company) and June
1, 1998 through July 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 10, 1999
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Robert F. Driver Co., Inc.:
We have audited the accompanying consolidated balance sheet of Robert F. Driver
Co., Inc. and subsidiaries (the Company) as of July 31, 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the two-year period ended July 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Robert F. Driver
Co., Inc. and subsidiaries as of July 31, 1997 and the results of their
operations and their cash flows for each of the years in the two-year period
ended July 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
San Diego, California
September 10, 1997
F-40
<PAGE>
ROBERT F. DRIVER CO., INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
July 31,
-------------------- April 30,
1997 1998 1999
------------ ------- -----------
(Predecessor (Unaudited)
Company) (Successor Company)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 798 $ 2,356 $ 2,372
Premium trust cash......................... 22,053 22,855 12,028
Insurance premiums receivable.............. 8,689 11,665 11,059
Other current assets....................... 230 1,935 1,386
------- ------- -------
Total current assets..................... 31,770 38,811 26,845
Property and equipment, net.................. 1,214 1,151 1,327
Goodwill, net................................ -- 17,895 28,163
Customer lists acquired, net................. 938 826 742
Deferred income taxes........................ 433 889 103
Other assets................................. 92 800 606
------- ------- -------
Total assets............................. $34,447 $60,372 $57,786
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................ $ -- $ 253 $ 4,280
Current portion of long-term debt.......... 219 1,267 2,001
Accounts payable and accrued expenses...... 4,903 6,005 4,667
Insurance premiums payable................. 23,670 26,250 19,620
Income taxes payable....................... 256 616 --
------- ------- -------
Total current liabilities................ 29,048 34,391 30,568
Long-term debt, net of current portion....... 356 14,263 15,957
Deferred compensation........................ 590 1,331 26
------- ------- -------
Total liabilities........................ 29,994 49,985 46,551
------- ------- -------
Class A redeemable preferred stock, $.01 par
value: authorized, issued and outstanding
4,000 shares at July 31, 1998 and 1,046,082
(unaudited) at April 30, 1999; redeemable at
$1,000 per share............................ -- 4,000 4,000
------- ------- -------
Commitments and contingencies
Common stockholders' equity:
Class A common stock, $.01 par value:
authorized 10,000,000 shares; outstanding
738,540 shares at July 31, 1998 and
1,046,082 shares (unaudited) at April 30,
1999, respectively........................ -- 7 10
Common stock, $1 par value: authorized
1,650,000 shares; issued and outstanding
1,031,568 shares at July 31, 1997......... 1,032 -- --
Additional paid-in capital................. 418 6,711 10,058
Retained earnings (deficit)................ 3,368 509 (773)
Unearned compensation...................... -- -- (1,220)
Unearned ESOP contribution................. (365) -- --
------- ------- -------
4,453 7,227 8,075
Stockholder notes receivable............... -- (840) (840)
------- ------- -------
Total stockholders' equity............... 4,453 6,387 7,235
------- ------- -------
Total liabilities and stockholders' equi-
ty...................................... $34,447 $60,372 $57,786
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-41
<PAGE>
ROBERT F. DRIVER CO., INC.
CONSOLIDATED STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Nine Months Ended April
Ended July 31, Period From 30,
---------------- ---------------------------- -----------------------
August 1, 1997 June 1, 1998
Through Through
1996 1997 May 31, 1998 July 31, 1998 1998 1999
------- ------- -------------- ------------- ------------ ----------
(Unaudited)
(Predecessor Company) (Successor (Predecessor (Successor
Company) Company) Company)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions and fees.. $26,939 $28,170 $24,446 $8,440 $21,477 $26,050
------- ------- ------- ------ ------- -------
Expenses:
Producer
compensation......... 13,074 12,965 11,630 3,792 10,259 10,559
Employee compensation
and related costs.... 7,261 7,433 6,760 1,715 6,092 9,895
Occupancy costs....... 1,453 1,378 1,144 230 1,005 1,340
Office operating
expenses............. 716 759 650 230 538 751
Depreciation and
amortization......... 329 463 656 337 491 1,583
Other selling, general
and administrative
expenses............. 3,716 3,948 2,162 1,222 2,126 2,746
------- ------- ------- ------ ------- -------
26,549 26,946 23,002 7,526 20,511 26,874
------- ------- ------- ------ ------- -------
Operating income
(loss)............. 390 1,224 1,444 914 966 (824)
------- ------- ------- ------ ------- -------
Other (income) expense:
Interest expense...... 70 42 36 220 31 1,253
Interest income....... (580) (654) (599) (193) (544) (635)
Other................. (109) (213) (161) (6) (11) (233)
------- ------- ------- ------ ------- -------
(619) (825) (724) 21 (524) 385
------- ------- ------- ------ ------- -------
Income (loss) before
provision for income
taxes.................. 1,009 2,049 2,168 893 1,490 (1,209)
Provision (benefit) for
income taxes........... 354 933 970 384 637 (180)
------- ------- ------- ------ ------- -------
Net income (loss)....... $ 655 $ 1,116 $ 1,198 $ 509 $ 853 $(1,029)
======= ======= ======= ====== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-42
<PAGE>
ROBERT F. DRIVER CO., INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Class A Total
Common Stock Common Stock Additional Retained Stockholder Unearned Stockholders'
---------------- ------------------- Paid-In Earnings Unearned Notes ESOP -------------
Shares Amount Shares Amount Capital (Deficit) Compensation Receivable Contributions Equity
--------- ------ ---------- ------- ---------- -------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July
31, 1995........ -- $ -- 1,018,697 $ 1,019 $ 10 $ 1,750 $ -- $ -- $ (389) $ 2,390
Net income...... -- -- -- -- -- 655 -- -- -- 655
Stock
repurchased and
retired........ -- -- (25) -- (1) -- -- -- -- (1)
Advances and
unearned
contributions
to ESOP........ -- -- -- -- -- -- -- -- (1,340) (1,340)
Allocation of
contributions
to ESOP........ -- -- -- -- -- -- -- -- 900 900
Repayment by
ESOP of
unearned
compensation... -- -- -- -- -- -- -- -- 64 64
--------- ----- ---------- ------- ------- ------- ------- ------- ------ -------
Balance at July
31, 1996........ -- -- 1,018,672 1,019 9 2,405 -- -- (765) 2,668
Net income...... -- -- -- -- -- 1,116 -- -- -- 1,116
Stock issued.... -- -- 21,081 21 418 -- -- -- -- 439
Stock
repurchased and
retired........ -- -- (8,185) (8) (9) (153) -- -- -- (170)
Advances and
unearned
contributions
to ESOP........ -- -- -- -- -- -- -- -- (400) (400)
Allocation of
contributions
to ESOP........ -- -- -- -- -- -- -- -- 800 800
--------- ----- ---------- ------- ------- ------- ------- ------- ------ -------
Balance at July
31, 1997........ -- -- 1,031,568 1,032 418 3,368 -- -- (365) 4,453
Net income...... -- -- -- -- -- 1,198 -- -- -- 1,198
Stock issued.... -- -- 500 1 10 -- -- -- -- 11
Stock
repurchased and
retired........ -- -- (4,699) (6) (128) -- -- -- -- (134)
Advances to
ESOP........... -- -- -- -- -- -- -- -- (542) (542)
Repayment of
advances to
ESOP........... -- -- -- -- -- -- -- -- 907 907
Adjustment of
Predecessor
Company balance
due to
leveraged
buyout......... -- -- (1,027,369) (1,027) (300) (4,566) -- -- -- (5,893)
Capitalization
of
Successor
Company........ 444,301 4 -- -- 3,772 -- -- -- -- 3,776
Issuance of
Class A
Common Stock... 294,239 3 -- -- 2,939 -- -- (1,183) -- 1,759
--------- ----- ---------- ------- ------- ------- ------- ------- ------ -------
Balance at May
31, 1998........ 738,540 7 -- -- 6,711 -- -- (1,183) -- 5,535
Net income...... -- -- -- -- -- 509 -- -- -- 509
Payments on
stockholder
notes
receivable..... -- -- -- -- -- -- -- 343 -- 343
--------- ----- ---------- ------- ------- ------- ------- ------- ------ -------
Balance at July
31, 1998........ 738,540 7 -- -- 6,711 509 -- (840) -- 6,387
Unaudited data:
Net income
(loss)......... -- -- -- -- -- (1,029) -- -- -- (1,029)
Issuance of
Class A
Common Stock... 307,542 3 -- -- 3,072 -- (1,220) -- -- 1,855
Issuance of
warrants....... -- -- -- -- 275 -- -- -- -- 275
Dividends....... -- -- -- -- -- (253) -- -- -- (253)
--------- ----- ---------- ------- ------- ------- ------- ------- ------ -------
Balance at April
30, 1999
(unaudited)..... 1,046,082 $ 10 -- $ -- $10,058 $ (773) $(1,220) $ (840) $ -- $ 7,235
========= ===== ========== ======= ======= ======= ======= ======= ====== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-43
<PAGE>
ROBERT F. DRIVER CO., INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Period From
----------------------------
Fiscal Year Nine Months
Ended July 31, August 1, 1997 June 1, 1998 Ended April 30,
--------------- Through Through -----------------------
1996 1997 May 31, 1998 July 31, 1998 1998 1999
------- ------ -------------- ------------- ------------ ----------
(Unaudited)
(Predecessor Company) (Successor (Predecessor (Successor
Company) Company) Company)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income (loss)...... $ 655 $1,116 $ 1,198 $ 509 $ 853 $(1,029)
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Stock based
compensation........ -- -- -- -- -- 804
Depreciation and
amortization........ 329 463 656 337 491 1,583
Change in deferred
income taxes........ 46 (342) (217) (239) (234) 762
Changes in operating
assets and
liabilities:
Premium trust
cash.............. 332 (4,788) 7,348 (8,150) 11,378 10,827
Insurance premiums
receivable........ 352 801 (3,636) 659 (6,271) 606
Other assets....... (173) 301 (579) (157) 149 (134)
Accounts payable
and accrued
expenses.......... 567 17 (870) 1,972 (792) (1,338)
Insurance premiums
payable........... (1,658) 2,129 (2,797) 5,377 (2,973) (6,630)
Income taxes
payable........... 65 139 249 111 (261) (1,768)
Deferred
compensation...... -- 590 500 241 425 (1,305)
------- ------ -------- ------- ------- -------
Net cash provided
by operating
activities....... 515 426 1,852 660 2,765 2,378
------- ------ -------- ------- ------- -------
Cash flows from
investing activities:
Purchase of predecessor
company............... -- -- (17,064) -- -- --
Investment in deferred
compensation sinking
fund.................. -- -- -- -- (1,030) --
Puchase business
combinations.......... -- -- -- -- -- (10,758)
Purchases of equipment
and leasehold
improvements.......... (382) (351) (479) (51) (370) (739)
Collections on notes
receivable............ 55 49 -- -- -- --
Purchase of customer
lists................. -- (193) -- -- (190) --
Cash received in
acquisition of Cal-
Central............... -- 4 -- -- -- --
------- ------ -------- ------- ------- -------
Net cash used in
investing
activities....... (327) (491) (17,543) (51) (1,590) (11,497)
------- ------ -------- ------- ------- -------
Cash flows from
financing activities:
Proceeds from debt
issuance.............. -- -- 16,178 -- -- 7,107
Proceeds from revolving
line of credit........ 500 -- 253 -- -- 1,725
Principal payments on
debt.................. (669) (294) (1,027) (202) (108) (2,377)
Repurchase of common
stock................. (1) (170) -- -- (124) --
Proceeds from issuance
of common stock
warrants.............. -- -- 730 -- -- 275
Proceeds from issuance
of common stock....... -- -- -- -- -- 819
Payments received on
stockholder notes..... -- -- -- 343 -- 1,764
Dividends paid......... -- -- -- -- -- (178)
Contributions
(advances) to ESOP.... (440) 400 (542) -- (535) --
Repayment received from
ESOP.................. 64 -- 907 -- -- --
------- ------ -------- ------- ------- -------
Net cash (used in)
provided by
financing
activities....... (546) (64) 16,499 141 (767) 9,135
------- ------ -------- ------- ------- -------
Net (decrease) increase
in cash and cash
equivalents............ (358) (129) 808 750 408 16
Cash and cash
equivalents at
beginning of period.... 1,285 927 798 1,606 798 2,356
------- ------ -------- ------- ------- -------
Cash and cash
equivalents at end of
period................. $ 927 $ 798 $ 1,606 $ 2,356 $ 1,206 $ 2,372
======= ====== ======== ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-44
<PAGE>
ROBERT F. DRIVER CO., INC.
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
(In Thousands)
<TABLE>
<CAPTION>
Period From
----------------------------
Fiscal Year
Ended Nine Months
July 31, August 1, 1997 June 1, 1998 Ended April 30,
------------ Through Through ----------------------- ---
1996 1997 May 31, 1998 July 31, 1998 1998 1999
---- ------- -------------- ------------- ------------ ----------
(Predecessor Company) (Successor (Unaudited)
Company)
(Predecessor (Successor
Company) Company)
<S> <C> <C> <C> <C> <C> <C> <C>
Supplementary
disclosures of cash
flow information:
Cash payments for:
Interest........... $ 66 $ 42 $ 220 $ 36 $ 31 $ 1,150
Income taxes....... $244 $ 1,135 $ 512 $ 938 $545 $ 929
Supplementary
disclosure of noncash
investing activities:
The Company's
business
acquisitions
involved the
following:
Fair value of
assets acquired
other than cash
and cash
equivalents....... $-- $ 1,166 $ 30,230 $ -- $-- $11,463
Liabilities
assumed........... -- (1,184) (26,957) -- -- (2,349)
---- ------- -------- ----- ---- -------
Net assets
(liabilities)
assumed, other
than cash and
cash
equivalents..... $-- $ (18) $ 3,273 $ -- $-- $ 9,114
==== ======= ======== ===== ==== =======
Supplementary
disclosure of noncash
financing activities:
Issuance of common
stock for
acquisitions........ $-- $ 439 $ 3,776 $ -- $-- $ --
Debt assumed in
acquisitions........ $-- $ 219 $ 455 $ -- $-- $ 182
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-45
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Share and Per Share)
NOTE 1--BACKGROUND AND BUSINESS DESCRIPTION
Robert F. Driver Co., Inc. and subsidiaries (the Company) operates general
insurance agencies in California and Texas with minimal activity in Nevada. The
Company has three wholly-owned subsidiaries, FHI Benefit Plans, Inc., Robert F.
Driver of Nevada, Inc. and Cal-Central Insurance and Management Services, Inc.
(Cal-Central).
NOTE 2--BASIS OF PRESENTATION
Effective May 31, 1998, Robert F. Driver Co., Inc. (Driver or the
Predecessor Company) was acquired by RFDC Acquisition Corporation (RFDC) (the
Transaction), a holding company formed by certain members of management for the
purpose of completing the Transaction. RFDC purchased all of the outstanding
shares of Driver, merged with Driver and then canceled all of Driver's shares.
RFDC then changed its name to Robert F. Driver Co., Inc. This merged entity is
hereinafter referred to as the Company. The Transaction was accounted for under
the purchase method of accounting for financial reporting purposes, and the
purchase price of approximately $25.2 million has been allocated to the
underlying net assets acquired. The Transaction has resulted in the Company
having substantial goodwill and debt.
As a result of the Transaction, the financial position and results of
operations of the Company subsequent to the Transaction are not necessarily
comparable to the financial position and results of operations of the Company
prior to the Transaction. In the accompanying consolidated financial
statements, the Company's results of operations prior to the Transaction are
indicated as relating to the "Predecessor Company" while the financial position
and results of operations subsequent to the Transaction are indicated as
relating to the "Successor Company." Amounts reported for financial reporting
purposes in fiscal 1998 represent the activity of the Successor Company
beginning June 1, 1998.
In connection with accounting for the Transaction, the Company applied the
provisions of Emerging Issues Task Force Issue 88-16, "Basis in Leveraged
Buyout Transactions" (EITF 88-16), whereby the carryover equity interests of
certain stockholders from the Predecessor Company to the Successor Company were
recorded at their predecessor basis. The remaining interests were recorded at
the fair value of the Predecessor Company.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Revenue Recognition:
The Company recognizes commission income principally on the later of the
effective date of the policy or the billing date. Commissions on premiums
billed and collected directly by the insurance company are principally
recognized as income when received by the Company. Contingent commissions are
recorded when received. Service fee income is recognized as earned, which is
ordinarily over the period in which the services are provided.
F-46
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased, such as money
market accounts, with an original maturity of three months or less to be cash
equivalents.
Premium Trust Cash:
Premiums collected but not yet remitted to insurance companies are
restricted as to use by law. The Company maintains segregated fiduciary funds
in accordance with the requirements of the California Insurance Commissioner.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation.
Depreciation of property and equipment is computed on the straight-line method
over estimated useful asset lives generally ranging from 5 to 7 years.
Expenditures for maintenance and repairs and minor renewals and betterments
which do not improve or extend the life of the respective assets are expensed.
All other expenditures for renewals and betterments are capitalized. The assets
and related depreciation accounts are adjusted for retirements and disposals
using the specific identification method, with the resulting gain or loss
included in operations.
Intangible Assets:
Goodwill related to the Transaction is being amortized over forty years on a
straight-line basis. Customer lists are amortized on a straight-line basis over
the ten-year estimated useful life of the asset. Deferred organization costs
are being amortized over fourteen months on a straight-line basis, and deferred
finance costs are being amortized over the life of each loan. The realizability
of intangibles is evaluated periodically as events or circumstances indicate a
possibility to recover their carrying amount.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. If an impairment is recognized, the
carrying value of the impaired asset is reduced to its fair value. No
impairment has been recognized through April 30, 1999.
Income Taxes:
The Company files its federal income tax return and a California franchise
tax return on a consolidated basis.
Income taxes have been computed using the asset and liability approach.
Under this approach, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and the tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that are currently in effect.
Concentrations of Credit Risk:
During 1998, a substantial portion of the Company's commissions and fees
were received from insureds in the state of California. Accordingly, the
occurrence of adverse economic conditions or an adverse
F-47
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
regulatory climate in California could have a material adverse effect on the
Company. However, the Company believes, based on its diversified customer base
and product lines, that there is minimal risk of a material adverse occurrence
due to the concentration of operations in California.
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash investments.
The Company maintains cash and cash equivalents with various major financial
institutions. The Company performs periodic evaluations of the relative credit
standings of these financial institutions. The Company limits the amount of
risk by selecting financial institutions with a strong relative credit
standing.
Fair Value of Financial Instruments:
The carrying amount of the Company's financial instruments including cash
and cash equivalents, premium trust cash, insurance premiums receivable,
accounts payable, insurance premiums payable, accrued expenses, debt and
deferred compensation approximate their fair value as these items are either
liquid, short-term in nature or their current rates approximate market rates.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
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. While management believes that the estimates and related
assumptions used in the preparation of the financial statements are
appropriate, actual results could differ from those estimates. Estimates are
made when accounting for the allowances for doubtful accounts and deprecation.
New Accounting Standards:
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income." The
Company plans to adopt this Statement in fiscal year 1999. The Company believes
that this Statement will not require any significant information beyond that
already provided in the Company's consolidated financial statements.
Reclassifications:
Certain reclassifications have been made to 1996 and 1997 financial
statements to conform to current year presentation. The reclassifications have
no impact on previously reported net income or stockholders' equity.
Unaudited Interim Financial Statements:
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at April 30, 1999 and the
results of its operations and its cash flows for the nine months ended April
30, 1998 and 1999, as presented in the accompanying unaudited interim financial
statements.
F-48
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
NOTE 4--BUSINESS COMBINATIONS
On July 31, 1997 at the close of business, the Company acquired all of the
outstanding shares of common stock of Cal-Central in exchange for 21,081 shares
of the Company's common stock. Cal-Central is a general insurance agency in
Fresno, California.
The acquisition was accounted for as a purchase. The purchase price has been
allocated to tangible and intangible assets acquired and liabilities assumed
based on the fair market values on the date of the acquisition. The allocation
of purchase price is summarized as follows:
<TABLE>
<S> <C>
Cash............................................................... $ 4
Premium trust cash................................................. 903
Insurance premiums receivable...................................... 215
Equipment.......................................................... 48
Notes payable...................................................... (48)
Insurance premiums payable......................................... (1,084)
Accounts payable and accrued expenses.............................. (52)
Customer list...................................................... 453
------
Cash value of shares issued...................................... $ 439
======
</TABLE>
F-49
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
NOTE 5--SELECTED FINANCIAL STATEMENT INFORMATION
<TABLE>
<CAPTION>
July 31,
-----------------------
April 30,
1997 1998 1999
------------ ---------- -----------
(Unaudited)
(Predecessor (Successor (Successor
Company) Company) Company)
<S> <C> <C> <C>
Other current assets:
Current portion of employee
receivable........................ $ 41 $ 18 $ 4
Stockholder notes receivable....... -- 1,759 27
Prepaid expenses and other......... 189 158 203
Income taxes receivable............ -- -- 1,152
------- ------- -------
$ 230 $ 1,935 $ 1,386
======= ======= =======
Property and equipment, net:
Furniture and fixtures............. $ 1,418 $ 184 $ 768
Computer equipment................. 2,290 1,062 1,765
Leasehold improvements............. 588 50 101
------- ------- -------
4,296 1,296 2,634
Less accumulated depreciation and
amortization...................... (3,082) (145) (1,307)
------- ------- -------
$ 1,214 $ 1,151 $ 1,327
======= ======= =======
Intangible assets, net:
Goodwill........................... $ -- $17,969 $28,526
Customer lists..................... 1,121 1,121 1,121
------- ------- -------
1,121 19,090 29,647
Less accumulated amortization........ (183) (369) (867)
------- ------- -------
$ 938 $18,721 $28,780
======= ======= =======
Other assets:
Cash surrender value of life
insurance......................... $ 12 $ 13 $ 30
Employee receivable, net of current
portion........................... 52 6 113
Deferred financing costs........... -- 329 285
Other.............................. 28 452 178
------- ------- -------
$ 92 $ 800 $ 606
======= ======= =======
Accounts payable and accrued
expenses:
Producers' commissions............. $ 3,148 $ 4,080 $ 2,073
Accrued personnel costs, vacation
and bonuses....................... 700 953 1,305
Other.............................. 1,055 972 1,289
------- ------- -------
$ 4,903 $ 6,005 $ 4,667
======= ======= =======
</TABLE>
F-50
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
NOTE 6--CREDIT FACILITIES
Short-Term Debt:
The Company currently has a revolving credit agreement with a bank that
provides a line of credit up to $2,000 at the prime rate plus .25 percent (8.75
percent at July 31, 1998). Under this agreement, $253 was outstanding at July
31, 1998.
In 1996 and 1997, the Company had a revolving credit agreement with a bank
which provides a line of credit up to $2,000 through February 23, 1998 at the
prime rate plus .25 percent. Under this agreement, no borrowings were
outstanding at July 31, 1997. There were no borrowings under this agreement
during the year ended July 31, 1997.
Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 31,
----------------------- April 30,
1997 1998 1999
------------ ---------- -----------
(Unaudited)
(Predecessor (Successor (Successor
Company) Company) Company)
<S> <C> <C> <C>
$12,000 note payable, secured by the
Company's assets. Payable in varying
monthly amounts at prime plus .25%
(effective rate of 8.75% at July 31,
1998), with a balloon payment of $4,470
due on May 15, 2003...................... $ -- $11,840 $11,120
$4,000 unsecured senior subordinated debt.
Interest payable quarterly at rate of
12%. Principal due May 28, 2005.......... -- 3,295 3,251
$510 note payable, secured by various
assets. Principal and interest of $11
payable monthly at prime plus .25%
(effective rate of 8.75% at July 31,
1998), maturing July 26, 1999............ 227 120 25
$219 unsecured note payable, principal and
interest of $16 payable quarterly at a
rate of 8% through April 30, 2001........ 207 158 132
$191 unsecured note payable, principal and
interest payable monthly at a rate of 9%
through August 15, 1999.................. -- 41 14
$260 unsecured note payable, principal of
$10 and interest payable quarterly at an
imputed rate of 6% through July 1, 1999.. 75 39 10
$59 unsecured note payable to related
party, principal and interest of $1
payable monthly at a rate of 12% through
April 13, 2001........................... 48 37 28
$80 unsecured note payable to related
party, principal of $20 and interest
payable annually at an imputed rate of 8%
through February 1, 1998................. 18 -- --
$1,394 note payable, secured by the
Company's assets to related party.
principal and interest payable annually
at a rate of 7% through
March 31, 2004........................... -- -- 1,394
$142 unsecured note payable to related
party, principal and interest of 7% due
1/1/2000................................. -- -- 142
$2,075 unsecured, non-interest bearing
note payable to related party, payable
annually with an imputed interest rate of
8% or $317 through December 31, 2001..... -- -- 1,757
$128 unsecured, non-interest bearing note
payable to related party, payable
annually through December 24, 2000....... -- -- 85
----- ------- -------
575 15,530 17,958
Less current portion of long-term debt.... (219) (1,267) (2,001)
----- ------- -------
Long-term debt, net of current portion.... $ 356 $14,263 $15,957
===== ======= =======
</TABLE>
F-51
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
Maturities of long-term debt as of July 31, 1998, are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
------------
<S> <C>
1999.............................................................. $ 1,267
2000.............................................................. 1,475
2001.............................................................. 1,873
2002.............................................................. 1,800
2003.............................................................. 5,820
Thereafter........................................................ 3,295
-------
Total maturities of long-term debt.............................. $15,530
=======
</TABLE>
The $12,000 note payable and the $4,000 unsecured senior subordinated debt
requires the Company to maintain certain minimum net worth and debt service
coverage ratios. The Company was in compliance with these requirements at July
31, 1998 and April 30, 1999 (unaudited).
Note 7--INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended July 31, Period From Ended April 30,
--------------- ---------------------------- -----------------------
August 1, 1997 June 1, 1998
Through Through
1996 1997 May 31, 1998 July 31, 1998 1998 1999
--------------- -------------- ------------- ------------ ----------
(Unaudited)
(Predecessor Company) (Successor (Predecessor (Successor
Company) Company) Company)
<S> <C> <C> <C> <C> <C> <C>
Income taxes, currently
payable:
Federal............... $ 231 $ 991 $ 923 $ 495 $ 678 $(776)
State................. 78 283 264 128 194 (190)
------ -------- ------ ----- ----- -----
309 1,274 1,187 623 872 (966)
------ -------- ------ ----- ----- -----
Deferred:
Federal............... 31 (282) (172) (199) (194) 646
State................. 14 (59) (45) (40) (41) 140
------ -------- ------ ----- ----- -----
45 (341) (217) (239) (235) 786
------ -------- ------ ----- ----- -----
$ 354 $ 933 $ 970 $ 384 $ 637 $(180)
====== ======== ====== ===== ===== =====
</TABLE>
F-52
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
July 31,
---------------------- April 30,
1997 1998 1999
------------ --------- -------------
(Predecessor (Unaudited)
Company) (Successor Company)
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation................. $ 259 $ 530 $ --
State taxes........................... 94 134 --
Errors and omissions liability........ 113 120 129
Compensated absences and bonuses,
principally due to accrual for
financial reporting purposes......... 100 130 132
Amortization of agency acquisitions... 12 41 40
Allowance for bad debt................ -- 10 7
Deferred financing and organization
costs................................ -- -- 135
----- --------- ---------
Total deferred tax assets........... 578 965 443
----- --------- ---------
Deferred tax liabilities:
Equipment and leasehold improvements,
principally due to differences in
depreciation......................... (145) (76) (2)
State taxes........................... -- -- (65)
Stock grants.......................... -- -- (273)
----- --------- ---------
Total deferred tax liabilities...... (145) (76) (340)
----- --------- ---------
Net deferred tax assets................. $ 433 $ 889 $ 103
===== ========= =========
</TABLE>
Based upon the level of taxable income in previous years and projections,
for future taxable income over the period in which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences.
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
Fiscal
Year
Ended Nine Months Ended April
July 31, Period From 30,
---------- ---------------------------- -----------------------
August 1, 1997 June 1, 1998
Through Through
1996 1997 May 31, 1998 July 31, 1998 1998 1999
---- ---- -------------- ------------- ------------ ----------
(Unaudited)
(Successor (Predecessor (Successor
(Predecessor Company) Company) Company) Company)
<S> <C> <C> <C> <C> <C> <C>
Computed expected income
taxes.................. 34% 34% 34% 34% 34% (34)%
State income taxes, net
of federal income tax
benefit................ 7 7 7 6 7 (4)
Other, net.............. (6) 4 3 5 2 4
Nondeductible
amortization of
goodwill............... -- -- -- -- -- 15
Meals and
entertainment.......... -- -- -- -- -- 2
Officers Life........... -- -- -- -- -- 2
--- --- --- --- --- ---
35% 45% 44% 45% 43% (15)%
=== === === === === ===
</TABLE>
F-53
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
NOTE 8--LEASE COMMITMENTS
The Company leases office space under various operating leases. The
Company's downtown office in the Driver Office Building is leased from a
limited partnership, which is a related party. The lease agreement expires
December 31, 2007, with current monthly rent of approximately $61. Management
expects that, in the normal course of business, leases that expire will be
renewed or replaced by other leases. The Company's rent expense under these
leases was $849 and $781 in 1996 and 1997, $968 for the period from August 1,
1997 to May 31, 1998 and $199 for the period from June 1, 1998 to July 31,
1998, and $870 (unaudited) and $1,027 (unaudited) for the nine months ended
April 30, 1998 and 1999, respectively.
Future minimum rental payments at July 31, 1998, under agreements classified
as operating leases with noncancelable terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
Fiscal Year:
------------
<S> <C>
1999................................................................ $1,213
2000................................................................ 1,081
2001................................................................ 1,086
2002................................................................ 992
2003................................................................ 962
Thereafter.......................................................... 3,550
------
$8,884
======
</TABLE>
NOTE 9--EMPLOYEE BENEFIT PLANS
Savings Plan:
The Company has established a defined contribution plan, the Savings and
Retirement Program of Robert F. Driver Company, Inc. 401(k), which covers all
full-time employees of the Company who have at least one year of service and
are age 21 or over. There are no matching employer contributions.
Deferred Compensation Plan:
Effective August 1, 1996, the Company adopted a deferred compensation plan
for certain key employees of the Company. Under the Plan, the Company makes a
mandatory contribution in an amount equal to a specific percentage of the gross
monthly commission of the participant, as defined in the Plan document. In
addition, the participant may elect to defer a minimum of 1 percent up to a
maximum of 5 percent of their plan commission. The deferred compensation earns
a rate of return based on a crediting rate set by the deferred compensation
plan committee immediately following the end of each fiscal year. A participant
shall be fully vested in contributions upon termination of employment other
than a termination for cause, as defined in the Plan document. Under the Plan,
benefits are paid upon the earlier of a participant's termination of employment
or the complete termination of the Plan by the Company. A participant with
vested amounts valued at $50 or less shall receive a lump-sum payment. A
participant with vested amounts valued at more than $50 shall receive
installment payments over a maximum period of three years. As of July 31, 1998,
the Company had accrued $1,331 for its obligations under the Plan. The
Company's expense was $590 for the year ended July 31, 1997 and $241 for the
period from June 1, 1998 through July 31, 1998.
F-54
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
Employee Stock Option Plan (ESOP):
In 1996 and 1997, the Company maintained a defined contribution employee
stock ownership plan (ESOP) covering substantially all employees. The ESOP had
assets principally comprised of shares of the Company's common stock at July
31, 1996 and 1997. The Company made annual contributions to the ESOP in cash or
shares of the Company's common stock in amounts determined by the Company's
Board of Directors. For the years ended July 31, 1996 and 1997, the Company
contributed $900 and $800, respectively, to the ESOP in cash.
In conjunction with the Transaction, the ESOP's participants' accounts were
converted to cash and the ESOP was merged into the Company's 401(k) plan.
Producer Stock Equity Plan and Stock Ownership Plan (Unaudited):
In February 1999, the Company entered into a Producer Stock Equity Plan and
Stock Ownership Plan (the Plan). The Plan provides for three forms of incentive
compensation: stock grants, stock purchase rights and incentive stock options.
All of the shares granted under the Plan are subject to the stock repurchase
option described in Note 10.
Under the stock grants, participants received a one-time grant of Class A
Common Stock determined by the aggregate net commissions earned during the 1998
calendar year. Under this option the Company granted 108,000 shares of its
Class A Common Stock during February 1999.
The stock purchase right provides that certain participants are eligible to
purchase a number of shares determined by the aggregate net commissions earned
during the 1998 calendar year. Under this provision, the Company granted stock
purchase rights at $10.00 per share for 45,000 shares of its Class A Common
Stock during February 1999. These rights were all exercised during February
1999.
The Company has reserved 111,000 shares of the Company's Class A Common
Stock to be issued from 1999 to 2004 under the incentive stock option
provisions of the Plan. No options will be issued under the Plan until
subsequent to December 31, 1999.
NOTE 10--STOCKHOLDERS' EQUITY
Redeemable Preferred Stock:
In 1998, the Company issued 4,000 shares of Class A Preferred Stock to the
Robert F. Driver Family Trust, a related party, as part of the financing of the
Transaction. Dividends are cumulative at 7.5 percent annually through May 1998,
and at 10 percent annually thereafter. Payment of dividends or preferred shares
ranks senior to all other classes of stock. These shares are nonvoting unless
dividends are more than five quarters in arrears. The shares are redeemable at
the option of either the board of directors or the holders upon the death of
Robert F. Driver at $1,000 per share.
Stockholder Notes Receivable:
Stockholder notes receivable represent obligations by certain members of
management in connection with their purchase of Class A Common Stock. Payments
made in August 1998, totaling $1,759, have been classified as an other current
asset on the balance sheet.
F-55
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
Common Stock Warrants:
Senior subordinated debt (see Note 6) issued in connection with the
Transaction has 73,042 detachable warrants. Each warrant is convertible into
one share of Class A Common Stock at an exercise price of $0.01 per share up
through the earlier of May 28, 2008 or the sale of initial public offering of
the Company. The value assigned to these warrants ($730 as of July 31, 1998) is
included in additional paid-in capital.
The Company also issued 13,333 common stock warrants to an outside advisor
as part of the Transaction. The warrants have an exercise price of $2.50 each.
The fair value of the warrants is included in deferred financing costs.
Class B and Class C Common:
On November 12, 1997, the Company authorized 10,000,000 shares of Class B
Common Stock and 5,000,000 shares of Class C Common Stock. Both Class B and
Class C have a par value of $.01 per share, and no shares of either were
outstanding as of July 31, 1998 or April 30, 1999 (unaudited).
Stock Repurchase Option:
Stock granted subsequent to the May 31, 1998 transaction (see Note 2), is
subject to a repurchase option by the Company. The repurchase clause stipulates
that upon termination from employment the Company may repurchase a specified
number of shares at the original fair market grant price. The specified shares
that are not subject to repurchase are the total number of shares held less
than five years multiplied by a fraction of the number of calendar years
completed following May 31, 1998, divided by five years.
Stock Options:
In January 1999, the Company granted and issued to certain key executives
40,000 stock options of its Class A Common Stock with an exercise price of
$10.00 a share. These options were exercised in January 1999, and the shares
issued in connection therewith are subject to the aforementioned stock
repurchase option.
Stock Grants:
In January 1999, the Company issued 95,000 shares of its Class A Common
Stock to certain key executives. These shares were unrestricted, but are
subject to the aforementioned stock repurchase option. Unearned compensation
for the non-vested portion was recorded at the date of these awards based on
the market value of the shares. Unearned compensation shown as a separate
component of stockholders' equity is being amortized to expense over the four
year vesting period. In connection with this grant, the Company loaned certain
key executives an amount to pay their Federal and State income taxes. The note
is payable in five equal annual instalments commencing November 1, 1999 and
bears interest at the lesser of the maximum rate permitted by the State of
California or the prime rate. As of April 30, 1999, these amounts totalling $31
are included in other current assets.
F-56
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
NOTE 11--CONTINGENCIES
The Company is occasionally involved in routine insurance policy-related and
employment practices litigation which has arisen in the ordinary course of its
business. The litigation is covered in whole or in part by insurance. The
conclusions of such matters are not expected to have a material adverse effect
on the Company's consolidated financial statements.
NOTE 12--SUBSEQUENT EVENTS (Unaudited)
During November 1998, the Company acquired all of the assets of Sedgwick of
California and Ochinero/Barlocken for a purchase price of $2,750 and $250,
respectively. During March 1999, the Company acquired all the assets of
Averbeck and Sher Insurance Services for a purchase price of $4,989 and $2,644,
respectively.
Immediately following these acquisitions, the Company issued to certain key
executives of Sedgwick 23,200 shares of Class A Common Stock. The shares are
unrestricted, but are subject to the stock repurchase option described in Note
10.
In February 1999, the Company issued 137,441 shares of its Class A Common
Stock in connection with its Producer Stock Equity Program (PSEP). These shares
included 30,106 shares which were unrestricted, but are subject to the stock
repurchase option as described in Note 10. The remaining 107,335 shares were 20
percent vested upon issuance, with the remainder subject to a four year vesting
period. Unearned compensation for the non-vested portion was recorded at the
date of these awards based on the market value of the shares. Unearned
compensation shown as a separate component of stockholders' equity is being
amortized to expense over a four year vesting period.
In February 1999, the Company issued 11,801 shares of its Class A Common
Stock to certain of its key executives for cash consideration. The shares were
unrestricted, but are subject to the stock repurchase option as described in
Note 10.
In March 1999, the Company and its stockholders entered into a definitive
agreement with Centerprise Advisors, Inc. (Centerprise) pursuant to which the
Company will merge with a wholly-owned subsidiary of Centerprise. All of the
Company's outstanding shares of common stock will be exchanged for cash and
common stock of Centerprise concurrently with the consummation of the initial
public offering of the common stock of Centerprise.
F-57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Mann Frankfort Stein & Lipp, P.C.
In our opinion, the accompanying balance sheet and the related statements of
income, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Mann Frankfort Stein & Lipp, P.C.
at December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 17, 1999
F-58
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 288 $ 606 $ 1,604
Fees receivable, less allowance for doubtful
accounts of $1,124, $1,356 and $1,596 (unaudited),
respectively...................................... 3,475 4,077 6,532
Unbilled fees, at net realizable value............. 628 431 1,186
Due from principals................................ 119 14 18
Prepaid expenses and other current assets.......... 75 81 143
------ ------ -------
Total current assets............................. 4,585 5,209 9,483
Property and equipment, net.......................... 874 1,142 1,174
Other assets......................................... 6 6 6
------ ------ -------
Total assets..................................... $5,465 $6,357 $10,663
====== ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................. $ 160 $ 879 $ 851
Accounts payable................................... 68 23 374
Accrued compensation and related costs............. 133 126 1,292
Income taxes payable............................... 2 27 (4)
Deferred income taxes.............................. 1,420 1,569 2,491
------ ------ -------
Total current liabilities........................ 1,783 2,624 5,004
Long-term debt....................................... 794 473 799
Deferred income taxes................................ 71 85 95
------ ------ -------
Total liabilities................................ 2,648 3,182 5,898
------ ------ -------
Commitments and contingencies
Shareholders' equity:
Common stock, $1 par value; 1,000,000 shares
authorized, 1,573, 1,573 and 1,574 (unaudited)
common shares issued and outstanding,
respectively...................................... 2 2 2
Additional paid-in-capital......................... 58 58 61
Retained earnings.................................. 2,757 3,115 4,702
------ ------ -------
Total shareholders' equity....................... 2,817 3,175 4,765
------ ------ -------
Total liabilities and shareholders' equity....... $5,465 $6,357 $10,663
====== ====== =======
</TABLE>
See accompanying Notes to Financial Statements.
F-59
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------------------- ----------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Professional services..... $13,292 $17,475 $21,631 $ 5,889 $ 8,324
------- ------- ------- ------- -------
Expenses:
Member compensation and
related costs............ 4,423 6,636 8,921 1,317 1,572
Employee compensation and
related costs............ 4,896 6,405 8,829 2,269 2,966
Occupancy costs........... 410 527 659 139 198
Office operating
expenses................. 961 1,398 1,670 400 616
Other selling, general and
administrative expenses.. 936 1,071 1,018 472 440
------- ------- ------- ------- -------
11,626 16,037 21,097 4,597 5,792
------- ------- ------- ------- -------
Operating income........ 1,666 1,438 534 1,292 2,532
------- ------- ------- ------- -------
Other (income) expense:
Interest expense.......... 35 32 58 18 21
Interest income........... (48) (31) (69) (3) (6)
Other..................... (26) (2) (26) 9 (2)
------- ------- ------- ------- -------
(39) (1) (37) 24 13
------- ------- ------- ------- -------
Income before provision for
income taxes............... 1,705 1,439 571 1,268 2,519
Provision for income taxes.. 58 557 213 469 932
------- ------- ------- ------- -------
Net income.................. $ 1,647 $ 882 $ 358 $ 799 $ 1,587
======= ======= ======= ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
F-60
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
STATEMENT OF SHAREHOLDERS' EQUITY AND PARTNERS' CAPITAL
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------- Paid-in- Partners' Treasury Retained Shareholders'
Shares Amount Capital Capital Stock Earnings Equity
------ ------ ---------- --------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 1,180 $ 1 $108 $ 972 $(85) $1,221 $2,217
Issuances of common
stock................ -- -- 35 -- -- -- 35
Net income............ -- -- -- 1,573 -- 74 1,647
Draws on Partners'
Capital.............. -- -- -- (1,964) -- -- (1,964)
----- --- ---- ------ ---- ------ ------
Balance at December 31,
1996................... 1,180 1 143 581 (85) 1,295 1,935
Cancellation of
treasury stock....... -- -- (85) -- 85 -- --
Issuances of common
stock for pooling of
interests business
combination.......... 393 1 -- (581) -- 580 --
Net income............ -- -- -- -- -- 882 882
----- --- ---- ------ ---- ------ ------
Balance at December 31,
1997................... 1,573 2 58 -- -- 2,757 2,817
Net income............ -- -- -- -- -- 358 358
----- --- ---- ------ ---- ------ ------
Balance at December 31,
1998................... 1,573 2 58 -- -- 3,115 3,175
----- --- ---- ------ ---- ------ ------
Unaudited data:
Issuances of common
stock................ 1 -- 3 -- -- -- 3
Net income............ -- -- -- -- -- 1,587 1,587
----- --- ---- ------ ---- ------ ------
Balance at March 31,
1999 (unaudited)....... 1,574 $ 2 $ 61 $ -- $-- $4,702 $4,765
===== === ==== ====== ==== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-61
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
----------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ----- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income........................ $ 1,647 $ 882 $ 358 $ 799 $ 1,587
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization... 202 132 266 51 68
Change in deferred income
taxes.......................... (4) 466 163 932 932
Changes in operating assets and
liabilities:
Fees receivable............... (121) (1,197) (602) (1,108) (2,455)
Unbilled fees................. (104) (139) 197 (617) (755)
Prepaid expenses and other
current assets............... (30) 64 99 (85) (66)
Accounts payable.............. 27 (76) (45) 107 351
Accrued compensation and
related costs................ (254) 70 (7) 849 1,166
Other......................... (29) 90 25 1 (31)
------- ------- ----- ------- -------
Net cash provided by
operating activities....... 1,334 292 454 466 797
------- ------- ----- ------- -------
Cash flows from investing
activities:
Purchase of property and
equipment........................ (123) (625) (534) (58) (100)
------- ------- ----- ------- -------
Net cash used in investing
activities................. (123) (625) (534) (58) (100)
------- ------- ----- ------- -------
Cash flows from financing
activities:
Proceeds from issuance of long-
term debt........................ 300 1,200 750 -- 319
Payments of long-term debt........ (466) (680) (352) (263) (21)
Draws on Partners' Capital........ (1,964) -- -- -- --
Proceeds from issuance of common
stock............................ 35 -- -- -- 3
------- ------- ----- ------- -------
Net cash provided by (used
in) financing activities... (2,095) 520 398 (263) 301
------- ------- ----- ------- -------
Net increase (decrease) in cash and
cash equivalents................... (884) 187 318 145 998
Cash and cash equivalents at
beginning of period................ 985 101 288 288 606
------- ------- ----- ------- -------
Cash and cash equivalents at end of
period............................. $ 101 $ 288 $ 606 $ 433 $ 1,604
======= ======= ===== ======= =======
Supplemental disclosures of cash
flow information:
Interest paid..................... $ 35 $ 32 $ 58 $ 18 $ 21
Income taxes paid................. $ 33 $ 13 $ 19 $ -- $ 30
</TABLE>
See accompanying Notes to Financial Statements.
F-62
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
NOTES TO FINANCIAL STATEMENTS
(Dollars In Thousands)
NOTE 1--BACKGROUND AND BUSINESS DESCRIPTION
Mann Frankfort Stein & Lipp, P.C. (the Company) is a full service firm of
professional accountants and business advisors which offers accounting, tax and
consulting services to a variety of clients in the Houston, Texas market.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition:
The Company recognizes revenue as the related services are provided. The
Company bills clients based upon actual hours incurred on client projects at
expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact of any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known. Outstanding fees receivable are evaluated each
period to assess the adequacy of the allowance for doubtful accounts.
Unbilled Fees:
Unbilled fees represent the anticipated net realizable value for hours
incurred by the Company's professional and administrative staff, plus out-of-
pocket expenses, on projects which had not yet been billed to clients as of
period end.
Cash and Cash Equivalents:
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives (shorter
of asset life or lease term for leasehold improvements), generally ranging from
5 to 12 years. Expenditures for maintenance and repairs and minor renewals and
betterments which do not improve or extend the life of the respective assets
are expensed. All other expenditures for renewals and betterments are
capitalized. The assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gain or loss included in
operations.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. If an impairment is recognized the
carrying value of the impaired asset is reduced to its fair value. No
impairment has been recognized through December 31, 1998.
F-63
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, fees receivable, accounts payable, accrued liabilities
and debt approximate fair value.
Income Taxes:
Income taxes have been computed using the asset and liability approach.
Under this approach, deferred income tax assets and liabilities are determined
based on the differences between the financial statement and tax basis of
assets and liabilities using currently enacted tax rates in effect for the
years in which the differences are expected to reverse.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of fees receivable. Receivables
arising from services provided to clients are not collateralized and, as a
result, management continually monitors the financial condition of its clients
to reduce the risk of loss.
Use of Estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. While management believes that the
estimates and related assumptions used in the preparation of the consolidated
financial statements are appropriate, actual results could differ from those
estimates. Estimates are made when accounting for the allowances for doubtful
accounts, depreciation and amortization and income taxes.
Unaudited Interim Financial Statements:
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1999, and
the results of its operations and its cash flows for the three months ended
March 31, 1998 and 1999, as presented in the accompanying unaudited interim
financial statements.
NOTE 3--BUSINESS COMBINATIONS
On January 1, 1997, the Company merged with Schulse Hartwig Richter &
Company, L.L.P. (SHRCO), in a business combination accounted for as a pooling
of interests. Former partners in SHRCO exchanged their partnership interests
for common stock in the Company, and received stock totaling 25 percent of the
outstanding stock immediately following the merger. The results of SHRCO's
operations during the year ended December 31, 1996 have been combined with the
Company's as if the two entities had been combined prior to 1996. The
conversion of partnership interests to common stock has been accounted for in
1997.
The following presents the separate results of the Company (excluding the
results of SHRCO prior to the date on which it was acquired), and the SHRCO
results up to the date on which it was acquired:
<TABLE>
<CAPTION>
Company SHRCO Combined
------- ------ --------
<S> <C> <C> <C>
For the year ended December 31, 1996:
Revenues........................................... $991 $3,371 $13,292
Net income......................................... $ 74 $1,573 $ 1,647
</TABLE>
SHRCO's partner draws have not been reflected as an expense in the Company's
1996 statement of income. Additionally, as a partnership, SHRCO was not subject
to federal level taxation.
F-64
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment, net reflected on the accompanying balance sheet is
comprised as follows:
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Property and equipment, net:
Furniture and fixtures................... $ 877 $ 1,036 $ 1,047
Computer equipment....................... 1,132 1,459 1,548
Leasehold improvements................... 27 75 75
------- ------- -------
2,036 2,570 2,670
Less accumulated depreciation and
amortization............................ (1,162) (1,428) (1,496)
------- ------- -------
$ 874 $ 1,142 $ 1,174
======= ======= =======
</TABLE>
NOTE 5--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for doubtful
accounts:
<TABLE>
<CAPTION>
Three Months
Year Ended December Ended
31, March 31,
--------------------- ------------
1996 1997 1998 1999
----- ------ ------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of period......... $ 581 $ 552 $1,124 $1,356
Additions to costs and expenses........ 489 755 687 330
Write-offs............................. (518) (183) (455) (90)
----- ------ ------ ------
Balance at end of period............... $ 552 $1,124 $1,356 $1,596
===== ====== ====== ======
</TABLE>
NOTE 6--CREDIT FACILITIES
Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
----- ------ -----------
(Unaudited)
<S> <C> <C> <C>
Notes payable, secured by certain assets of
the Company, interest rate 7.25%, maturities
from 1999 through 2004...................... $ 954 $1,352 $1,650
Less current maturities of long-term debt.... (160) (879) (851)
----- ------ ------
Total long-term debt....................... $ 794 $ 473 $ 799
===== ====== ======
</TABLE>
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1999.............................................................. $ 879
2000.............................................................. 136
2001.............................................................. 148
2002.............................................................. 159
2003.............................................................. 30
------
Total maturities of long-term debt.............................. $1,352
======
</TABLE>
F-65
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 7--INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
Three
Months
Year Ended Ended
December 31, March 31,
-------------- -----------
1996 1997 1998 1998 1999
---- ---- ---- ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income taxes currently payable:
Federal...................................... $21 $ 25 $ 50 $ -- $ --
--- ---- ---- ----- -----
Deferred income tax expense:
Federal...................................... 37 532 163 469 932
--- ---- ---- ----- -----
Total provision for income taxes........... $58 $557 $213 $ 469 $ 932
=== ==== ==== ===== =====
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts............... $ 467 $ 512 $ 591
Accrued liabilities........................... 40 34 389
------ ------ ------
Total current deferred tax assets........... 507 546 980
Current deferred tax liabilities:
Accounts receivable and unbilled fees......... 1,903 2,090 3,446
Other......................................... 24 25 25
------ ------ ------
Total current deferred tax liabilities...... 1,927 2,115 3,471
------ ------ ------
Net current deferred tax liabilities........ 1,420 1,569 2,491
Non-current deferred tax liabilities:
Property and equipment........................ 71 85 95
------ ------ ------
Net deferred tax liability...................... $1,491 $1,654 $2,586
====== ====== ======
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended March
December 31, 31,
---------------- ---------------
1996 1997 1998 1998 1999
---- ---- ---- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
U.S. federal statutory rate............ 35% 35% 35% 35% 35%
Partnership income not subject to
corporate-level taxation.............. (34) -- -- -- --
Other.................................. 2 2 2 2 2
--- --- --- ------ ------
Effective income tax rate.............. 3% 37% 37% 37% 37%
=== === === ====== ======
</TABLE>
In 1996, $1,573 of the Company's pretax income was attributable to a
partnership acquired in a pooling-of-interests transaction. No provision was
made for taxes on this income as it was taxable directly to the partners.
F-66
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 8--LEASE COMMITMENTS
The Company leases office facilities under a noncancelable lease
agreement, which expires in 2002. This lease allows the Company, at its option,
to extend the lease term at the end of the lease term, generally at fair market
value. Future minimum lease payments under noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
1999............................................................. $ 603
2000............................................................. 621
2001............................................................. 621
2002............................................................. 103
------
Total minimum lease payments..................................... $1,948
======
</TABLE>
Rent expense for this operating lease for the fiscal years ended December
31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 was
$344, $429, $530, $112 (unaudited) and $164 (unaudited), respectively.
NOTE 9--EMPLOYEE BENEFIT PLAN
401(k) Plan:
The Company sponsors a 401(k) savings plan for the benefit of its
employees. Generally, employees who have attained the age of 21 and have one
year's creditable service may make salary deferrals to the plan, up to 6
percent of their salary on a pre-tax basis and up to 15 percent of their salary
on an after-tax basis. The Company, at its discretion, may make matching
contributions from its earnings. Contributions for each of the three years
ended December 31, 1996, 1997 and 1998 and the three months ended March 31,
1998 and 1999 were $52, $61, $67, $15 (unaudited) and $20 (unaudited),
respectively.
NOTE 10--COMMITMENTS AND CONTINGENCIES
Litigation:
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
NOTE 11--SUBSEQUENT EVENTS (UNAUDITED)
In March 1999, the Company and its stockholders entered into a definitive
agreement with Centerprise Advisors, Inc. (Centerprise) pursuant to which the
Company will convert from a professional corporation to a business corporation
by adopting a plan of conversion and amending its organizational documents (the
"MFSL Company"). Thereafter, a wholly-owned subsidiary of Centerprise will
merge with and into MFSL Company. All of the MFSL Company's outstanding shares
will be exchanged for cash and common stock of Centerprise concurrently with
the consummation of the initial public offering of the common stock of
Centerprise.
In order to comply with standards of the accounting profession and
applicable state regulations governing the profession, Centerprise is requiring
that the Company cease providing attest services prior to the
closing of the acquisition. Following the closing, all attest services formerly
provided by the Company will be provided by a newly created separate legal
entity (the Attest Firm) which will be owned by former owners of the Company
who are certified public accountants. Pursuant to a services agreement,
Centerprise will provide professional and other personnel, equipment, office
space and business and administrative services necessary to operate the Attest
Firm.
F-67
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Follmer, Rudzewicz & Company, P.C.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Follmer, Rudzewicz
and Company, P.C. and its subsidiary at May 31, 1998 and 1999 and the results
of their operations and their cash flows for each of the three years in the
period ended May 31, 1999, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 20, 1999
F-68
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
May 31,
----------------
1998 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 771 $ 823
Funds held in trust for clients............................ 10 13
Fees receivable, less allowance for doubtful accounts of
$693 and $754, respectively............................... 5,553 5,749
Unbilled fees, at net realizable value..................... 2,334 2,657
Prepaid expenses and other current assets.................. 314 668
------- -------
Total current assets..................................... 8,982 9,910
Property and equipment, net.................................. 1,234 1,411
Cash surrender value, life insurance......................... 2,832 3,518
Deferred income taxes........................................ 1,066 1,478
Other assets................................................. 106 72
------- -------
Total assets............................................. $14,220 $16,389
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt............................................ $ 345 $ 1,103
Notes payable to shareholders.............................. 1,693 3,798
Accounts payable and other accrued expenses................ 55 83
Accrued compensation and related costs to shareholders..... 4,080 3,987
Accrued compensation and related costs to employees........ 1,259 1,457
Deferred income taxes...................................... 1,245 1,299
------- -------
Total current liabilities................................ 8,677 11,727
Long-term debt............................................... 371 --
Retirement plan.............................................. 2,978 4,280
------- -------
Total liabilities........................................ 12,026 16,007
------- -------
Commitments and contingencies
Shareholders' equity:
Common stock, $1 par value; 50,000 shares authorized,
10,400 and 7,500 shares issued and outstanding at May 31,
1998 and 1999, respectively............................... 10 8
Additional paid-in-capital................................. 1,210 1,234
Treasury stock, at cost, 250 shares at May 31, 1998 and
1999, respectively........................................ (140) (140)
Retained earnings (deficit)................................ 1,114 (720)
------- -------
Total shareholders' equity............................... 2,194 382
------- -------
Total liabilities and shareholders' equity............... $14,220 $16,389
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-69
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
May 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues:
Professional services............................. $17,954 $19,417 $22,525
------- ------- -------
Expenses:
Shareholder compensation and related costs........ 6,646 7,339 8,797
Employee compensation and related costs........... 7,567 8,225 9,949
Occupancy costs................................... 1,045 990 1,134
Office operating expenses......................... 861 870 977
Depreciation and amortization..................... 394 475 485
Other selling, general and administrative
expenses......................................... 1,742 1,556 2,092
------- ------- -------
18,255 19,455 23,434
------- ------- -------
Operating loss.................................. (301) (38) (909)
------- ------- -------
Other (income) expense:
Interest expense.................................. 79 101 103
Interest income................................... (51) (22) (30)
Other............................................. (156) (192) (80)
------- ------- -------
(128) (113) (7)
------- ------- -------
Income (loss) before provision for income taxes..... (173) 75 (902)
Provision (benefit) for income taxes................ 191 286 (156)
------- ------- -------
Net loss............................................ $ (364) $ (211) $ (746)
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-70
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock Total
------------- Paid-in- --------------- Retained Shareholders'
Shares Amount Capital Shares Amount Earnings Equity
------ ------ ---------- ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31,
1996................... 10 $10 $1,082 2,990 $(1,189) $1,906 $ 1,809
Reissuances of
treasury stock....... -- -- -- (2,900) 959 -- 959
Net loss.............. -- -- -- -- -- (364) (364)
--- --- ------ ------ ------- ------ -------
Balance at May 31,
1997................... 10 10 1,082 90 (230) 1,542 2,404
Issuances of common
stock................ -- -- 141 -- -- -- 141
Purchases of treasury
stock................ -- -- -- 250 (140) -- (140)
Retirement of treasury
stock................ -- -- (13) (90) 230 (217) --
Net loss.............. -- -- -- -- -- (211) (211)
--- --- ------ ------ ------- ------ -------
Balance at May 31,
1998................... 10 10 1,210 250 (140) 1,114 2,194
Purchase and
retirement of common
stock................ (2) (2) -- -- -- (1,088) (1,090)
Shareholder
contribution......... -- -- 24 -- -- -- 24
Net loss.............. -- -- -- -- -- (746) (746)
--- --- ------ ------ ------- ------ -------
Balance at May 31,
1999................... 8 $ 8 $1,234 250 $ (140) $ (720) $ 382
=== === ====== ====== ======= ====== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-71
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year
Ended May 31,
-----------------------
1997 1998 1999
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (364) $ (211) $ (746)
Adjustments to reconcile income to net cash provided
by operating activities:
Depreciation and amortization..................... 394 466 485
Change in deferred taxes.......................... (85) (429) (358)
Loss on disposal of property and equipment........ 5 1 8
Changes in operating assets and liabilities:
Funds held in trust............................. 9 (2) (3)
Fees receivable................................. (154) (565) (196)
Unbilled fees................................... (1,059) 728 (323)
Prepaid expenses and other current assets....... (654) 552 (354)
Accounts payable and other accrued expenses..... 25 (87) 28
Accrued compensation and related costs.......... 1,118 (276) (105)
Income taxes payable............................ (256) -- --
Retirement plans................................ 1,015 1,208 1,302
Other........................................... 232 23 34
------- ------ ------
Net cash provided by (used in) operating
activities................................... 226 1,408 (228)
------- ------ ------
Cash flows from investing activities:
Purchase of property and equipment.................. (646) (307) (437)
Proceeds from sale of property and equipment........ 36 24 1
Increase in cash surrender value.................... (612) (644) (686)
------- ------ ------
Net cash used in investing activities......... (1,222) (927) (1,122)
------- ------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............ -- 500 --
Payments of long-term debt.......................... (139) (481) (613)
Proceeds from borrowings on line of credit.......... -- -- 1,000
Proceeds from (payments of) short-term debt, net.... 500 (500) --
Advances (repayments) to shareholders............... 857 377 2,105
Acquisition and retirement of stock................. -- -- (1,090)
Proceeds from issuance of stock..................... -- 141 --
------- ------ ------
Net cash provided by financing activities..... 1,218 37 1,402
------- ------ ------
Net increase in cash and cash equivalents............. 222 518 52
Cash and cash equivalents at beginning of period...... 31 253 771
------- ------ ------
Cash and cash equivalents at end of period............ $ 253 $ 771 $ 823
======= ====== ======
Supplemental disclosures of cash flow information:
Interest paid....................................... $ 75 $ 101 $ 103
Income taxes paid................................... $ 347 $ 841 $ 536
</TABLE>
Noncash transactions:
As of March 31, 1999, Report Systems, Inc. ("RSI") was contributed to the
Company. The book value of property, plant and equipment was transferred to the
Company as additional paid-in capital. The net book value of transferred
equipment was $24 (Note 10).
During 1998, the Company reacquired 250 shares of treasury stock in the
amount of $140 through issuance of a note payable to shareholder. The Company
also retired 90 shares of treasury stock in the amount of $230 in 1998.
During 1997, the Company issued 2,900 shares of treasury stock in the amount
of $959 through retirement of a note payable to shareholder.
See accompanying Notes to Consolidated Financial Statements.
F-72
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands)
NOTE 1--BACKGROUND AND BUSINESS DESCRIPTION
Follmer, Rudzewicz & Company (the Company) is a full service firm of
professional accountants and business advisors to privately held companies and
their owners. The Company was founded in 1968 and primarily operates in
Michigan.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Bridgeco, Inc. All significant intercompany
transactions and accounts are eliminated in consolidation.
Revenue Recognition:
The Company recognizes revenue as the related services are provided. The
Company bills clients based upon actual hours incurred on client projects at
expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact of any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known. Outstanding fees receivable are evaluated each
period to assess the adequacy of the allowance for doubtful accounts.
Unbilled Fees:
Unbilled fees represent the anticipated net realizable value for hours
incurred by the Company's professional and administrative staff, plus out-of-
pocket expenses, on projects which had not yet been billed to clients as of
period end.
Cash and Cash Equivalents:
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Funds Held in Trust for Clients:
Funds held in trust for clients are restricted amounts held for client trust
fund. A corresponding liability is recorded by the Company and is included in
other long-term liabilities.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives (shorter
of asset life or lease term for leasehold improvements), generally ranging from
3 to 10 years. Expenditures for maintenance and repairs and minor renewals and
betterments which do not improve or extend the life of the respective assets
are expensed. All other expenditures for renewals and
F-73
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Per Share)
betterments are capitalized. The assets and related depreciation accounts are
adjusted for property retirements and disposals with the resulting gain or loss
included in operations.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. If an impairment is recognized the
carrying value of the impaired asset is reduced to its fair value. No
impairment has been recognized through May 31, 1999.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, fees receivable, accounts payable, accrued liabilities
and debt approximate fair value.
Income Taxes:
Income taxes have been computed using the asset and liability approach.
Under this approach, deferred income tax assets and liabilities are determined
based on the differences between the financial statement and tax basis of
assets and liabilities using currently enacted tax rates in effect for the
years in which the differences are expected to reverse.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of fees receivable. Receivables
arising from services provided to clients are not collateralized and, as a
result, management continually monitors the financial condition of its clients
to reduce the risk of loss.
The Company's cash balances are concentrated primarily with one financial
institution.
Use of Estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. While management believes that the
estimates and related assumptions used in the preparation of the consolidated
financial statements are appropriate, actual results could differ from those
estimates. Estimates are made when accounting for the allowances for doubtful
accounts, depreciation and amortization and income taxes.
F-74
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment, net reflected on the accompanying balance sheet is
comprised as follows:
<TABLE>
<CAPTION>
May 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Property and equipment, net
Furniture and fixtures................................ $ 729 $ 977
Computer equipment..................................... 1,729 2,104
Automobiles............................................ -- 41
Leasehold improvements................................. 261 270
------- -------
2,719 3,392
Less accumulated depreciation and amortization......... (1,485) (1,981)
------- -------
$ 1,234 $ 1,411
======= =======
</TABLE>
NOTE 4--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for doubtful
accounts:
<TABLE>
<CAPTION>
Fiscal Year
Ended May 31,
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of period........................ $ 598 $ 885 $ 693
Additions to costs and expenses....................... 579 375 693
Less write-offs....................................... (292) (567) (632)
----- ----- -----
Balance at end of period.............................. $ 885 $ 693 $ 754
===== ===== =====
</TABLE>
NOTE 5--CREDIT FACILITIES
Short-Term Debt:
Short-term debt consists of the following:
<TABLE>
<CAPTION>
May 31,
-----------
1998 1999
---- ------
<S> <C> <C>
Line of credit................................................ $-- $1,000
Current maturities of long-term debt.......................... 345 --
Other short term debt......................................... -- $ 103
---- ------
Total short-term debt..................................... $345 $1,103
==== ======
</TABLE>
The Company has available a $1,500 line of credit with Comerica Bank, used
to finance short-term cash flow needs. Interest on the line is payable monthly
at prime rate, and is collateralized by any of the Company's assets in the
bank's possession. There are no significant covenants related to this line.
Other short-term debt consists of a note to a former shareholder that bears
interest at 10%.
F-75
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
May 31,
1998
-------
<S> <C>
Notes payable, secured by certain assets of the Company, interest
rates ranging from 8% to 10%, maturities from August 2000 through
December 2002.................................................... $ 716
Less current maturities of long-term debt......................... (345)
-----
Total long-term debt.......................................... $ 371
=====
</TABLE>
All long-term debt was paid off during fiscal year 1999.
NOTE 6--INCOME TAXES
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
Fiscal Year
Ended
May 31,
------------------
1997 1998 1999
---- ----- -----
<S> <C> <C> <C>
Income taxes currently payable
Federal............................................ $ 90 $ 493 $ (56)
State............................................... 186 222 258
---- ----- -----
276 715 202
Deferred income tax benefit:
Federal............................................. (80) (406) (339)
State............................................... (5) (23) (19)
---- ----- -----
Total provision (benefit) for taxes............... $191 $ 286 $(156)
==== ===== =====
</TABLE>
F-76
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
May 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Current deferred tax liabilities:
Accrual to cash adjustment............................ $(1,245) $(1,299)
------- -------
Long-term deferred tax liabilities:
Property and equipment................................ (36) (105)
Supplemental Executive Retirement Plan................ 1,102 1,583
------- -------
Total long-term deferred tax asset.................. 1,066 1,478
------- -------
Net deferred tax (liability) asset...................... $ (179) $ 179
======= =======
</TABLE>
The Company's income tax expense varied from the amounts resulting from
applying the applicable U.S. federal statutory tax rate to pre-tax income as
follows:
<TABLE>
<CAPTION>
Fiscal Year
Ended May 31,
-----------------
1997 1998 1999
---- ---- -----
<S> <C> <C> <C>
Tax provision (benefit) at U.S. federal statutory
rate................................................ $(61) $ 26 $(317)
Net increase in life insurance cash surrender value.. (15) (14) (95)
Nondeductible expenses............................... 90 83 89
State tax rate....................................... (3) 2 (18)
State permanent differences, net of federal benefit.. 180 189 185
---- ---- -----
Total provision (benefit) for taxes.................. $191 $286 $(156)
==== ==== =====
</TABLE>
NOTE 7--LEASE COMMITMENTS
The Company leases various office facilities and vehicles under
noncancelable lease agreements, which expire at various dates. Certain of these
leases allow the Company, at its option, to extend the lease term and/or
purchase the leased asset at the end of the lease term, generally at fair
market value. Future minimum lease payments under noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
------------
<S> <C>
2000............................................................... $1,073
2001............................................................... 1,090
2002............................................................... 1,065
2003............................................................... 1,091
2004............................................................... 1,117
------
Total minimum lease payments....................................... $5,436
======
</TABLE>
F-77
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Rent expense for all operating leases for the fiscal years ended May 31,
1997, 1998 and 1999 was $1,077, $1,129 and $1,216, respectively.
NOTE 8--EMPLOYEE BENEFIT PLANS
401(k) Plan:
The Company has a contributory defined contribution benefit plan covering
substantially all employees who have completed one year of service and have
attained the age of 21. Company contributions are discretionary and amounted to
$150, $115 and $179 for the fiscal years ended May 31, 1997, 1998 and 1999,
respectively.
Supplemental Executive Retirement Plan:
During November 1995, the Company adopted a Supplemental Executive
Retirement Plan (SERP) to provide benefits to certain shareholders and
employees (the Participants) or their beneficiaries. A Participant becomes
eligible to participate in the SERP on June 1 of the year following the
Participant's second anniversary as an account executive.
If the Participants retire from employment with the Company on or after
attaining age 65, they are entitled to an annual SERP benefit of 66.67% of
their highest three year average compensation for the period following their
eligibility to participate in the SERP. If the Participant retires from the
Company prior to obtaining age 65, the benefit otherwise payable is multiplied
by a scheduled vesting factor corresponding to the Participant's total years of
service. If the Participant retires as a result of a total and permanent
disability or dies before retiring, the Participant's (or their beneficiaries')
supplemental disability benefit is deemed to be 33.33% of the Participant's
highest three year average compensation for the period following their
eligibility to participate in the SERP, multiplied by a scheduled vesting
factor corresponding to the Participant's total years of service. In all cases,
SERP benefits are payable for a period of seven years.
The Company may terminate or freeze benefits under the SERP at any time,
provided it commences payment of the present value of the Participant's vested
benefit at the time of such termination.
Net deferred compensation cost for the Company includes the following
components:
<TABLE>
<CAPTION>
Fiscal Year Ended
May 31,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Service cost......................................... $ 344 $ 384 $ 435
Interest cost........................................ 420 476 519
Amortization of prior service cost................... 348 348 348
------ ------ ------
Net deferred compensation cost....................... $1,112 $1,208 $1,302
====== ====== ======
</TABLE>
F-78
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Assumptions used in the development of pension data follow:
<TABLE>
<CAPTION>
Fiscal Year Ended
May 31,
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Discount rate...................................... 7.0% 7.0% 7.0%
Rates of increase in compensation levels........... 4.0% 4.0% 4.0%
</TABLE>
The Company's SERP is currently unfunded. However, the Company does maintain
life insurance policies on the SERP's participants. The following table
presents the status of the Company's SERP benefits:
<TABLE>
<CAPTION>
May 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Projected benefit obligation:
Active plan participants.............................. $ 7,291 $ 8,246
Retirees.............................................. -- --
------- -------
Funded status........................................... (7,291) (8,246)
Unrecognized prior service cost......................... 4,301 3,954
Unrecognized gain....................................... 12 12
------- -------
Accrued SERP cost....................................... $(2,978) $(4,280)
======= =======
</TABLE>
NOTE 9--CONTINGENCIES
Litigation:
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
NOTE 10--RELATED PARTY TRANSACTIONS
Report Systems, Inc. (RSI) (which is owned by the shareholders of the
Company) provides bookkeeping services to certain clients of the Company.
Through the end of fiscal year 1997, the Company had leased computer equipment
from RSI. Additionally, RSI provides certain bookkeeping services to the
Company. The cost of these services were negotiated on an arms length basis and
amounted to $64, $10 and $5 for the years ended May 31, 1997, 1998 and the ten
months ended March 31, 1999, respectively.
The partners of the Company also own 100% of RSI. During March 1999, the
Company acquired for cash the accounts receivable and work in process at net
realizable value for $99 and $20, respectively. Subsequently, during March
1999, the partners contributed certain equipment, primarily personal computers,
formerly owned by RSI to the Company. As both companies were controlled by the
partners of the Company, this contribution of non-cash assets by the partners
was accounted for at historical cost.
Notes payable to shareholders represent amounts due under the partner bonus
program. Partner bonuses are accrued at fiscal year end and repaid, together
with interest, over the six month period ending December 31.
F-79
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
The notes accrue interest at rates ranging from 8.0% to 8.5%. Interest payments
of $30 and $70 were paid to shareholders in 1998 and 1999, respectively.
There are notes and other receivables from certain shareholders in the
aggregate amount of $10 and $20 at May 31, 1998 and 1999, respectively, which
are included in other assets.
The Company leases its Southfield, Michigan space from Lincoln Development
Corporation, a company which is 50 percent owned by Follmer Rudzewicz
Development. Follmer Rudzewicz Development is a limited partnership which is
owned in part by Anthony P. Frabotta. The lease term began in 1988 and expires
in 2004. The current annual rent is approximately $680, which increases over
the term of the lease. The annual rent for the 2003 to 2004 term is
approximately $736.
NOTE 11--CENTERPRISE TRANSACTION
In March 1999, the Company and its stockholders entered into a definitive
agreement with Centerprise Advisors, Inc. (Centerprise) pursuant to which the
Company stockholders will create FRF Holding LLC and capitalize it with their
stock of the Company. The Company will convert from a professional corporation
to a business corporation. Thereafter, a wholly-owned subsidiary of Centerprise
will merge with and into the Company. All of the Company's outstanding shares
will be exchanged for cash and common stock of Centerprise concurrently with
the consummation of the initial public offering of the common stock of
Centerprise.
In order to comply with standards of the accounting profession and
applicable state regulations governing the profession, Centerprise is requiring
that the Company cease providing attest services prior to the closing of the
acquisition. Following the closing, all attest services formerly provided by
the Company will be provided by a newly created separate legal entity (the
Attest Firm) which will be owned by former owners of the Company who are
certified public accountants. Pursuant to a services agreement, Centerprise
will provide professional and other personnel, equipment, office space and
business and administrative services necessary to operate the Attest Firm.
In connection with the pending merger described above, the shareholders have
tentatively agreed to rescind all shareholders' benefits related to the SERP
Plan described in Note 8.
F-80
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Berry, Dunn, McNeil & Parker, Chartered
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Berry,
Dunn, McNeil & Parker, Chartered at June 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 9, 1999
F-81
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
June 30,
--------------- March 31,
1997 1998 1999
------ ------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $1,167 $ 2,013 $ 36
Fees receivable, less allowance for doubtful
accounts of $814, $924 and $935 (unaudited),
respectively................................... 3,829 4,349 3,964
Unbilled fees, at net realizable value.......... 1,240 1,341 2,943
Prepaid expenses and other current assets....... 353 183 129
------ ------- -------
Total current assets.......................... 6,589 7,886 7,072
Property and equipment, net....................... 1,672 1,763 2,023
Intangible assets, net............................ 708 1,058 1,231
Deferred income taxes............................. 460 423 423
Other assets...................................... 43 15 25
------ ------- -------
Total assets.................................. $9,472 $11,145 $10,774
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................................. $2,268 $ 2,612 $ 1,561
Due to principals............................... 3,721 4,906 5,127
Accounts payable................................ 204 99 817
Accrued employee compensation and related
costs.......................................... 635 785 597
Deferred compensation........................... 380 619 541
Deferred income taxes........................... 690 653 653
Other accrued liabilities....................... 222 208 197
------ ------- -------
Total current liabilities..................... 8,120 9,882 9,493
Deferred compensation............................. 628 542 517
Other long-term liabilities....................... -- 4 56
------ ------- -------
Total liabilities............................. 8,748 10,428 10,066
------ ------- -------
Commitments and contingencies
Shareholders' equity:
Redeemable common stock and contributed capital,
no par value; 10,000 shares authorized, 31, 32
and 31 (unaudited) common shares issued and
outstanding at June 30, 1997 and 1998 and March
31, 1999, (unaudited) respectively............. 1,167 1,222 1,358
Accumulated deficit............................. (216) (216) (216)
Treasury stock, at cost: one share at March 31,
1999 (unaudited)............................... -- -- (204)
Related party advances.......................... (227) (289) (230)
------ ------- -------
Total shareholders' equity.................... 724 717 708
------ ------- -------
Total liabilities and shareholders' equity.... $9,472 $11,145 $10,774
====== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-82
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
CONSOLIDATED STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended June 30, Ended March 31,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Professional services........... $14,844 $16,812 $17,916 $14,201 $14,692
------- ------- ------- ------- -------
Expenses:
Shareholder compensation and
related costs.................. 5,024 6,214 7,113 5,986 5,611
Employee compensation and
related costs.................. 6,037 6,441 6,318 4,712 5,196
Occupancy costs................. 1,188 1,248 1,256 873 982
Office operating expenses....... 1,434 1,690 1,811 1,175 1,225
Other selling, general and
administrative expenses........ 1,105 1,175 1,338 1,323 1,449
------- ------- ------- ------- -------
14,788 16,768 17,836 14,069 14,463
------- ------- ------- ------- -------
Operating income.............. 56 44 80 132 229
------- ------- ------- ------- -------
Other (income) expense:
Interest expense................ 275 291 326 310 239
Interest income................. (215) (254) (261) (185) (203)
Other........................... (4) 7 15 7 193
------- ------- ------- ------- -------
56 44 80 132 229
------- ------- ------- ------- -------
Net income........................ $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-83
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Common Stock Related Total
------------- Accumulated Treasury Party Shareholders'
Shares Amount Deficit Stock Advances Equity
------ ------ ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1995................... 21 $ 857 $(216) -- $(513) $128
Capital contributed by
principals........... 6 166 -- -- -- 166
Net decrease in
related party
advances............. -- -- -- 88 88
--- ------ ----- ----- ----- ----
Balance at June 30,
1996................... 27 1,023 (216) -- (425) 382
Capital contributed by
principals........... 4 144 -- -- -- 144
Net decrease in
related party
advances............. -- -- -- -- 198 198
--- ------ ----- ----- ----- ----
Balance at June 30,
1997................... 31 1,167 (216) -- (227) 724
Capital contributed by
principals........... 2 92 -- -- -- 92
Redemption of capital
contributed by
principals........... (1) (37) -- -- -- (37)
Net increase in
related party
advances............. -- -- -- -- (62) (62)
--- ------ ----- ----- ----- ----
Balance at June 30,
1998................... 32 1,222 (216) (289) 717
Unaudited data:
Capital contributed by
principals........... -- 211 -- -- -- 211
Redemption of capital
contributed by
principals........... (1) (75) -- -- -- (75)
Payment to acquire
treasury stock....... -- -- -- (204) -- (204)
Net decrease in
related party
advances............. -- -- -- -- 59 59
--- ------ ----- ----- ----- ----
Balance at March 31,
1999 (unaudited)....... 31 $1,358 $(216) $(204) $(230) $708
=== ====== ===== ===== ===== ====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-84
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Nine Months
Fiscal Year Ended March
Ended June 30, 31,
------------------------- --------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income........................ $ -- $ -- $ -- $ -- $ --
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization... 599 810 908 606 863
Provision for uncollectible fees
receivable..................... 233 210 278 210 148
Loss on disposal of property and
equipment...................... -- -- -- -- 127
Changes in operating assets and
liabilities:
Fees receivable............... (1,254) (735) (798) (575) 237
Unbilled fees................. (12) (233) (101) (2,020) (1,602)
Prepaid expenses and other
current assets............... (26) (238) (87) 203 54
Due to principals............. 541 1,232 1,185 1,293 221
Accounts payable.............. 115 (26) (105) 27 718
Other accrued liabilities..... 5 154 (15) 49 (11)
Accrued compensation and
related costs................ (181) 121 150 (29) (188)
Other......................... 9 (239) 157 201 (51)
------- ------- ------- ------ ------
Net cash provided by (used
in) operating activities... 29 1,056 1,572 (35) 516
------- ------- ------- ------ ------
Cash flows from investing
activities:
Business acquisitions............. (300) (453) (390) (157) (244)
Purchase of property and
equipment........................ (954) (665) (702) (792) (1,179)
Other............................. (19) (15) 29 11 (10)
------- ------- ------- ------ ------
Net cash used in investing
activities................. (1,273) (1,133) (1,063) (938) (1,433)
------- ------- ------- ------ ------
Cash flows from financing
activities:
Repayments (advances) to related
parties.......................... 88 198 (62) (3) 59
Proceeds from (payments of) short-
term debt, net................... 247 776 344 258 (1,051)
Redemption of capital contributed
by principals.................... -- -- (37) (37) (75)
Capital contributed by
principals....................... 166 144 92 92 211
Payment to acquire treasury
stock............................ -- -- -- -- (204)
------- ------- ------- ------ ------
Net cash provided by (used
in) financing activities... 501 1,118 337 310 (1,060)
------- ------- ------- ------ ------
Net increase (decrease) in cash and
cash equivalents................... (743) 1,041 846 (663) (1,977)
Cash and cash equivalents at
beginning of period................ 869 126 1,167 1,167 2,013
------- ------- ------- ------ ------
Cash and cash equivalents at end of
period............................. $ 126 $ 1,167 $ 2,013 $ 504 $ 36
======= ======= ======= ====== ======
Supplemental disclosures of cash
flow information:
Interest paid..................... $ 275 $ 291 $ 326 $ 310 $ 349
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-85
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands)
NOTE 1--BACKGROUND AND BUSINESS DESCRIPTION
Berry, Dunn, McNeil & Parker, Chartered (the Company) provides professional
accounting, auditing, tax and consulting services primarily in northern New
England.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiary, BDMP Decision Development, LLC. All
significant intercompany transactions and accounts are eliminated in
consolidation.
Revenue Recognition:
The Company recognizes revenue as the related services are provided. The
Company bills clients based upon actual hours incurred on client projects at
expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact of any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known. Outstanding fees receivable are evaluated each
period to assess the adequacy of the allowance for doubtful accounts.
Unbilled Fees:
Unbilled fees represent the anticipated net realizable value of services
provided by the Company's professional and administrative staff, plus out-of-
pocket expenses, on projects which had not yet been billed to clients as of
period end.
Cash and Cash Equivalents:
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives or the
shorter of asset life or lease term for leasehold improvements, generally
ranging from 3 to 10 years. Expenditures for maintenance and repairs and minor
renewals and betterments that do not improve or extend the life of the
respective assets are expensed. All other expenditures for renewals and
betterments are capitalized. The assets and related depreciation (amortization)
accounts are adjusted for property retirements and disposals with the resulting
gain or loss included in operations.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment loss is recognized to the extent
F-86
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
that the sum of undiscounted estimated future cash flows expected to result
from use of the assets is less than the carrying value. If an impairment is
recognized the carrying value of the impaired asset is reduced to its fair
value. No impairment has been recognized by the Company.
Intangible Assets:
Intangible assets consist of goodwill, which represents the excess of cost
over the fair value of assets acquired in business combinations accounted for
under the purchase method. Substantially all goodwill is amortized on a
straight-line basis over an estimated useful life of 40 years.
Investments:
Investments in companies in which the Company has significant ownership and
influence, but not control, are included in the consolidated financial
statements under the equity method of accounting. Other investments in
companies are stated at cost.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, fees receivable, accounts payable and accrued liabilities
approximate fair value.
Income Taxes:
Income taxes have been computed using the asset and liability approach.
Under this approach, deferred income tax assets and liabilities are determined
based on the differences between the financial statement and tax basis of
assets and liabilities using currently enacted tax rates in effect for the
years in which the differences are expected to reverse.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of fees receivable. Receivables
arising from services provided to clients are not collateralized and, as a
result, management continually monitors the financial condition of its clients
to reduce the risk of loss.
Use of Estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. While management believes that the
estimates and related assumptions used in the preparation of the consolidated
financial statements are appropriate, actual results could differ from those
estimates. Estimates are made when accounting for the allowances for doubtful
accounts, unbilled fees, depreciation and amortization and income taxes.
F-87
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Unaudited Interim Financial Statements:
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1999, and
the results of its operations and its cash flows for the nine months ended
March 31, 1998 and 1999, as presented in the accompanying unaudited interim
financial statements.
NOTE 3--BUSINESS COMBINATIONS
On January 10, 1995, the Company acquired the firm of Brooks & Carter (B&C)
for one dollar and additional contingent consideration. The additional
contingent consideration is based on actual cash receipts of future gross
billings to former B&C clients for each calendar quarter during the period 1995
through 1999. However, the agreement limits the Company's payments to the
former owners of B&C based on amounts that B&C had collected from its clients
during 1994. Total payments made to the former owners of B&C for the years
ended June 30, 1996, 1997 and 1998, and the nine months ended March 31, 1999
were approximately $19, $30, $34 and $21 (unaudited), respectively. These
amounts are being amortized over the remaining portion of a forty-year period
from the date of acquisition.
On January 31, 1995, the Company acquired the firm of Smith, Batchelder &
Rugg ("SBR") for $117 and other consideration as described below. In addition,
the Company paid a $425 note payable from SBR to State Street Bank and Trust
Co. The purchase price consideration also includes payments of $38 per year for
five years, plus variable percentages of cash receipts of future gross billings
to former clients of SBR for and during the five year period starting February
1, 1995 and terminating January 31, 2000. Excluding the initial acquisition
payment of $117, the maximum amount payable to the former owners of SBR under
the terms of the purchase agreement is $1,688. Total payments made to the
former owners of SBR for the years ended June 30, 1996, 1997 and 1998, and the
nine months ended March 31, 1999 , were approximately $134, $245, $270 and $134
(unaudited), respectively. These amounts are being amortized over the remaining
portion of a forty-year period from the date of acquisition.
On January 1, 1996, the Company acquired the firm of Ade & Associates (Ade)
for $45 and additional contingent consideration. The additional contingent
consideration is based on actual cash receipts of future gross billings to
former Ade clients for and during the seven year period commencing January 1,
1996, and terminating December 31, 2002, including all work-in-process as of
December 31, 2002, for former clients of Ade, if and when collected by the
Company. Total contingent payments made to the former owners of Ade for the
years ended June 30, 1996, 1997 and 1998, and the nine months ended March 31,
1999 were approximately $103, $178, $86 and $89 (unaudited), respectively.
These amounts are being amortized over the remaining portion of a forty-year
period from the date of acquisition.
F-88
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 4--SELECTED FINANCIAL STATEMENT INFORMATION
Additional information concerning consolidated financial statement accounts
include the following:
<TABLE>
<CAPTION>
June 30,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Property and equipment, net:
Furniture and fixtures................... $ 3,001 $ 2,942 $ 1,574
Computer equipment....................... 450 828 1,423
Automobiles.............................. 579 839 798
Leasehold improvements................... 463 652 777
------- ------- -------
4,493 5,261 4,572
Less accumulated depreciation and
amortization............................ (2,821) (3,498) (2,549)
------- ------- -------
$ 1,672 $ 1,763 $ 2,023
======= ======= =======
Intangible assets, net:
Goodwill................................. $ 744 $ 1,134 $ 1,378
Less accumulated amortization............ (36) (76) (147)
------- ------- -------
$ 708 $ 1,058 $ 1,231
======= ======= =======
</TABLE>
NOTE 5--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for doubtful
accounts:
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months
June 30, Ended March 31,
-------------------- -----------------
1996 1997 1998 1998 1999
----- ------ ------ ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. $ 536 $ 789 $ 814 $ 814 $ 924
Additions to costs and
expenses............... 233 210 278 210 148
Less (write-offs)
recoveries............. 20 (185) (168) (92) (137)
----- ------ ------ ----- -----
Balance at end of
period................. $ 789 $ 814 $ 924 $ 932 $ 935
===== ====== ====== ===== =====
</TABLE>
NOTE 6--CREDIT FACILITIES
Short-Term Debt:
Short-term debt consists of notes payable to shareholders' and shareholders'
families, which bear interest at a variable rate of prime plus 1.5 percent and
1.0 percent, respectively. Amounts are due upon demand. The prime rate was 8.5
percent, 8.5 percent and 7.75 percent at June 30, 1997, 1998 and December 31,
1998, respectively.
F-89
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
In addition, the Company has a $3 million line of credit with Peoples
Heritage Bank, with interest payable monthly at prime plus 0.5 percent,
expiring November 1, 1999. At June 30, 1997 and 1998, there were no borrowings
outstanding under the line of credit. At March 31, 1999, there was $44
(unaudited) outstanding under the line of credit. The line of credit is
collateralized by substantially all assets of the Company, and guaranteed by
the Company's shareholders.
NOTE 7--INCOME TAXES
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
June 30,
--------- March 31,
1997 1998 1999
---- ---- -----------
(Unaudited)
<S> <C> <C> <C>
Long-term deferred tax assets:
Deferred compensation.............................. $252 $225 $225
Net operating loss carryforward.................... 159 141 141
Property and equipment............................. 49 57 57
---- ---- ----
Total long-term deferred tax assets.............. 460 423 423
Current deferred tax liabilities:
Intangible assets.................................. 166 119 119
Accrual to cash adjustment......................... 524 534 534
---- ---- ----
Total current deferred tax liabilities........... 690 653 653
---- ---- ----
Net deferred tax liability........................... $230 $230 $230
==== ==== ====
</TABLE>
NOTE 8--LEASE COMMITMENTS
The Company leases various office facilities and equipment under
noncancelable lease agreements, which expire at various dates through November
2011. Certain of these leases allow the Company, at its option to extend the
lease term and/or purchase the leased asset at the end of the lease term,
generally at fair market value. Future minimum lease payments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
------------
<S> <C>
1999............................................................... $ 707
2000............................................................... 707
2001............................................................... 735
2002............................................................... 681
2003............................................................... 608
Thereafter......................................................... 3,353
------
Total minimum lease payments....................................... $6,791
======
</TABLE>
Rent expense for all operating leases for the fiscal years ended June 30,
1996, 1997 and 1998, and the nine months ended March 31, 1998 and 1999 was
$717, $603, $806, $598 (unaudited) and $652 (unaudited), respectively.
F-90
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 9--EMPLOYEE BENEFIT PLANS
401(k) and Profit Sharing Plan:
The Company has a contributory defined contribution benefit plan covering
substantially all employees. Total Company contributions to the plan for the
fiscal years ended June 30, 1996, 1997 and 1998, and the nine months ended
March 31, 1998 and 1999 was $504, $493, $503, $429 (unaudited) and $417
(unaudited), respectively.
Deferred Compensation Plan:
The Company has a nonqualified deferred compensation plan with its retired
principals for retirement benefits earned by the retired principals through
1985 under a benefit plan which is no longer in place, and undistributed
shareholder income related to a change in the Company's fiscal year end during
1990. The benefit to retired principals is paid in 120 equal monthly
instalments. In addition, unpaid salaries and bonuses payable to the retired
principals are included in the deferred compensation balances. These amounts
bear interest at prime plus 1.5 percent.
NOTE 10--SHAREHOLDERS' EQUITY
Each shareholder of the Company (Shareholder) is issued one share of the
Company's no par common stock upon admission as a shareholder. The price of
each share is determined by the Board of Directors. After five years as a
principal, a Shareholder is required to have a capital contribution equal to 50
percent of their salary. Upon retirement, resignation, death, or other defined
events, each Shareholder or Shareholder beneficiary has the right to receive
the amount paid to the Company by each Shareholder for his/her share of common
stock.
NOTE 11--COMMITMENTS AND CONTINGENCIES
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
NOTE 12--RELATED PARTY TRANSACTIONS
Prior to June 30, 1996, the Company loaned $438 to BDMP Realty LLC (BDMP), a
related party owned by the Company's principals, for the purchase of certain
real property. The loan bears interest at prime and does not require scheduled
payments. The Company also periodically advances funds to its shareholders.
Loans to BDMP and advances to shareholders have been included in the
consolidated balance sheet as related party advances.
The Company also leases the Bangor office from BDMP under a 15-year lease.
Annual rent is $230 and the lease is renewable for two periods of five years
each.
As described in Note 7, the Company periodically receives loans from the
Company's Shareholders and Shareholders' families.
F-91
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Amounts due to principals consist of accrued bonuses and accrued salaries.
Accrued bonuses and salaries earn interest at prime plus 1.5 percent.
NOTE 13--SUBSEQUENT EVENTS (UNAUDITED)
In March 1999, the Company and its stockholders entered into a definitive
agreement with Centerprise Advisors, Inc. (Centerprise) pursuant to which the
Company stockholders will transfer their Company shares to a newly formed Maine
limited liability company ("BDM&P Holdings"). The Company will be converted
from a professional corporation to a business corporation. A wholly-owned
subsidiary of Centerprise will merge with and into the Company. All of the
Company's outstanding shares will be exchanged for cash and common stock of
Centerprise concurrently with the consummation of the initial public offering
of the common stock of Centerprise.
In order to comply with standards of the accounting profession and
applicable state regulations governing the profession, Centerprise is requiring
that the Company cease providing attest services prior to the closing of the
acquisition. Following the closing, all attest services formerly provided by
the Company will be provided by a newly created separate legal entity (the
Attest Firm) which will be owned by former owners of the Company who are
certified public accountants. Pursuant to a services agreement, Centerprise
will provide professional and other personnel, equipment, office space and
business and administrative services necessary to operate the Attest Firm.
F-92
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Urbach Kahn & Werlin PC
In our opinion, the accompanying balance sheet and the related statements of
income, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Urbach Kahn & Werlin PC at October
31, 1997 and 1998, and the results of its operations and its cash flows for
each of the two years in the period ended October 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 9, 1999
F-93
<PAGE>
URBACH KAHN & WERLIN PC
BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
October 31,
---------------- April 30,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 18 $ 189 $ 1,553
Marketable securities.......................... 1,028 1,152 --
Fees receivable, less allowance for doubtful
accounts of $1,070,
$1,177 and $1,090 (unaudited), respectively... 6,905 7,741 9,992
Unbilled fees, at net realizable value......... 138 299 827
Due from shareholders.......................... 394 570 443
Prepaid expenses and other current assets...... 821 829 497
------- ------- -------
Total current assets......................... 9,304 10,780 13,312
Property and equipment, net...................... 778 699 984
Investments...................................... 667 927 914
Deferred income taxes............................ 2,075 2,188 2,264
Other assets..................................... 239 319 345
------- ------- -------
Total assets................................. $13,063 $14,913 $17,819
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................................ $ 429 $ 946 $ 1,546
Accounts payable............................... 407 340 434
Accrued compensation and related costs to
employees..................................... 265 249 245
Accrued compensation and related costs to
shareholders.................................. 882 1,337 3,384
Deferred compensation.......................... 294 262 252
Deferred income taxes.......................... 2,353 2,603 2,727
Other accrued liabilities...................... 159 564 533
------- ------- -------
Total current liabilities.................... 4,789 6,301 9,121
Long-term debt................................... 2,068 1,622 1,401
Deferred compensation............................ 4,475 4,805 4,986
Other............................................ -- 149 149
------- ------- -------
Total liabilities............................ 11,332 12,877 15,657
------- ------- -------
Commitments and contingencies
Shareholders' equity:
Redeemable common stock, $.01 par value;
100,000 shares authorized,
17,690, 18,425 and 18,425 (unaudited) common
shares issued
and outstanding at October 31, 1997 and 1998
and April 30,
1999, respectively............................ -- -- --
Additional paid-in-capital..................... 2,958 3,186 3,336
Accumulated other comprehensive income......... 91 151 --
Accumulated deficit............................ (1,318) (1,301) (1,174)
------- ------- -------
Total shareholders' equity................... 1,731 2,036 2,162
------- ------- -------
Total liabilities and shareholders' equity... $13,063 $14,913 $17,819
======= ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
F-94
<PAGE>
URBACH KAHN & WERLIN PC
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Six Months
Ended October 31, Ended April 30,
------------------ -----------------
1997 1998 1998 1999
-------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Professional services................. $ 16,012 $ 17,085 $ 9,671 $ 11,716
-------- -------- ------- --------
Expenses:
Shareholder compensation and related
costs................................ 4,798 4,853 3,194 5,309
Employee compensation and related
costs................................ 6,590 7,147 3,707 4,220
Occupancy costs....................... 1,036 1,136 564 545
Office operating expenses............. 674 736 391 389
Depreciation and amortization......... 222 261 121 158
Other selling, general and
administrative expenses.............. 2,385 2,727 1,353 1,238
-------- -------- ------- --------
15,705 16,860 9,330 11,859
-------- -------- ------- --------
Operating income (loss)............. 307 225 341 (143)
-------- -------- ------- --------
Other (income) expense:
Interest expense...................... 594 643 317 314
Realized gains on investment.......... -- -- -- (366)
Interest income....................... (78) (108) (24) (150)
Other................................. (489) (435) (155) (201)
-------- -------- ------- --------
27 100 138 (403)
-------- -------- ------- --------
Income before provision for income
taxes.................................. 280 125 203 260
Provision for income taxes.............. 172 105 110 129
-------- -------- ------- --------
Net income.............................. $ 108 $ 20 $ 93 $ 131
======== ======== ======= ========
</TABLE>
See accompanying Notes to Financial Statements.
F-95
<PAGE>
URBACH KAHN & WERLIN PC
STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total Total
-------------- Paid-in- Accumulated Comprehensive Shareholders' Comprehensive
Shares Amount Capital Deficit Income Equity Income
------ ------ ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31,
1996................... 17,835 $-- $2,944 $(1,299) $-- $1,645
Cash dividends, $.17
per share............ -- -- -- (3) -- (3)
Issuances of common
stock/ payments of
subscriptions........ 1,125 -- 333 -- -- 333
Retirement of common
stock................ (1,270) -- (319) (124) -- (443)
Unrealized gain on
available for sale
securities........... -- -- -- -- 91 91 $ 91
Net income............ -- -- -- 108 -- 108 108
------ ---- ------ ------- ---- ------ -----
Total comprehensive
income.............. -- -- -- -- -- -- $ 199
=====
Balance at October 31,
1997................... 17,690 -- 2,958 (1,318) 91 1,731
Cash dividends, $.17
per share............ -- -- -- (3) -- (3)
Issuances of common
stock/ payments of
subscriptions........ 735 -- 228 -- -- 228
Unrealized gain on
available for sale
securities........... -- -- -- -- 60 60 $ 60
Net income............ -- -- -- 20 -- 20 20
------ ---- ------ ------- ---- ------ -----
Total comprehensive
income.............. -- -- -- -- -- -- $ 80
=====
Balance at October 31,
1998................... 18,425 -- 3,186 (1,301) 151 2,036
Unaudited data:
Cash dividends, $.17
per share............ -- -- -- (4) -- (4) --
Issuances of common
stock/ payments of
subscriptions........ -- -- 150 -- -- 150
Reclassification
adjustment for gains
included in net
income............... -- -- -- -- (151) (151) $(151)
Net income............ -- -- -- 131 -- 131 131
------ ---- ------ ------- ---- ------ -----
Total comprehensive
income.............. -- -- -- -- -- -- $ (20)
=====
Balance at April 30,
1999 (unaudited)....... 18,425 $-- $3,336 $(1,174) $-- $2,162
====== ==== ====== ======= ==== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-96
<PAGE>
URBACH KAHN & WERLIN PC
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Six Months
Ended Ended April
October 31, 30,
-------------- ---------------
1997 1998 1998 1999
------- ----- ------- ------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 108 $ 20 $ 93 $ 131
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 222 261 121 158
Change in deferred income taxes........... 148 105 110 129
Gain on sale of investments............... -- -- -- (366)
Increase in related entities' and
investment equity........................ (367) (346) (3) (232)
Changes in current assets and liabilities:
Fees receivable......................... 126 (836) (1,815) (2,251)
Unbilled fees........................... 92 (161) (994) (528)
Prepaid expenses and other current
assets................................. (253) (8) 316 332
Accounts payable........................ (607) (67) 47 94
Accrued liabilities..................... (74) 405 150 (31)
Accrued compensation and related costs
to employees........................... (173) (16) (144) (4)
Accrued compensation and related costs
to shareholders........................ 45 455 532 2,047
Deferred compensation................... 602 298 186 171
Other................................... 140 47 62 --
------- ----- ------- ------
Net cash provided by (used in)
operating activities................. 9 157 (1,339) (350)
------- ----- ------- ------
Cash flows from investing activities:
Due from shareholders....................... 41 (176) (43) 127
Purchase of property and equipment.......... (283) (187) (144) (441)
Dividends from corporate joint venture
equity investment.......................... 176 85 -- 123
Purchase of investments..................... (37) (31) -- --
Proceeds from sale of investments........... -- -- -- 1,408
Other....................................... (75) (40) -- (28)
------- ----- ------- ------
Net cash (used in) provided by
investing activities................. (178) (349) (187) 1,189
------- ----- ------- ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.... 1,700 -- -- --
Payments of long-term debt.................. (296) (429) (218) (221)
Proceeds from (payments of) short-term debt,
net........................................ (1,100) 500 1,750 600
Payments of dividends....................... (3) (3) (3) (4)
Proceeds from issuance of common
stock/payments of subscriptions............ 333 228 209 150
Payments to retire common stock............. (443) -- -- --
Other....................................... (10) 67 -- --
------- ----- ------- ------
Net cash provided by financing
activities........................... 181 363 1,738 525
------- ----- ------- ------
Net increase in cash and cash equivalents..... 12 171 212 1,364
Cash and cash equivalents at beginning of
period....................................... 6 18 18 189
------- ----- ------- ------
Cash and cash equivalents at end of period.... $ 18 $ 189 $ 230 $1,553
======= ===== ======= ======
Supplemental disclosures of cash flow
information:
Interest paid............................... $ 238 $ 254 $ 114 $ 125
Income taxes paid........................... $ 11 $ 34 $ 9 $ 6
</TABLE>
See accompanying Notes to Financial Statements.
F-97
<PAGE>
URBACH KAHN & WERLIN PC
NOTES TO FINANCIAL STATEMENTS
(Dollars In Thousands)
NOTE 1--BACKGROUND AND BUSINESS DESCRIPTION
The Company:
Urbach Kahn & Werlin PC (the Company or UKW), which was founded in 1964, is
a professional accountancy corporation engaged in providing tax, accounting and
auditing, and consulting services. The Company is headquartered in Albany, New
York and also conducts its practice in five other operating offices, which are
located in: Glens Falls, NY; Poughkeepsie, NY; New York, NY; Los Angeles, CA;
and Washington, DC.
NOTE 2--RELATED ENTITIES AND INVESTMENTS
The accounts and operations of several entities which are affiliated with
the Company through partnership arrangements and/or common stock investments
are not material, are generally carried at the Company's net equity and are
classified as investments. The Company's interest in a corporate joint venture,
which provides malpractice insurance to its members, is also carried at net
equity in underlying net assets and is also classified as an investment.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition:
The Company recognizes revenue as the related services are provided. The
Company bills clients based upon actual hours incurred on client projects at
expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact of any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known. Outstanding fees receivable are evaluated each
period to assess the adequacy of the allowance for doubtful accounts.
Unbilled Fees:
Unbilled fees represent the anticipated net realizable value for hours
incurred by the Company's professional and administrative staff, plus out-of-
pocket expenses, on projects which had not yet been billed to clients as of
period end.
Cash and Cash Equivalents:
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Marketable Securities:
The Company accounts for marketable securities in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
F-98
<PAGE>
URBACH KAHN & WERLIN PC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Marketable securities consisted of investments in equity securities and are
classified as available for sale securities. At October 31, 1997 and 1998 and
April 30, 1999, the fair market value of the marketable securities exceeds the
adjusted cost. The unrealized gains, net of deferred income taxes, are reported
as an increase to shareholders' equity. On April 29, 1999, the Company divested
all of its marketable securities ($1,248), which resulted in realized gains of
$328 (unaudited).
Marketable securities consisted of:
<TABLE>
<CAPTION>
October 31,
------------- April 30,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Adjusted cost.................................... $ 889 $ 920 $--
Unrealized holding gains......................... 139 232 --
------ ------ ----
Fair market value................................ $1,028 $1,152 $--
====== ====== ====
</TABLE>
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives (shorter
of asset life or lease term for leasehold improvements), generally ranging from
4 to 10 years. Expenditures for maintenance and repairs and minor renewals and
betterments which do not improve or extend the life of the respective assets
are expensed. All other expenditures for renewals and betterments are
capitalized. The assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gain or loss included in
operations.
Intangible Assets:
Intangible assets consist of goodwill, which represents the excess of cost
over the fair value of assets acquired in practice acquisitions accounted for
under the purchase method. Substantially all goodwill is amortized on a
straight-line basis over an estimated useful life of 40 years.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. If an impairment is recognized, the
carrying value of the impaired asset is reduced to its fair value. No
impairment has been recognized through April 30, 1999.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, fees receivable, accounts payable, accrued liabilities
and debt approximate fair value.
Income Taxes:
Income taxes have been computed using the asset and liability approach.
Under this approach, deferred income tax assets and liabilities are determined
based on the differences between the financial statement and
F-99
<PAGE>
URBACH KAHN & WERLIN PC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
tax basis of assets and liabilities using currently enacted tax rates in effect
for the years in which the differences are expected to reverse.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of fees receivable. Receivables
arising from services provided to clients are not collateralized and, as a
result, management continually monitors the financial condition of its clients
to reduce the risk of loss.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
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. While management believes that the estimates and related
assumptions used in the preparation of the financial statements are
appropriate, actual results could differ from those estimates. Estimates are
made when accounting for the allowances for doubtful accounts, depreciation and
amortization, income taxes and deferred compensation liability.
Unaudited Interim Financial Statements:
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at April 30, 1999, and
the results of its operations and its cash flows for the six months ended April
30, 1998 and 1999, as presented in the accompanying unaudited interim financial
statements.
F-100
<PAGE>
URBACH KAHN & WERLIN PC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 4--SELECTED FINANCIAL STATEMENT INFORMATION
Additional information concerning consolidated financial statement accounts
include the following:
<TABLE>
<CAPTION>
October 31,
-------------- April 30,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Property and equipment, net:
Furniture and fixtures..................... $3,656 $3,795 $4,233
Leasehold improvements..................... 648 696 699
------ ------ ------
4,304 4,491 4,932
Less accumulated depreciation and
amortization.............................. (3,526) (3,792) (3,948)
------ ------ ------
$ 778 $ 699 $ 984
====== ====== ======
Prepaid expenses and other current assets:
Prepaid insurance.......................... $ 299 $ 306 $ 108
Prepaid taxes.............................. 81 65 84
Prepaid rent............................... 150 166 --
Other receivables.......................... 128 138 254
Notes receivables.......................... 75 83 46
Other...................................... 88 71 5
------ ------ ------
$ 821 $ 829 $ 497
====== ====== ======
Other accrued liabilities:
401K employer matching contribution........ $ 60 $ 245 $ 282
Other...................................... 99 319 251
------ ------ ------
$ 159 $ 564 $ 533
====== ====== ======
</TABLE>
NOTE 5--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for doubtful
accounts:
<TABLE>
<CAPTION>
Fiscal Year Ended
October 31, Six Months
------------------ Ended April
1997 1998 30, 1999
-------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
Balance at beginning of period............. $ 1,385 $ 1,070 $1,177
Additions to costs and expenses............ 174 420 234
Less write-offs............................ (489) (313) (321)
-------- -------- ------
Balance at end of period................... $ 1,070 $ 1,177 $1,090
======== ======== ======
</TABLE>
F-101
<PAGE>
URBACH KAHN & WERLIN PC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 6--CREDIT FACILITIES
Short-Term Debt:
Short-term debt consists of the following:
<TABLE>
<CAPTION>
October
31,
--------- April 30,
1997 1998 1999
---- ---- -----------
(Unaudited)
<S> <C> <C> <C>
Lines of credit...................................... $-- $500 $1,100
Current maturities of long-term debt................. 429 446 446
---- ---- ------
Total short-term debt.............................. $429 $946 $1,546
==== ==== ======
</TABLE>
The Company has several bank lines of credit with borrowing capacity of
$6,000. The interest rates range from prime plus .25 percent to prime minus
1.25 percent. The lines of credit are unsecured. The most significant covenant
related to these lines is a debt to equity ratio. On May 3, 1999, the Company
paid off its line of credit in connection with the sale of its marketable
securities.
Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 31,
-------------- April 30,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Note payable, unsecured, interest rates
ranging from 8% to 8.5%. Maturities from
April 2001 through July 2004................. $2,497 $2,068 $1,847
Less current maturities of long-term debt..... (429) (446) (446)
------ ------ ------
Total long-term debt........................ $2,068 $1,622 $1,401
====== ====== ======
</TABLE>
Maturities on long-term debt as of October 31, 1998, including capital
lease obligations, are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
------------
<S> <C>
1999............................................................... $ 446
2000............................................................... 467
2001............................................................... 364
2002............................................................... 264
2003............................................................... 287
Thereafter......................................................... 240
------
Total maturities of long-term debt............................... $2,068
======
</TABLE>
F-102
<PAGE>
URBACH KAHN & WERLIN PC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 7--INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
Fiscal Year Six Months
Ended Ended
October 31, April 30,
----------- -----------
1997 1998 1998 1999
----- ----- ----- -----
(Unaudited)
<S> <C> <C> <C> <C>
Income taxes currently payable:
State........................................... $ 24 $ -- $ -- $ --
----- ----- ----- -----
24 -- -- --
Deferred income tax expense (benefit):
Federal......................................... 128 81 84 98
State........................................... 20 24 26 31
----- ----- ----- -----
Total provision for income taxes.............. $ 172 $ 105 $ 110 $ 129
===== ===== ===== =====
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
October 31,
------------- April 30,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Long-term deferred tax assets:
Deferred compensation........................ $1,880 $2,018 $2,094
Fixed assets................................. 112 120 120
Net operating loss and tax credit
carryforwards............................... 83 50 50
------ ------ ------
Total long-term deferred tax assets........ 2,075 2,188 2,264
------ ------ ------
Current deferred tax liabilities:
Accrual to cash adjustments.................. 2,305 2,522 2,727
Unrealized gains on investments.............. 48 81 --
------ ------ ------
Total current deferred tax liabilities..... 2,353 2,603 2,727
------ ------ ------
Net deferred tax liability..................... $ 278 $ 415 $ 463
====== ====== ======
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
Fiscal Year
Ended Six Months
October 31, Ended
----------- April 30,
1997 1998 1999
----- ----- -----------
(Unaudited)
<S> <C> <C> <C>
Income taxes currently payable:
U.S. federal statutory rate.................... $ 98 $ 44 $ 91
State income taxes, net of federal income tax
benefit....................................... 44 24 18
Non-deductible expenses........................ 30 37 20
----- ----- ----
Actual income tax provision...................... $ 172 $ 105 $129
===== ===== ====
</TABLE>
F-103
<PAGE>
URBACH KAHN & WERLIN PC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 8--LEASE COMMITMENTS
The Company leases its office facilities under noncancelable lease
agreements, which expire at various dates. Certain of these leases allow the
Company, at its option, to extend the lease term and/or purchase the leased
asset at the end of the lease term, generally at fair market value. Future
minimum lease payments under noncancelable operating leases are as follows as
of October 31, 1998:
<TABLE>
<CAPTION>
Fiscal Year:
------------
<S> <C>
1999............................................................... $ 827
2000............................................................... 682
2001............................................................... 682
2002............................................................... 635
2003............................................................... 535
Thereafter......................................................... 871
------
Total minimum lease payments..................................... $4,232
======
</TABLE>
Rent expense for all operating leases for the fiscal years ended October 31,
1997 and 1998 and the three months ended April 30, 1998 and 1999 was $915,
$1,043, $521 (unaudited) and $520 (unaudited), respectively.
NOTE 9--EMPLOYEE BENEFIT PLANS
401(k) Plan:
The Company contributes to a 401(k) employee retirement plan based upon
requirements to fund benefits for covered employees. The Company matches ten
percent of an employee's contribution up to six percent of an employee's
salary.
Deferred Compensation:
The Company is liable, under the terms of its wage continuation plan, for
deferred benefits to active shareholders and retired shareholders or
beneficiaries of deceased shareholders. The benefits are based on years of
service and average annual compensation levels, as defined.
The Company is required to purchase all shares of stock held by a retiring
shareholder at the close of the fiscal year in which the separation takes
place.
Net deferred compensation cost for the Company includes the following
components:
<TABLE>
<CAPTION>
Fiscal Year
Ended
October 31,
-----------
1997 1998
----- -----
<S> <C> <C>
Service cost.................................................. $ 141 $ 144
Interest cost................................................. 355 389
Amortization of prior service cost............................ 58 58
----- -----
Net deferred compensation cost................................ $ 554 $ 591
===== =====
</TABLE>
F-104
<PAGE>
URBACH KAHN & WERLIN PC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Assumptions used in the development of pension data follow:
<TABLE>
<CAPTION>
Fiscal Year
Ended
October 31,
-----------
1997 1998
----- -----
<S> <C> <C>
Discount rate.................................................. 7.5% 7.5%
Rates of increase in compensation levels....................... 4.0% 4.0%
</TABLE>
The Company's deferred compensation plan is not funded. The following table
presents the status of the Company's deferred compensation benefits:
<TABLE>
<CAPTION>
October 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Projected benefit obligation:
Retirees.............................................. $ 1,393 $ 1,223
Active participants................................... 3,387 3,796
------- -------
Funded status........................................... (4,780) (5,019)
Unrecognized prior service cost......................... 234 175
Unrecognized gain....................................... (223) (223)
------- -------
Accrued deferred compensation cost...................... $(4,769) $(5,067)
======= =======
</TABLE>
NOTE 10--SHAREHOLDERS' EQUITY
Shareholders' equity accounts are reported net of related amounts due from
the respective individuals for the portion of common stock that the Company
considers subscribed. The terms of subscription arrangements with shareholders
generally provide for payments (with interest) over a five-year term. The
number of common shares recognized as issued (1,125 shares in 1997 and 735
shares in 1998) were substantially all subscribed shares. Additional paid-in
capital is only recognized as cash payments are made.
On November 1, 1997, Common Stock (1,125 shares) was issued to new
shareholders in the amount of $333, including payments of subscriptions. Also
in 1997, Common Stock (1,270 shares) was acquired and retired on April 1 and
August 1 for consideration totaling $443.
On November 1, 1998, Common Stock (735 shares) was issued to new
shareholders in the amount of $228, including payments of subscriptions.
Dividends were declared and paid in both 1997 and 1998 in the amounts of $3.
NOTE 11--CONTINGENCIES
Litigation:
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
F-105
<PAGE>
URBACH KAHN & WERLIN PC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 12--SUBSEQUENT EVENTS (UNAUDITED)
In March 1999, the Company and its shareholders entered into a definitive
agreement with a newly formed Massachusetts corporation (the "UKW Company").
The shareholders of UKW Company will exchange all their stock for proportionate
membership interests in a newly formed Delaware limited liability company ("UKW
LLC"). Thereafter, Centerprise will merge with and into UKW LLC. All of the UKW
LLC interests will be exchanged for cash and common stock of Centerprise
concurrently with the consummation of the initial public offering of the common
stock of Centerprise.
In order to comply with standards of the accounting profession and
applicable state regulations governing the profession, Centerprise is requiring
that the Company cease providing attest services prior to the closing of the
acquisition. Following the closing, all attest services formerly provided by
the Company will be provided by a newly created separate legal entity (the
Attest Firm) which will be owned by former shareholders of the Company who are
certified public accountants. Pursuant to a services agreement, Centerprise
will provide professional and other personnel, equipment, office space and
business and administrative services necessary to operate the Attest Firm.
F-106
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Self Funded Benefits, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Self Funded Benefits, Inc. d/b/a
Insurance Design Administrators at December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 5, 1999
F-107
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 194 $ 857 $1,006
Restricted cash.................................... 190 -- --
Administration fees and commissions receivable..... 708 675 969
Funds held for customers........................... 612 660 499
Prepaid expenses and other current assets.......... 28 160 67
Due from principal................................. -- 164 --
------ ------ ------
Total current assets............................. 1,732 2,516 2,541
Property and equipment, net.......................... 966 747 747
Due from principal................................... 155 -- --
Other assets-security deposits....................... 43 38 38
------ ------ ------
Total assets..................................... $2,896 $3,301 $3,326
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................. $ 200 $ 153 $ 138
Accounts payable................................... 53 123 129
Accrued liabilities................................ 266 185 305
Accrued compensation and related costs............. 62 91 70
Deferred income.................................... 69 -- 67
Current portion of customer deposits............... 526 660 499
------ ------ ------
Total current liabilities........................ 1,176 1,212 1,208
Long-term debt, less current portion................. 309 154 125
Customer deposits, less current portion.............. 86 -- --
------ ------ ------
Total liabilities................................ 1,571 1,366 1,333
------ ------ ------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value; 200 shares authorized,
150 common shares issued and outstanding at
December 31, 1997 and 1998........................ -- -- --
Common stock--Class A (voting common stock), no par
value; 150 shares authorized, 150 shares issued
and 149 outstanding at March 31, 1999 (unaudited).
No shares authorized, issued or outstanding at
December 31, 1997 and 1998........................ -- -- --
Common stock--Class B (non-voting common stock), no
par value; 14,850 shares authorized, 14,850 shares
issued and 14,660 outstanding at March 31, 1999
(unaudited). No shares authorized, issued or
outstanding at December 31, 1997 and 1998......... -- -- --
Treasury stock..................................... -- -- (164)
Additional paid-in-capital......................... 208 208 208
Retained earnings.................................. 1,117 1,727 1,949
------ ------ ------
Total shareholders' equity....................... 1,325 1,935 1,993
------ ------ ------
Total liabilities and shareholders' equity....... $2,896 $3,301 $3,326
====== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-108
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
--------------- --------------
1997 1998 1998 1999
------ ------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Administration fees......................... $6,583 $ 6,703 $1,881 $1,921
Reinsurance commissions..................... 1,960 1,343 409 291
Other....................................... 1,213 2,887 612 766
------ ------- ------ ------
9,756 10,933 2,902 2,978
------ ------- ------ ------
Expenses:
Employee compensation and related costs..... 6,047 6,361 1,394 1,557
Occupancy costs............................. 296 299 64 69
Other operating expenses.................... 1,121 1,132 437 461
Depreciation and amortization............... 206 242 53 50
Other selling, general and administrative
expenses................................... 1,045 1,377 519 422
------ ------- ------ ------
8,715 9,411 2,467 2,559
------ ------- ------ ------
Operating income.......................... 1,041 1,522 435 419
------ ------- ------ ------
Other (income) expense:
Interest expense............................ 28 32 9 6
Interest income............................. (80) (77) (17) (15)
Other....................................... 132 82 -- --
------ ------- ------ ------
80 37 (8) (9)
------ ------- ------ ------
Income before provision for income taxes...... 961 1,485 443 428
Provision for income taxes.................... 31 25 11 6
------ ------- ------ ------
Net income.................................... $ 930 $ 1,460 $ 432 $ 422
====== ======= ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-109
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Common Stock Common Stock
Common Stock Class A Class B Additional Total
------------- ------------- -------------- Treasury Paid-in- Retained Shareholders'
Shares Amount Shares Amount Shares Amount Stock Capital Earnings Equity
------ ------ ------ ------ ------ ------ -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 150 $-- -- $-- -- $-- $ -- $208 $1,167 $1,375
Cash dividends, $6,533
per share............. -- -- -- -- -- -- -- -- (980) (980)
Net income............. -- -- -- 930 930
---- ---- --- ---- ------ ---- ----- ---- ------ ------
Balance at December 31,
1997................... 150 -- -- -- -- -- -- 208 1,117 1,325
Cash dividends, $5,666
per share............. -- -- -- -- -- -- -- -- (850) (850)
Net income............. -- -- -- -- -- -- -- -- 1,460 1,460
---- ---- --- ---- ------ ---- ----- ---- ------ ------
Balance at December 31,
1998................... 150 -- -- -- -- -- -- 208 1,727 1,935
Unaudited Data:
Issuance of Class A
Common Stock and
Class B Common Stock
in exchange for Common
Stock................. (150) -- 150 -- 14,850 -- -- -- -- --
Repurchase of Class A
Common Stock and Class
B Common Stock........ -- -- (1) -- (190) -- (164) -- -- (164)
Cash dividends, $1,333
per share............. -- -- -- -- -- -- -- -- (200) (200)
Net income............. -- -- -- -- -- -- -- -- 422 422
---- ---- --- ---- ------ ---- ----- ---- ------ ------
Balance at March 31,
1999 (unaudited)....... -- $-- 149 $-- 14,660 $-- $(164) $208 $1,949 $1,993
==== ==== === ==== ====== ==== ===== ==== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-110
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
-------------- -------------
1997 1998 1998 1999
----- ------- ----- ------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 930 $ 1,460 $ 432 $ 422
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 206 242 53 50
Loss on disposal of property and equipment.. 49 82 -- --
Changes in current assets and liabilities:
Administration fees and commissions
receivable............................... (215) 33 (104) (294)
Funds held for customers.................. 190 (48) 54 161
Restricted cash........................... (6) 190 -- --
Prepaid expenses and other current
assets................................... (11) (132) 3 93
Accounts payable.......................... 19 70 36 6
Accrued liabilities....................... 216 (81) (46) 120
Accrued compensation and related costs.... 26 29 (20) (21)
Deferred income........................... (47) (69) 8 67
Customer deposits......................... (275) 48 (54) (161)
Other..................................... (86) (4) -- --
----- ------- ----- ------
Net cash provided by operating
activities............................. 996 1,820 362 443
----- ------- ----- ------
Cash flows from investing activities:
Purchase of property and equipment............ (451) (105) (2) (50)
----- ------- ----- ------
Net cash used in investing activities... (451) (105) (2) (50)
----- ------- ----- ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt...... 400 -- -- --
Payments of long-term debt.................... (150) (202) (57) (44)
Payments of dividends......................... (980) (850) (150) (200)
----- ------- ----- ------
Net cash used in financing activities... (730) (1,052) (207) (244)
----- ------- ----- ------
Net increase (decrease) in cash and cash
equivalents.................................... (185) 663 153 149
Cash and cash equivalents at beginning of year.. 379 194 194 857
----- ------- ----- ------
Cash and cash equivalents at end of year........ $ 194 $ 857 $ 347 $1,006
===== ======= ===== ======
Supplemental disclosures of cash flow
information:
Interest paid................................. $ 28 $ 32 $ 9 $ 6
Income taxes paid............................. $ 29 $ 27 $ 11 $ 6
Non-cash transaction:
Retirement of an amount due from principal for
treasury stock............................... $ -- $ -- $ -- $ 164
</TABLE>
See accompanying Notes to Financial Statements.
F-111
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
NOTES TO FINANCIAL STATEMENTS
(Dollars In Thousands)
NOTE 1--BACKGROUND AND BUSINESS DESCRIPTION
Self Funded Benefits, Inc. d/b/a Insurance Design Administrators (the
Company) administers self-funded benefit plans of employees of their customers
in both the public sector and private industry primarily in New Jersey.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition:
The Company recognizes revenue as the related services are provided. The
Company bills administration fees for administering their customers' self-
insured health plans. Administration fees are based on a fixed amount per
eligible life per month. The Company receives reinsurance commissions from the
various reinsurance carriers utilized. The reinsurance commissions are
determined by the terms of the reinsurance carrier agreements. Reinsurance
commissions and contingent commissions are recorded when received. Outstanding
fees receivable are evaluated each period to assess the adequacy of the
allowance for doubtful accounts. As of December 31, 1997 and 1998 and March 31,
1999 (unaudited), the Company has determined that no allowance for doubtful
accounts was necessary.
Cash and Cash Equivalents:
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives (shorter
of asset life or lease term for leasehold improvements), generally ranging from
5 to 7 years. Expenditures for maintenance and repairs and minor renewals and
betterment's which do not improve or extend the life of the respective assets
are expensed. All other expenditures for renewals and betterments are
capitalized. The assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gain or loss included in
operations.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. If an impairment is recognized the
carrying value of the impaired asset is reduced to its fair value. No
impairment has been recognized through December 31, 1998.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, administration fees and commissions receivable, accounts
payable, accrued liabilities and debt approximate fair value.
F-112
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Income Taxes:
During the year ended December 31, 1995, the Company elected S corporation
status for Federal and New Jersey income tax purposes. The Company received a
tax determination letter approving the S corporation status from the Internal
Revenue Service. This election resulted in an elimination of Federal income
taxes and a reduction of New Jersey income taxes at the corporation level.
State income taxes have been computed using the asset and liability
approach. Under this approach, deferred income tax assets and liabilities are
determined based on the differences between the financial statement and tax
basis of assets and liabilities using currently enacted tax rates in effect for
the years in which the differences are expected to reverse.
Customer Deposits:
The Company holds client funds as deposits to pay claims of participants in
various self insurance plans. The related asset is accounted for as funds held
for customers and the corresponding liability is accounted for as customer
deposits on the balance sheet.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of administration fees and
commissions receivable. Receivables are not collateralized and, as a result,
management continually monitors the financial condition of its clients and
requires customer deposits for certain customers to reduce the risk of loss.
Sales Concentration:
A significant portion of the Company's total revenue comes from several
major customers. The following is a summary of the customers and corresponding
revenue for customers which consists of 10 percent or more of the Company's
total revenue for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
December 31,
-------------
Customer 1997 1998
-------- ------ ------
<S> <C> <C>
County of Bergen............................................ $1,228 $ 995
Trump Casino Services, LLC.................................. 1,583 1,556
North Jersey School......................................... 1,212 1,199
------ ------
$4,023 $3,750
====== ======
</TABLE>
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
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. While management believes that the estimates and related
assumptions used in the preparation of the financial statements are
appropriate, actual
F-113
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
results could differ from those estimates. Estimates are made when accounting
for the allowances for doubtful accounts, depreciation and amortization and
income taxes.
Unaudited Interim Financial Statements:
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1999, and
the results of its operations and its cash flows for the three months ended
March 31, 1998 and 1999, as presented in the accompanying unaudited interim
financial statements.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment, net reflected on the accompanying balance sheet is
comprised as follows:
<TABLE>
<CAPTION>
December 31,
--------------- March 31,
1997 1998 1999
------ ------- -----------
(Unaudited)
<S> <C> <C> <C>
Property and equipment, net:
Furniture and fixtures.................... $ 349 $ 284 $ 287
Computer equipment and software........... 1,444 1,626 1,218
Automobiles............................... 14 14 14
Leasehold improvements.................... 74 70 70
------ ------- ------
1,881 1,994 1,589
Less accumulated depreciation and
amortization............................. (915) (1,247) (842)
------ ------- ------
$ 966 $ 747 $ 747
====== ======= ======
</TABLE>
NOTE 4--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December
31,
--------- March 31,
1997 1998 1999
---- ---- -----------
(Unaudited)
<S> <C> <C> <C>
Notes payable, secured by certain assets of the
Company, interest rate 7.5% to 11.5%,
maturities from 1999 through 2002............. $506 $307 $263
Other.......................................... 3 -- --
---- ---- ----
509 307 263
Less current maturities of long-term debt...... 200 153 138
---- ---- ----
Total long-term debt......................... $309 $154 $125
==== ==== ====
Maturities on long-term debt are as follows:
1999..................................................... $153
2000..................................................... 106
2001..................................................... 34
2002..................................................... 14
----
Total maturities of long-term debt....................... $307
====
</TABLE>
NOTE 5--LEASE COMMITMENTS
The Company leases various types of office facilities, equipment, and
furniture and fixtures under noncancelable operating lease agreements, which
expire at various dates. Certain of these leases allow the
F-114
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Company, at its option to extend the lease term and/or purchase the leased
asset at the end of the lease term, generally at fair market value. Future
minimum lease payments under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1999............................................................... $ 285
2000............................................................... 255
2001............................................................... 253
2002............................................................... 230
2003............................................................... 230
Thereafter......................................................... 211
------
Total minimum lease payments..................................... $1,464
======
</TABLE>
Rent expense for all operating leases for the fiscal years ended December
31, 1997 and 1998 and the three months ended March 31, 1998 and 1999 was $253,
$269, $54 (unaudited) and $65 (unaudited), respectively.
NOTE 6--EMPLOYEE BENEFIT PLAN
401(k) Plan:
The Company has a 401(K) plan in which all full time employees can
participate. Employees can contribute up to 15 percent of their earnings. The
Company matches 40 percent of the employees' contributions up to a maximum of 5
percent of compensation. The 401(K) employee benefit expense for the fiscal
years ended December 31, 1997 and 1998 and the three months ended March 31,
1998 and 1999 was $39, $37, $11 (unaudited) and $12 (unaudited), respectively.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Litigation:
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
Letter of Credit:
The Company obtained a letter of credit from Bergen Commercial Bank for the
benefit of a health insurance carrier on January 5, 1993 for $250. On January
5, 1998, the letter of credit was reduced to $200. The letter of credit was
secured by a restricted money market account at the bank and expired on
December 31, 1998. Letter of credit fees incurred by the Company for each of
the years ended December 31, 1997 and 1998 were $1.
NOTE 8--RELATED PARTY TRANSACTIONS
The Company purchased certain leasehold improvements and travel related
services from two companies owned by a shareholder of the Company. During the
fiscal years ended December 31, 1997 and
F-115
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
1998 and the three months ended March 31, 1998 and 1999, these expenditures
totaled $74, $14, $1 (unaudited) and $4 (unaudited), respectively. There were
no outstanding payable balances related to these purchased items or services as
of December 31, 1997 and 1998.
The Company has a loan receivable balance due from a shareholder of the
Company. The outstanding balance of the loan as of December 31, 1997 and 1998
was $155 and $164, respectively. The loan bears interest at 5.63 percent and
5.85 percent as of December 31, 1997 and 1998, respectively.
NOTE 9--SUBSEQUENT EVENTS (UNAUDITED)
In March 1999, the Company and its stockholders entered into a definitive
agreement with Centerprise Advisors, Inc. (Centerprise) pursuant to which a
wholly-owned subsidiary of Centerprise will merge with and into the Company.
All of the Company's outstanding shares will be exchanged for cash and common
stock of Centerprise concurrently with the consummation of the initial public
offering of the common stock of Centerprise.
On March 16, 1999, the Company's certificate of incorporation was amended to
create a Class A and Class B Common Stock of the Company. The Class A Voting
Common Stock has 150 authorized shares with no par value. The Class B Non-
Voting Common Stock has 14,850 authorized shares with no par value. The
Shareholders and Board of Directors resolved that once the amendment to the
Company's certificate of incorporation has been filed, the Company will be able
to issue one (1) share of Class A Voting Common Stock and ninety-nine (99)
shares of Class B Non-Voting Common Stock in exchange for each share of the
Company's common stock which is returned to the Company.
On March 16, 1999, the two shareholders of the Company redeemed their shares
of the Company's common stock in exchange for shares of Class A and Class B
Common Stock as described above.
On March 26, 1999, the two shareholders of the Company entered into a
Reversion Agreement. As part of this agreement, the shareholders have agreed to
cause the Company to cancel advances due from one shareholder in exchange for
the redemption by this shareholder of one (1) share of Class A Voting Common
Stock and 190 shares of Class B Non-Voting Common Stock owned by that
shareholder. In the event that the Centerprise transaction, as described above,
does not occur, the shareholders will revert to their prior position.
F-116
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Grace & Company, P.C.
In our opinion, the accompanying balance sheet and the related statements of
income, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Grace & Company, P.C. at December
31, 1998, and the results of its operations and its cash flows for the period
then ended in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 12, 1999
F-117
<PAGE>
GRACE & COMPANY, P.C.
BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 6 $ 191
Fees receivable, less allowance for doubtful
accounts of $761 and $796 (unaudited),
respectively....................................... 1,531 2,003
Unbilled fees, at net realizable value.............. 815 2,085
Prepaid expenses and other current assets........... 204 264
------ ------
Total current assets.............................. 2,556 4,543
Property and equipment, net........................... 515 501
Cash surrender value of life insurance................ 993 995
Deferred income taxes................................. 11 11
Other assets.......................................... 30 34
------ ------
Total assets...................................... $4,105 $6,084
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt..................................... $ 742 $1,497
Due to shareholders................................. 601 473
Accounts payable.................................... 160 163
Accrued compensation and related costs.............. 530 949
Deferred income taxes............................... 766 1,142
Other accrued liabilities........................... 93 91
------ ------
Total current liabilities......................... 2,892 4,315
Long-term debt........................................ 419 413
------ ------
Total liabilities................................. 3,311 4,728
------ ------
Commitments
Shareholders' equity:
Common stock, $1 stated value; 30,000 shares
authorized, 16,500 shares issued and 15,000
outstanding at December 31, 1998 and March 31, 1999
(unaudited), respectively.......................... 17 17
Additional paid-in-capital.......................... 350 350
Treasury stock, 1,500 shares at December 31, 1998
and March 31, 1999 (unaudited), respectively....... (89) (89)
Retained earnings................................... 516 1,078
------ ------
Total shareholders' equity........................ 794 1,356
------ ------
Total liabilities and shareholders' equity........ $4,105 $6,084
====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-118
<PAGE>
GRACE & COMPANY, P.C.
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended March 31,
December 31, --------------
1998 1998 1999
------------ ------ ------
(Unaudited)
<S> <C> <C> <C>
Revenues:
Professional services........................... $9,691 $3,380 $3,687
Expenses:
Member compensation and related costs........... 2,709 711 733
Employee compensation and related costs......... 5,075 1,445 1,542
Occupancy costs................................. 406 96 119
Office operating expenses....................... 95 27 47
Depreciation and amortization................... 190 47 52
Other selling, general and administrative
expenses....................................... 689 215 212
------ ------ ------
9,164 2,541 2,705
------ ------ ------
Operating income.............................. 527 839 982
------ ------ ------
Other (income) expense:
Interest expense................................ 122 38 46
Interest income................................. (23) (3) (2)
Other........................................... (135) (5) --
Loss on equity investment....................... 40 -- --
------ ------ ------
4 30 44
------ ------ ------
Income before provision for income taxes.......... 523 809 938
Provision for income taxes........................ 232 356 376
------ ------ ------
Net income........................................ $ 291 $ 453 $ 562
====== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-119
<PAGE>
GRACE & COMPANY, P.C.
STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Treasury
Common Stock Additional Stock Total
------------- Paid-in- ------------- Retained Shareholders'
Shares Amount Capital Shares Amount Earnings Equity
------ ------ ---------- ------ ------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 13,500 $14 $182 1,500 $(89) $ 225 $ 332
Issuances of common
stock................ 3,000 3 168 -- -- -- 171
Net income............ -- -- -- -- -- 291 291
------ --- ---- ----- ---- ------ ------
Balance at December 31,
1998................... 16,500 17 350 1,500 (89) 516 794
------ --- ---- ----- ---- ------ ------
Net income
(unaudited).......... -- -- -- -- -- 562 562
------ --- ---- ----- ---- ------ ------
Balance at March 31,
1999 (unaudited)....... 16,500 $17 $350 1,500 $(89) $1,078 $1,356
====== === ==== ===== ==== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-120
<PAGE>
GRACE & COMPANY, P.C.
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended March 31,
December 31, --------------
1998 1998 1999
------------ ----- -------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 291 $ 453 $ 562
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 190 47 52
Change in deferred income taxes............... 127 356 376
Changes in operating assets and liabilities:
Fees receivable............................. (581) (420) (472)
Unbilled fees............................... 113 (846) (1,270)
Prepaid expenses and other current assets... 44 (5) (60)
Other assets................................ (15) (4) (4)
Accounts payable............................ (3) 15 3
Accrued compensation and related costs...... (13) 366 419
Other accrued liabilities................... 84 (1) (2)
----- ----- -------
Net cash provided by (used in) operating
activities............................... 237 (39) (396)
----- ----- -------
Cash flows from investing activities:
Purchase of property and equipment.............. (328) (12) (38)
Proceeds from sale of property and equipment.... 6 -- --
Increase in cash surrender value................ (171) (15) (2)
----- ----- -------
Net cash used in investing activities..... (493) (27) (40)
----- ----- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........ 450 -- 50
Payments of long-term debt...................... (77) (49) (56)
Payments (decrease) of short-term debt, net..... (292) 106 627
Issuance of common stock........................ 171 -- --
----- ----- -------
Net cash provided by financing
activities............................... 252 57 621
----- ----- -------
Net decrease in cash.............................. (4) (9) 185
Cash at beginning of period....................... 10 10 6
----- ----- -------
Cash at end of period............................. $ 6 $ 1 $ 191
===== ===== =======
Supplemental disclosures of cash flow information:
Interest paid................................... $ 134 $ 38 $ 46
Income taxes paid............................... $ 20 $ 1 $ 34
</TABLE>
See accompanying Notes to Financial Statements.
F-121
<PAGE>
GRACE & COMPANY, P.C.
NOTES TO FINANCIAL STATEMENTS
(Dollars In Thousands)
NOTE 1--BACKGROUND AND BUSINESS DESCRIPTION
Grace & Company, P.C. (the Company) is a full service firm of professional
accountants and business advisors serving privately-held companies and their
owners and is based in St. Louis, Missouri.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition:
The Company recognizes revenue as the related services are provided. The
Company bills clients based upon actual hours incurred on client projects at
expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact of any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known. Outstanding fees receivable are evaluated each
period to assess the adequacy of the allowance for doubtful accounts.
Unbilled Fees:
Unbilled fees represent the anticipated net realizable value for hours
incurred by the Company's professional and administrative staff, plus out-of-
pocket expenses, on projects which had not yet been billed to clients as of
period end.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives (shorter
of asset life or lease term for leasehold improvements), generally ranging from
3 to 10 years. Expenditures for maintenance and repairs and minor renewals and
betterments which do not improve or extend the life of the respective assets
are expensed. All other expenditures for renewals and betterments are
capitalized. The assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gain or loss included in
operations.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. If an impairment is recognized the
carrying value of the impaired asset is reduced to its fair value. No
impairment has been recognized through December 31, 1998.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments including cash,
fees receivable, accounts payable, notes payable, accrued liabilities and debt
approximate fair value.
F-122
<PAGE>
GRACE & COMPANY, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Income Taxes:
Income taxes have been computed using the asset and liability approach.
Under this approach, deferred income tax assets and liabilities are determined
based on the differences between the financial statement and tax basis of
assets and liabilities using currently enacted tax rates in effect for the
years in which the differences are expected to reverse.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of fees receivable.
Receivables arising from services provided to clients are not collateralized
and, as a result, management continually monitors the financial condition of
its clients to reduce the risk of loss.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
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. While management believes that the estimates and related
assumptions used in the preparation of the financial statements are
appropriate, actual results could differ from those estimates. Estimates are
made when accounting for the allowance for doubtful accounts, net
realizability of unbilled fees, depreciation and amortization, and income
taxes.
Unaudited Interim Financial Statements:
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1999 and
the results of its operations and its cash flows for the three months ended
March 31, 1998 and 1999, as presented in the accompanying unaudited interim
financial statements.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment, net reflected on the accompanying balance sheets is
comprised of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Property and equipment, net:
Furniture and fixtures............................... $ 663 $ 626
Computer equipment................................... 1,079 1,087
Automobiles.......................................... 47 47
Leasehold improvements............................... 56 56
------- -------
1,845 1,816
Less accumulated depreciation and amortization....... (1,330) (1,315)
------- -------
$ 515 $ 501
======= =======
</TABLE>
F-123
<PAGE>
GRACE & COMPANY, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 4--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The rollforward of activity within the allowance for doubtful accounts is as
follows:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Balance at beginning of period................... $903 $761
Additions to costs and expenses.................. 96 43
Recoveries of previously reserved amounts........ (105) --
Less write-offs.................................. (133) (8)
---- ----
Balance at end of period......................... $761 $796
==== ====
</TABLE>
NOTE 5--CREDIT FACILITIES
Short-Term Debt:
Short-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Line of credit.................................... $595 $1,350
Current maturities of long-term debt.............. 147 147
---- ------
Total short-term debt........................... $742 $1,497
==== ======
</TABLE>
The Company has a $1,600 line of credit with Commerce Bank, N.A. with
interest payable monthly at the Federal Funds rate plus 2.75 percent expiring
April 30, 1999. The line of credit is collateralized by accounts receivable,
unbilled fees and all fixed assets. The line of credit is also partially
guaranteed by nine shareholders of the Company. Each shareholder has guaranteed
$100. The most significant covenant related to this line requires the Company
to maintain a minimum tangible net worth of not less than $1,100.
F-124
<PAGE>
GRACE & COMPANY, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Notes payable, secured by certain assets of the
Company, interest rate 7.90% to 8.33%,
maturities from April 2001 through October
2002............................................ $ 566 $ 560
Less current maturities of long-term debt........ (147) (147)
----- -----
Total long-term debt........................... $ 419 $ 413
===== =====
The notes payable include $118 at December 31, 1998 and $107
(unaudited) at March 31, 1999 due to former shareholders of
the Company.
Maturities of long-term debt are as follows:
Fiscal Year:
1999........................................... $ 147
2000........................................... 148
2001........................................... 197
2002........................................... 49
2003........................................... 5
Thereafter..................................... 20
-----
Total maturities of long-term debt........... $ 566
=====
</TABLE>
NOTE 6--INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
Three
Months
Ended
Year Ended March 31,
December 31, -----------
1998 1998 1999
------------ ----- -----
(Unaudited)
<S> <C> <C> <C>
Income taxes currently payable:
Federal........................................ $ 94 $ -- $ --
State.......................................... 11 -- --
---- ----- -----
Deferred income tax expense:
Federal........................................ 114 322 337
State.......................................... 13 34 39
---- ----- -----
Total provision for income taxes............. $232 $ 356 $ 376
==== ===== =====
</TABLE>
F-125
<PAGE>
GRACE & COMPANY, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Long-term deferred tax assets:
Property and equipment/intangible assets........ $ 11 $ 11
----- -------
Total long-term deferred tax assets........... 11 11
Current deferred tax liabilities:
Accrual to cash................................. (766) (1,142)
----- -------
Total current deferred tax liabilities........ (766) (1,142)
----- -------
Net deferred tax liability........................ $(755) $(1,131)
===== =======
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
Three
Months
Ended
Year Ended March 31,
December 31, -------------
1998 1998 1999
------------ ----- -----
(Unaudited)
<S> <C> <C> <C>
U.S. federal statutory rate................. 35% 35% 35%
State income taxes, net of federal income
tax benefit................................ 4 4 4
Meals and entertainment..................... 5 5 1
--- ----- -----
Effective income tax rate................... 44% 44% 40%
=== ===== =====
</TABLE>
NOTE 7--LEASE COMMITMENTS
The Company leases various types of office facilities, equipment, and
furniture and fixtures under noncancelable lease agreements, which expire at
various dates. Certain of these leases allow the Company, at its option to
extend the lease term. Future minimum lease payments under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
Fiscal Year:
1999............................................................. $ 576
2000............................................................. 576
2001............................................................. 552
2002............................................................. 561
2003............................................................. 505
Thereafter....................................................... 1,115
------
Total minimum lease payments..................................... $3,885
======
</TABLE>
Rent expense for all operating leases for the year ended December 31, 1998
was $399 and for the three months ended March 31, 1998 and 1999 was $96
(unaudited) and $119 (unaudited), respectively.
NOTE 8--EMPLOYEE BENEFIT PLAN
401(k) Plan:
The Company offers a qualified contributory 401k plan (the Plan) to all its
employees. Employee participation in the Plan is optional; participants
contribute at least one percent but no more than 18 percent of
F-126
<PAGE>
GRACE & COMPANY, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
base compensation. The Company makes a matching contribution based on the
amount of eligible employee contributions. The Company matches 50 percent of
the first 4 percent of the eligible contributions made by employees. The
Company's total expense for this plan was $112 for 1998 and for the three
months ended March 31, 1998 and 1999 was $34 (unaudited) and $27 (unaudited),
respectively.
NOTE 9--COMMITMENTS
The Company entered into an agreement with a current non-equity principal to
guarantee that principal's base salary through September 30, 2004.
NOTE 10--RELATED PARTY TRANSACTIONS
In September 1998, the Company invested $40 in Better Business Methods
(BBM). The Company subsequently loaned $184 to BBM for working capital needs.
The Company also had an obligation to guarantee or loan up to an additional
$176. For the period from investment through disposition, the Company recorded
its 50 percent equity share in BBM's net losses substantially eliminating the
carrying value of the investment.
Effective December 1, 1998, the Company sold its investment and note
receivable to Grace Capital, LLP whose partners are largely comprised of
shareholders of the Company. Both transactions were consummated at net book
value. In connection with this sale, the Company was relieved of all
obligations for additional funding to BBM.
The Company has a receivable of $11 at December 31, 1998 and March 31, 1999
(unaudited) from employees for expense advances.
The Company has a note payable of $21 on behalf of shareholders which was
paid in January 1999.
The Company has $840 at December 31, 1998 and $870 (unaudited) at March 31,
1999 in notes payable to shareholders and principals of the Company. The notes
payable are offset by receivables from the shareholders of $55 at December 31,
1998 and $2 (unaudited) at March 31, 1999. These notes are payable on demand
and, if no demand is made, then payable in full on December 31, 1999.
NOTE 11--SUBSEQUENT EVENTS (UNAUDITED)
In March 1999, the Company and its shareholders entered into a definitive
agreement with Centerprise Advisors, Inc. (Centerprise) pursuant to which the
stockholders of the Company have transferred their Company shares to a newly
formed Missouri limited liability partnership ("Grace Capital"). The Company
will be converted from a professional corporation to a business corporation.
Thereafter, a wholly-owned subsidiary of Centerprise will merge with and into
the Company. All of the Company's outstanding shares will be exchanged for cash
and common stock of Centerprise concurrently with the consummation of the
initial public offering of the common stock of Centerprise.
In order to comply with standards of the accounting profession and
applicable state regulations governing the profession, Centerprise is requiring
that the Company cease providing attest services prior to the closing of the
acquisition. Following the closing, all attest services formerly provided by
the Company will be provided by a newly created separate legal entity (the
Attest Firm) which will be owned by former owners of the Company who are
certified public accountants. Pursuant to a services agreement, Centerprise
will provide professional and other personnel, equipment, office space and
business and administrative services necessary to operate the Attest Firm.
F-127
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Holthouse Carlin & Van Trigt LLP
In our opinion, the accompanying balance sheet and the related statements of
income, of partners' capital equity and of cash flows present fairly, in all
material respects, the financial position of Holthouse Carlin & Van Trigt LLP
at December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 31, 1999
F-128
<PAGE>
HOLTHOUSE CARLIN & VAN TRIGT LLP
BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
December 31, March 31,
------------- -----------
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 524 $ 644 $ 129
Marketable securities.............................. 273 285 287
Fees receivable, less allowance for doubtful
accounts of $443, $655 and $529 (unaudited),
respectively...................................... 1,394 1,816 2,469
Unbilled fees, at net realizable value............. 493 610 1,365
Prepaid expenses and other current assets.......... 63 15 78
------ ------ ------
Total current assets............................. 2,747 3,370 4,328
Property and equipment, net.......................... 219 276 318
Other assets......................................... 28 44 44
------ ------ ------
Total assets..................................... $2,994 $3,690 $4,690
====== ====== ======
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable................................... $ 63 $ 71 $ 36
Accrued compensation and related costs............. 26 72 56
Accrued vacation................................... 58 104 112
------ ------ ------
Total current liabilities........................ 147 247 204
------ ------ ------
Commitments and contingencies
Partners' equity
Total partners' capital accounts................. 2,847 3,443 4,486
------ ------ ------
Total liabilities and partners' equity........... $2,994 $3,690 $4,690
====== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-129
<PAGE>
HOLTHOUSE CARLIN & VAN TRIGT LLP
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
-------------- --------------
1997 1998 1998 1999
------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Professional services........................ $7,720 $9,446 $2,848 $3,234
------ ------ ------ ------
Expenses:
Employee compensation and related costs...... 2,617 3,089 745 839
Occupancy costs.............................. 286 360 75 84
Office operating expenses.................... 306 326 220 250
Depreciation and amortization................ 55 73 18 14
Other selling, general and administrative
expenses.................................... 801 819 103 (59)
------ ------ ------ ------
4,065 4,667 1,161 1,128
------ ------ ------ ------
Operating income........................... 3,655 4,779 1,687 2,106
------ ------ ------ ------
Other (income) expense:
Interest income.............................. (31) (25) (9) (5)
Other........................................ 5 -- -- 6
------ ------ ------ ------
(26) (25) (9) 1
------ ------ ------ ------
Net income..................................... $3,681 $4,804 $1,696 $2,105
====== ====== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-130
<PAGE>
HOLTHOUSE CARLIN & VAN TRIGT LLP
STATEMENT OF PARTNERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Total
Partners'
Equity
---------
<S> <C>
Balance at December 31, 1996.......................................... $2,696
Net income.......................................................... 3,681
Partners' withdrawals............................................... (3,530)
------
Balance at December 31, 1997.......................................... 2,847
Net income.......................................................... 4,804
Partners' withdrawals............................................... (4,238)
Capital contribution................................................ 30
------
Balance at December 31, 1998.......................................... 3,443
Unaudited data:
Net income.......................................................... 2,105
Partners' withdrawals............................................... (1,062)
------
Balance at March 31, 1999 (Unaudited)................................. $4,486
======
</TABLE>
See accompanying Notes to Financial Statements.
F-131
<PAGE>
HOLTHOUSE CARLIN & VAN TRIGT LLP
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
---------------- ---------------
1997 1998 1998 1999
------- ------- ------ -------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 3,681 $ 4,804 $1,696 $ 2,105
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 55 73 18 14
Bad debt expense........................ 281 340 205 (124)
Changes in current assets and
liabilities:
Fees receivable....................... (309) (762) (606) (527)
Unbilled fees......................... (77) (117) (720) (755)
Prepaid expenses and other assets..... 9 31 43 (63)
Accounts payable...................... 11 8 (8) (35)
Accrued compensation and related
costs................................ (18) 46 95 (16)
Accrued vacation...................... 58 46 26 8
------- ------- ------ -------
Net cash provided by operating
activities......................... 3,691 4,469 749 607
------- ------- ------ -------
Cash flows from investing activities:
Purchase of property and equipment........ (104) (130) (15) (57)
Purchase of investments................... (178) (148) (6) (3)
Proceeds from sale of investments......... 167 136 -- --
------- ------- ------ -------
Net cash used in investing
activities......................... (115) (142) (21) (60)
------- ------- ------ -------
Cash flows from financing activities:
Payments of partner capital............... (3,531) (4,237) (990) (1,062)
Capital contributed by principals......... -- 30 -- --
------- ------- ------ -------
Net cash used in financing
activities......................... (3,531) (4,207) (990) (1,062)
------- ------- ------ -------
Net increase in cash and cash equivalents... 45 120 (262) (515)
Cash and cash equivalents at beginning of
period..................................... 479 524 524 644
------- ------- ------ -------
Cash and cash equivalents at end of period.. $ 524 $ 644 $ 262 $ 129
======= ======= ====== =======
</TABLE>
See accompanying Notes to Financial Statements.
F-132
<PAGE>
HOLTHOUSE CARLIN & VAN TRIGT LLP
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
NOTE 1--BACKGROUND AND BUSINESS DESCRIPTION
Holthouse Carlin & Van Trigt LLP (the Company) was formed in 1991 as a
general partnership pursuant to the provisions of the California Uniform
Partnership Act and provides tax, accounting and consulting services for
closely-held businesses and the related individuals primarily in the southern
California region. In 1996, the Company elected to convert from a general
partnership to a registered limited liability partnership pursuant to the
California Corporations Code.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition:
The Company recognizes revenue as the related services are provided. The
Company bills clients based upon actual hours incurred on client projects at
expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact of any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known. Outstanding fees receivable are evaluated each
period to assess the adequacy of the allowance for doubtful accounts.
Unbilled Fees:
Unbilled fees represent the anticipated net realizable value for hours
incurred by the Company's professional and administrative staff, plus out-of-
pocket expenses, on projects which had not yet been billed to clients as of
period end.
Cash and Cash Equivalents:
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Marketable Securities:
The Company accounts for marketable securities in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Marketable securities consisted of investments in various state and local
city debt securities and are classified as available for sale. At December 31,
1997 and 1998, the fair market value of the securities approximated their
original cost.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives
generally ranging from 5 to 7 years. Expenditures for maintenance and repairs
and minor renewals and betterments which do not improve or extend the life of
the respective assets are expensed.
F-133
<PAGE>
HOLTHOUSE CARLIN & VAN TRIGT LLP
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
All other expenditures for renewals and betterments are capitalized. The assets
and related depreciation accounts are adjusted for property retirements and
disposals with the resulting gain or loss included in operations.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. If an impairment is recognized the
carrying value of the impaired asset is reduced to its fair value. No
impairment has been recognized through December 31, 1998.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, fees receivable, accounts payable and accrued liabilities
approximate fair value.
Income Taxes:
The Company is a limited liability partnership. As such, the Company has no
current or deferred income tax assets or liabilities outstanding at December
31, 1997 and 1998 as the taxes associated with net income of the Company is
borne by the individual partners.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of fees receivable. Receivables
arising from services provided to clients are not collateralized and, as a
result, management continually monitors the financial condition of its clients
to reduce the risk of loss.
Use of Estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. While management believes that the
estimates and related assumptions used in the preparation of the consolidated
financial statements are appropriate, actual results could differ from those
estimates. Estimates are made when accounting for the allowance for doubtful
accounts, unbilled fees, depreciation and amortization and the valuation of
investments.
Unaudited Interim Financial Statements:
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1999, and
the results of its operations and its cash flows for the three months ended
March 31, 1998 and 1999, as presented in the accompanying unaudited interim
financial statements.
F-134
<PAGE>
HOLTHOUSE CARLIN & VAN TRIGT LLP
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 3--SELECTED FINANCIAL STATEMENT INFORMATION
Additional information concerning financial statement accounts include
the following:
<TABLE>
<CAPTION>
December 31, March 31,
-------------- -----------
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Property and equipment, net:
Furniture and fixtures..................... $ 206 $ 268 $ 280
Computer equipment......................... 173 241 286
------ ------ -----
379 509 566
Less accumulated depreciation and
amortization.............................. (160) (233) (248)
------ ------ -----
$ 219 $ 276 $ 318
====== ====== =====
Prepaid expenses and other current assets:
Prepaid expenses........................... $ 35 $ 2 $ 68
Employee receivables....................... 28 13 10
------ ------ -----
$ 63 $ 15 $ 78
====== ====== =====
</TABLE>
NOTE 4--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for
doubtful accounts:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
-------------- ------------
1997 1998 1999
------ ------ ------------
(Unaudited)
<S> <C> <C> <C>
Balance at beginning of period.............. $ 309 $ 443 $655
Additions (reductions) to costs and
expenses, net.............................. 282 343 (73)
Write-offs.................................. (148) (131) (53)
------ ------ ----
Balance at end of period.................... $ 443 $ 655 $529
====== ====== ====
</TABLE>
NOTE 5--LEASE COMMITMENTS
The Company leases various office facilities under noncancelable lease
agreements, which expire at various dates. Certain of these leases allow the
Company, at its option to extend the lease term at the end of the original
lease term, generally at fair market rates. Future minimum lease payments under
noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1999............................................................... $ 347
2000............................................................... 357
2001............................................................... 316
2002............................................................... 233
2003............................................................... 175
------
Total minimum lease payments.................................... $1,428
======
</TABLE>
F-135
<PAGE>
HOLTHOUSE CARLIN & VAN TRIGT LLP
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Rent expense for all operating leases for the fiscal years ended December
31, 1997 and 1998, and the three months ended March 31, 1998 and 1999 was $242,
$291, $75 (unaudited) and $84 (unaudited), respectively,
NOTE 6--LINE OF CREDIT
The Company has a line of credit available with Union Bank of California at
December 31, 1997 and 1998 in the amount of $250. There were no balances
outstanding on this line at December 31, 1997 or 1998.
NOTE 7--EMPLOYEE BENEFIT PLAN
401(K):
The Company sponsors the Holthouse Carlin & Van Trigt 401(K) Plan which is
available to all of its employees. The employees are eligible to participate in
the plan after 90 days of employment. The plan is contributory by the employee
only as the Company makes no matching contribution.
NOTE 8--PARTNERS' EQUITY
The Company is a California Registered limited liability partnership with
seven common partners, one of which is the managing partner. In accordance with
the Partnership agreement each partner contributed $30 to the partners'
applicable capital account upon acceptance. One new partner was accepted during
1998 increasing the total number of partners from six partners in 1997 to seven
partners in 1998.
NOTE 9--CONTINGENCIES
Litigation:
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
NOTE 10--RELATED PARTY TRANSACTIONS
The Company has loans outstanding to certain of its employees, excluding
partners, during 1997 and 1998. These loans are for the employees' personal
uses and are collected via monthly payroll deductions since inception. The
Company decided to eliminate the issuance of such loans during 1998. Employee
loans totaled $28, $13 and $10 (unaudited) at December 31, 1997 and 1998 and
March 31, 1999, respectively.
One of the Company's partners is a partial owner of a legal service firm
located in Orange County, California. This legal service firm is a client of
the Company during 1997 and 1998. There were no material transactions with this
legal service firm during 1997 or 1998.
Certain partners of the Company are investors in business ventures conducted
by certain of the Company's clients. All of these clients receive only tax
consultation services from the Company. The respective partners' investments
are made and held individually rather than by the Company at December 31, 1997
and 1998.
F-136
<PAGE>
HOLTHOUSE CARLIN & VAN TRIGT LLP
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 11--SUBSEQUENT EVENTS
Effective January 1, 1999, the Company admitted William L. Warburton as a
probationary partner bringing the total number of partners to eight. As a
probationary partner, Mr. Warburton does not have voting privileges for a
period of two years, other than the right to vote on any prospective partner.
Cornerstone Transaction (Unaudited):
In March 1999, the Company and its stockholders entered into a definitive
agreement with Centerprise Advisors, Inc. (Centerprise) pursuant to which the
Company will transfer all of its assets to a newly formed Delaware limited
liability company ("HCVT Company") followed by a dissolution of the Company.
Thereafter, seven wholly-owned subsidiaries and one wholly-owned limited
liability company of Centerprise will merge with and into the seven corporate
members of HCVT Company and the sole limited liability company member of HCVT
Company, respectively. All of the Company's outstanding partnership interests
will be exchanged for cash and common stock of Centerprise concurrently with
the consummation of the initial public offering of the common stock of
Centerprise.
In order to comply with standards of the accounting profession and
applicable state regulations governing the profession, Centerprise is requiring
that the Company divest its attest functions prior to the closing of the
acquisition. Following the closing, all attest services formerly provided by
the Company will be provided by a newly created separate legal entity (the
Attest Firm) which will be owned by former owners of the Company who are
certified public accountants. Pursuant to a services agreement, Centerprise
will provide professional and other personnel, equipment, office space and
business and administrative services necessary to operate the Attest Firm.
F-137
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
The Reppond Companies
In our opinion, the accompanying combined balance sheet and the related
combined statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of The Reppond
Company, Inc., the Reppond Administrators L.L.C. and Verasource Excess Risk
Ltd. (collectively, The Reppond Companies or the Company) at December 31, 1998,
and the results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 29, 1999
F-138
<PAGE>
THE REPPOND COMPANIES
COMBINED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 148 $ 174
Accounts receivable................................. 842 885
Prepaid expenses.................................... 77 94
------ ------
Total current assets.............................. 1,067 1,153
Property and equipment, net........................... 792 837
Deferred income taxes................................. 7 7
Other assets.......................................... 27 30
------ ------
Total assets...................................... $1,893 $2,027
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt..................................... $ 368 $ 673
Accounts payable.................................... 248 229
Accrued compensation and related costs.............. 243 148
Income taxes payable................................ 103 20
Deferred income taxes............................... 120 107
Other accrued liabilities........................... 5 --
------ ------
Total current liabilities......................... 1,087 1,177
Long-term debt........................................ 130 84
------ ------
Total liabilities................................. 1,217 1,261
------ ------
Commitments
Shareholders' equity:
Members' equity of the Reppond Administrators
L.L.C.............................................. (26) 13
Common stock of The Reppond Company, $1 par value;
50,000 shares authorized; 500 shares issued and
outstanding at December 31, 1998 and March 31, 1999
(unaudited)........................................ 1 1
Common stock of Verasource Excess Risk Ltd., $1 par
value; 50,000 shares authorized; 250 shares issued
and outstanding at December 31, 1998 and March 31,
1999 (unaudited)................................... -- --
Additional paid-in capital.......................... 56 56
Note receivable from shareholder.................... (28) (28)
Retained earnings................................... 673 724
------ ------
Total shareholders' equity........................ 676 766
------ ------
Total liabilities and shareholders' equity........ $1,893 $2,027
====== ======
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-139
<PAGE>
THE REPPOND COMPANIES
COMBINED STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended March 31,
December 31, -------------
1998 1998 1999
------------ ------ ------
(Unaudited)
<S> <C> <C> <C>
Revenue:
Commission....................................... $6,423 $1,562 $1,788
Fee for service.................................. 1,469 347 403
------ ------ ------
7,892 1,909 2,191
------ ------ ------
Expenses:
Producer compensation and related costs.......... 2,359 635 674
Employee compensation and related costs.......... 2,708 586 646
Occupancy costs.................................. 391 98 111
Office operating expenses........................ 501 77 124
Depreciation and amortization.................... 332 76 76
Other selling, general and administrative
expenses........................................ 1,090 227 401
------ ------ ------
7,381 1,699 2,032
------ ------ ------
Operating income............................... 511 210 159
------ ------ ------
Other (income) expense:
Interest expense................................. 72 23 10
Interest income.................................. (43) -- (1)
Other............................................ 22 7 --
------ ------ ------
51 30 9
------ ------ ------
Income before provision for income taxes........... 460 180 150
Provision for income taxes......................... 113 45 60
------ ------ ------
Net income......................................... $ 347 $ 135 $ 90
====== ====== ======
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-140
<PAGE>
THE REPPOND COMPANIES
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Members'
Common Stock Equity of the Common Stock
of the Reppond of Verasource
Reppond Administrators Excess Risk, Note Accumulated
Company L.L.C. Ltd. Additional Receivable Other Total
------------- -------------- ------------- Paid-in Retained from Comprehensive Shareholders'
Shares Amount Amount Shares Amount Capital Earnings Shareholder Income (Loss) Equity
------ ------ -------------- ------ ------ ---------- -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1998........... 500 $ 1 $(215) 313 $-- $70 $518 $(28) $(10) $336
Repurchase of
62.5 shares of
Verasource
stock............ -- -- -- (63) -- (14) (3) -- -- (17)
Unrealized loss
on marketable
securities....... -- -- -- -- -- -- -- -- 10 10
Net income........ -- -- 189 -- -- -- 158 -- -- 347
--- --- ----- --- ---- --- ---- ---- ---- ----
Total
comprehensive
income.........
Balance at December
31, 1998.......... 500 1 (26) 250 -- 56 673 (28) -- 676
Unaudited data:
Net income........ -- -- 39 -- -- -- 51 -- -- 90
--- --- ----- --- ---- --- ---- ---- ---- ----
Total
comprehensive
income...........
Balance at March
31, 1999
(unaudited)....... 500 $ 1 $ 13 250 $-- $56 $724 $(28) $-- $766
=== === ===== === ==== === ==== ==== ==== ====
<CAPTION>
Total
Comprehensive
Income
-------------
<S> <C>
Balance at January
1, 1998...........
Repurchase of
62.5 shares of
Verasource
stock............
Unrealized loss
on marketable
securities....... $ 10
Net income........ 490
-------------
Total
comprehensive
income......... 500
=============
Balance at December
31, 1998..........
Unaudited data:
Net income........ 90
-------------
Total
comprehensive
income........... $ 90
=============
Balance at March
31, 1999
(unaudited).......
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-141
<PAGE>
THE REPPOND COMPANIES
COMBINED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended March 31,
December 31, -------------
1998 1998 1999
------------ ------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 347 $ 135 $ 90
Adjustments to reconcile net income to net
cash provided by (used in ) operating
activities:
Depreciation and amortization............... 332 76 76
Changes in current operating assets and
liabilities:
Accounts receivable...................... 41 29 (43)
Prepaid expenses......................... (38) (35) (17)
Accounts payable......................... 102 (7) (19)
Accrued compensation and related costs... 78 (7) (95)
Income taxes payable..................... 184 (5) (83)
Deferred income taxes.................... (67) (19) (13)
Other assets and liabilities............. (20) 15 (8)
----- ----- ------
Net cash provided by (used in)
operating activities.................. 959 182 (112)
----- ----- ------
Cash flows from investing activities:
Purchase of property and equipment........... (301) (48) (121)
----- ----- ------
Net cash used in investing activities.. (301) (48) (121)
----- ----- ------
Cash flows from financing activities:
Payments of long-term debt................... (346) (46) (46)
Repurchase of common stock................... (17) (17) --
Proceeds from (payments of) short-term debt,
net......................................... (185) (18) 305
----- ----- ------
Net cash (used in) provided by
financing activities.................. (548) (81) 259
----- ----- ------
Net increase in cash and cash equivalents...... 110 53 26
Cash and cash equivalents at beginning of
period........................................ 38 38 148
----- ----- ------
Cash and cash equivalents at end of year....... $ 148 $ 91 $ 174
===== ===== ======
Supplemental disclosures of cash flow
information:
Interest paid................................ $ 72 $ 23 $ 10
Income taxes paid............................ $ 111 $ 51 $ 160
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-142
<PAGE>
THE REPPOND COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars In Thousands)
NOTE 1--BACKGROUND AND BUSINESS DESCRIPTION
The Reppond Companies (the Company) comprises three business entities, The
Reppond Company, Inc. (TRC), Reppond Administrators L.L.C. (RA) and Verasource
Excess Risk Ltd. (VS).
TRC is a group insurance brokerage firm in the Pacific Northwest primarily
marketing group medical, dental and life insurance products. Ben Reppond and
Louis Baransky own 75 percent and 25 percent of TRC, respectively. TRC
represents 77 percent of the Company's total revenues for the year ended
December 31, 1998.
RA provides administrative services for a fee primarily to TRC's client
base. RA administers COBRA plans, flexible spending accounts, direct dental
reimbursement and single billing. Ben and Deborah Reppond (husband and wife)
and Louis Baransky own 99 percent and 1 percent of RA, respectively. RA
represents 19 percent of the Company's total revenues for the year ended
December 31, 1998.
VS is a reinsurance brokerage firm marketing stop loss coverage to mid-size
companies that wish to limit losses related to its self-insured plans. Ben
Reppond and Scott Perry each own 50 percent of VS. VS represents 4 percent of
the Company's total revenues for the year ended December 31, 1998.
NOTE 2--BASIS OF PRESENTATION
The combined financial statements present the combined financial position
and results of operations of TRC, RA and VS. TRC, RA and VS are related through
common management. In view of their close operating and financial
relationships, the preparation of combined financial statements is considered
appropriate. The combined statements, however, do not refer to a legal entity.
All significant transactions and accounts among TRC, RA and VS have been
eliminated.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition:
The Company recognizes commission income on the later of the effective date
of the policy or the billing date. Contingent commissions are recorded when
received. Service fee income is recognized as earned, which is over the period
in which the services are provided.
Cash and Cash Equivalents:
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment are
computed on a straight-line basis over estimated useful asset lives (shorter of
asset life or lease term for leasehold improvements), generally ranging from 3
to 7 years. Expenditures for maintenance and repairs and minor renewals and
betterments which do not improve or extend the life of the respective assets
are expensed. All other expenditures for renewals and betterments are
capitalized. The assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gain or loss included in
operations.
F-143
<PAGE>
THE REPPOND COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. If an impairment is recognized the
carrying value of the impaired asset is reduced to its fair value. No
impairment has been recognized through December 31, 1998.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and debt approximate fair value.
Income Taxes:
Income taxes have been computed using the asset and liability approach for
TRC and VS. Under this approach, deferred income tax assets and liabilities are
determined based on the differences between the financial statement and tax
basis of assets and liabilities using currently enacted tax rates in effect for
the years in which the differences are expected to reverse.
RA's members elected to treat RA as a partnership for federal and state
income tax purposes. Under the election, RA's results of operations are passed
through to, and taken into account by, its members in computing their
individual tax liabilities. These items are not taxed at the entity's level;
thus, no provision for income taxes has been made, with respect to RA, in the
combined financial statements.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable.
Receivables arising from services provided to clients are not collateralized
and, as a result, management continually monitors the financial condition of
its clients to reduce the risk of loss.
Use of Estimates:
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the combined financial statements and the reported amounts of revenues and
expenses during the reporting period. While management believes that the
estimates and related assumptions used in the preparation of the combined
financial statements are appropriate, actual results could differ from those
estimates. Estimates are made when accounting for accounts receivable,
depreciation and income taxes.
Unaudited Interim Financial Statements:
In the opinion of management, the Company has made all the adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1999 and the
results of its operations and its cash flow for the three months ended March
31, 1999 and 1998, as presented in the accompanying unaudited interim financial
statements.
F-144
<PAGE>
THE REPPOND COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment, net reflected on the accompanying balance sheet
is comprised as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Property and equipment:
Furniture and fixtures......................... $ 438 $ 446
Computer equipment............................. 823 931
Leasehold improvements......................... 103 103
Office equipment............................... 302 307
Vehicles....................................... 19 19
Computer software.............................. 286 286
------- -------
1,971 2,092
Less accumulated depreciation and amortization... (1,179) (1,255)
------- -------
$ 792 $ 837
======= =======
</TABLE>
NOTE 5--CREDIT FACILITIES
Short-Term Debt:
Short-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Line of credit.................................... $183 $488
Current maturities of long-term debt.............. 185 185
---- ----
Total short-term debt........................... $368 $673
==== ====
</TABLE>
The Company has a $525 line of credit with The Commerce Bank of Washington,
N.A. with interest payable monthly at prime (7.75 percent at December 31, 1998)
plus 0.25 percent expiring April 30, 1999. The line of credit is collateralized
by substantially all assets.
F-145
<PAGE>
THE REPPOND COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Note payable, secured by certain assets of the
Company, interest rate of prime (7.75 percent
at December 31, 1998) plus 0.25 percent........ $315 $269
Less current maturities of long-term debt....... 185 185
---- ----
Total long-term debt........................ $130 $ 84
==== ====
Maturities on long-term debt, are as follows:
1999............................................ $185
2000............................................ 130
----
Total maturities of long-term debt.......... $315
====
</TABLE>
NOTE 6--INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1998 1998 1999
------------ ------ ------
(Unaudited)
<S> <C> <C> <C>
Income taxes currently payable:
Federal..................................... $180 $ 64 $ 73
---- ------ ------
Deferred income tax expense (benefit):
Federal..................................... (67) (19) (13)
---- ------ ------
Total provision for income taxes.......... $113 $ 45 $ 60
==== ====== ======
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
Three Months
Ended
December 31, March 31,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Non-current deferred tax assets:
Property and equipment......................... $ 7 $ 7
==== ====
Current deferred tax liabilities:
Accrual to cash differences.................... $116 $103
Unrealized losses.............................. 4 4
---- ----
$120 $107
==== ====
</TABLE>
F-146
<PAGE>
THE REPPOND COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended March 31,
December 31, ---------------
1998 1998 1999
------------ ------ ------
(Unaudited)
<S> <C> <C> <C>
U.S. federal statutory rate................ 34% 34% 34%
Limited liability company income not
subject to level taxation................. (14) (14) (9)
Meals and entertainment.................... 4 4 3
Merger costs............................... -- -- 10
Other...................................... 1 1 1
--- ------ ------
25% 25% 39%
=== ====== ======
</TABLE>
NOTE 7--LEASE COMMITMENTS
The Company leases various types of office facilities, equipment, and
furniture and fixtures under noncancelable lease agreements, which expire at
various dates. Certain of these leases allow the Company, at its option to
extend the lease term and/or purchase the leased asset at the end of the lease
term, generally at fair market value. Future minimum lease payments under
noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1999............................................................... $ 325
2000............................................................... 369
2001............................................................... 382
2002............................................................... 388
2003............................................................... 388
------
Total minimum lease payments....................................... $1,852
======
</TABLE>
Rent expense for all operating leases for the fiscal year ended December 31,
1998, and for the three months ended March 31, 1998 and 1999 was $386, $97
(unaudited), and $110 (unaudited), respectively.
NOTE 8--EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution pension plan covering
substantially all employees. At its discretion, the Company may make
contributions to the plan up to 6 percent of employees wages. Contributions for
the year ended December 31, 1998 were $25.
NOTE 9--RELATED PARTY TRANSACTIONS
The December 31, 1998 accounts receivable balance includes a $17 receivable
from a related party. This amount represents expenses that were paid by the
Company on behalf of the related party.
The Company is a party to a sublicense agreement in which it pays a related
party approximately $25 per year for the use of a luxury box at the Key Arena
in Seattle, Washington.
F-147
<PAGE>
THE REPPOND COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 10--SUBSEQUENT EVENTS (UNAUDITED)
In March 1999, the Company and its shareholders entered into a definitive
agreement with Centerprise Advisors, Inc. (Centerprise) pursuant to which three
wholly owned subsidiaries of Centerprise will merge with and into The Reppond
Company, Inc., Reppond Administrators L.L.C. and Vera Source Excess Risk Ltd.,
respectively. All of the Company's outstanding shares and membership interests
will be exchanged for cash and common stock of Centerprise concurrently with
the consummation of the initial public offering of the common stock of
Centerprise.
In April 1999, the Company obtained a note payable from The Commerce Bank of
Washington, N.A. with a borrowing limit of $600,000. The Note bears interest at
prime plus 0.25 percent and expires in April of 2004. The Note is
collateralized by substantially all assets of the Company. The Company has
borrowed $350,000 on the Note through May 17, 1999.
F-148
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of
Simione, Scillia, Larrow & Dowling LLC
In our opinion, the accompanying balance sheet and the related statements of
income, of members' equity and of cash flows present fairly, in all material
respects, the financial position of Simione, Scillia, Larrow & Dowling LLC at
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 29, 1999
F-149
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 169 $ 235
Fees receivable, less allowance for doubtful
accounts of $177 and $177 (unaudited).............. 1,562 2,265
Notes receivable.................................... 12 12
Unbilled fees, at net realizable value.............. 254 487
Prepaid expenses and other current assets........... 23 75
------ ------
Total current assets.............................. 2,020 3,074
Property and equipment, net........................... 133 125
Fees receivable....................................... 43 43
Notes receivable...................................... 46 46
------ ------
Total assets...................................... $2,242 $3,288
====== ======
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Short-term debt..................................... $1,101 $1,171
Loans from members.................................. 26 22
Due to managers..................................... 152 186
Accounts payable.................................... 115 216
Accrued expenses.................................... 142 139
------ ------
Total current liabilities......................... 1,536 1,734
Long-term debt........................................ 153 120
Deferred rent......................................... 113 115
------ ------
Total liabilities................................. 1,802 1,969
------ ------
Commitments and contingencies
Members' equity:
Members............................................. -- --
Managers............................................ 440 1,319
------ ------
Total members' equity............................. 440 1,319
------ ------
Total liabilities and members' equity............. $2,242 $3,288
====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-150
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended March 31,
December 31, ------------------
1998 1998 1999
------------ --------- ---------
(Unaudited)
<S> <C> <C> <C>
Revenues:
Professional services....................... $6,217 $ 1,983 $ 2,478
------ --------- ---------
Expenses:
Members' and managers' compensation and
related costs.............................. 2,306 570 627
Employee compensation and related costs..... 2,090 588 574
Occupancy costs............................. 372 86 86
Office operating expenses................... 494 129 131
Depreciation and amortization............... 31 8 8
Other selling, general and administrative
expenses................................... 467 104 108
------ --------- ---------
5,760 1,485 1,534
------ --------- ---------
Operating income.......................... 457 498 944
------ --------- ---------
Other expense:
Interest expense............................ 130 30 35
Other....................................... 50 -- 30
------ --------- ---------
180 30 65
------ --------- ---------
Net income.................................... $ 277 $ 468 $ 879
====== ========= =========
</TABLE>
See accompanying Notes to Financial Statements.
F-151
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
STATEMENT OF MEMBERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Total
Members' Managers' Members'
Equity Equity Equity
-------- --------- --------
<S> <C> <C> <C>
Balance at January 1, 1998.......................... $-- $ 163 $ 163
Net income.......................................... -- 277 277
---- ------ ------
Balance at December 31, 1998........................ -- 440 440
---- ------ ------
Net income (unaudited).............................. -- 879 879
---- ------ ------
Balance at March 31, 1999 (unaudited)............... $-- $1,319 $1,319
==== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-152
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended March 31,
December 31, ------------------
1998 1998 1999
------------ --------- ---------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 277 $ 468 $ 879
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 31 8 8
Provision for losses on accounts
receivable............................. 56 4 15
Changes in deferred rent expense........ 17 -- 2
Changes in current assets and
liabilities:
Fees receivable....................... (266) (197) (718)
Unbilled fees......................... (159) (287) (233)
Prepaid expenses and other current
assets............................... (2) (69) (52)
Due to managers....................... 152 -- 34
Accounts payable...................... (10) 87 101
Accrued expenses...................... 33 43 (3)
----- --------- ---------
Net cash provided by operating
activities......................... 129 57 33
----- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment........ (11) (6) --
----- --------- ---------
Net cash used in investing
activities......................... (11) (6) --
----- --------- ---------
Cash flows from financing activities:
Payments of long-term debt................ (133) (33) (33)
Proceeds from short-term debt............. 197 10 70
Payments of loans from members............ (16) (4) (4)
----- --------- ---------
Net cash provided by (used in)
financing activities............... 48 (27) 33
----- --------- ---------
Net increase in cash........................ 166 24 66
Cash and cash equivalents at beginning of
year....................................... 3 3 169
----- --------- ---------
Cash and cash equivalents at end of year.... $ 169 $ 27 $ 235
===== ========= =========
Supplemental disclosure of cash flow
information:
Interest paid............................. $ 130 $ 30 $ 35
</TABLE>
See accompanying Notes to Financial Statements.
F-153
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
NOTE 1--BACKGROUND AND BUSINESS DESCRIPTION
Nature of Operations and Organization:
Simione, Scillia, Larrow & Dowling LLC (the Company) is a limited liability
company engaged in the practice of providing audit, accounting, tax, and
management consulting services. The Company has offices in New Haven, Hartford,
and Hamden, Connecticut. The primary area is Connecticut, although the Company
has clients throughout the United States. The Company specializes in providing
services for small and mid-sized privately owned business and governmental
clients. More than half of the Company's revenue is derived from audit and
accounting services.
The Company was formed pursuant to the Connecticut Limited Liability Company
Act. The term of the Company began as of January 1, 1996 and shall continue
until December 31, 2046 unless sooner terminated in accordance with the
Operating Agreement. Ownership in the Company consists of members, certain of
which are designated as managers. Members have limited personal liability for
the obligations or debts of the Company. The managers are responsible for the
business, property, and affairs of the Company. Each individual who becomes a
manager of the Company shall have capital in the Company to the extent of: (i)
capital contributions actually made, and (ii) the amount of guaranteed payments
(as defined) "contributed" in relation to total guaranteed payments
"contributed" by all managers, with such percentage interest applied to
unallocated capital of the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition:
The Company recognizes revenue as the related services are provided. The
Company bills clients based upon actual hours incurred on client projects at
expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact of any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known. Outstanding fees receivable are evaluated each
period to assess the adequacy of the allowance for doubtful accounts.
Unbilled Fees:
Unbilled fees represent the anticipated net realizable value for hours
incurred by the Company's professional and administrative staff, plus out-of-
pocket expenses, on projects which had not yet been billed to clients as of
period end.
Cash and Cash Equivalents:
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
F-154
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives (shorter
of asset life or lease term for leasehold improvements), generally ranging from
5 to 7 years. Expenditures for maintenance and repairs and minor renewals and
betterments which do not improve or extend the life of the respective assets
are expensed. All other expenditures for renewals and betterments are
capitalized. The assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gain or loss included in
operations.
Income Taxes:
The Company is treated as a partnership for income tax purposes. As such,
the Company has no current or deferred income tax assets or liabilities
outstanding at December 31, 1998 as the taxes associated with net income of the
Company is borne by the individual members.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment is recognized to the extent that the sum of
undiscounted estimated future cash flows expected to result from use of the
assets is less than the carrying value. If an impairment is recognized the
carrying value of the impaired asset is reduced to its fair value. No
impairment has been recognized through December 31, 1998.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, fees receivable, accounts payable, accrued liabilities
and debt approximate fair value.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of fees receivable. Receivables
arising from services provided to clients are not collateralized and, as a
result, management continually monitors the financial condition of its clients
to reduce the risk of loss.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
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. While management believes that the estimates and related
assumptions used in the preparation of the financial statements are
appropriate, actual results could differ from those estimates. Estimates are
made when accounting for the allowances for doubtful accounts and deprecation.
Unaudited Interim Financial Statements:
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company at March 31, 1999, and
the results of its operations and its cash flows for the three months ended
March 31, 1998 and 1999, as presented in the accompanying unaudited interim
financial statements.
F-155
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment, net reflected on the accompanying balance sheet is
comprised as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Property and equipment, net:
Furniture and fixtures........................ $197 $197
Computer equipment............................ 19 19
---- ----
216 216
Less accumulated depreciation and
amortization................................. (83) (91)
---- ----
$133 $125
==== ====
</TABLE>
NOTE 4--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for doubtful
accounts:
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
1998 1999
------------ ---------------
(Unaudited)
<S> <C> <C>
Balance at beginning of period................ $255 $177
Additions to costs and expenses............... 56 15
Less write-offs............................... (134) (15)
---- ----
Balance at end of period...................... $177 $177
==== ====
</TABLE>
NOTE 5--CREDIT FACILITIES
Short-Term Debt:
Short-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Line of credit borrowings......................... $ 969 $1,039
Current maturities of long-term debt.............. 132 132
------ ------
Total short-term debt........................... $1,101 $1,171
====== ======
</TABLE>
Line of credit borrowings consist of amounts outstanding under the Company's
$1,500 commercial note and revolving loan agreement with a bank. That note and
loan agreement bears interest at the bank's prime rate (as defined) plus .5
percent (8.25 percent at December 31, 1998). The line of credit borrowings are
secured by all assets of the Company and are personally guaranteed by the
Managers. To the extent the line of credit borrowings exceed $1,000, such
borrowings cannot exceed 85 percent of the Company's eligible accounts
receivable (as defined). The revolving line of credit matures on April 30,
1999.
F-156
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
As a condition of the line of credit borrowings, the Company is required to
comply with certain loan covenants. The financial covenants require the Company
to cause its members' equity to increase by a minimum of $250 for the fiscal
year ending December 31, 1998 and for each year thereafter.
Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Commercial promissory note, due in 48 monthly
principal installments of $11 plus interest at
the bank's prime rate (as defined) plus
.5%(8.25% at December 31, 1998) through March 1,
2001. The note is secured by all assets of the
Company......................................... $285 $252
Less current maturities of long-term debt........ (132) (132)
---- ----
Total long-term debt......................... $153 $120
==== ====
Maturities on long-term debt as of December 31,
1998 are as follows:
1999............................................. $132
2000............................................. 132
2001............................................. 21
----
Total........................................ $285
====
</TABLE>
NOTE 6--LEASE COMMITMENTS
The Company leases office equipment and office space under operating leases
expiring at various dates through April 2006. The office space lease has a
renewal option and requires the Company to pay a proportionate share of common
area costs in addition to the base rental amount. Further, the office space
lease includes scheduled base rent increases over the term of the lease. The
total amount of the base rent payments is being charged to expense on the
straight-line method over the term of the lease. The Company has recorded a
deferred credit as a long-term liability to reflect the excess of rent expense
over cash payments since inception of the lease. Rent expense totaled
approximately $505, $83 (unaudited) and $125 (unaudited) for the fiscal year
ended December 31, 1998 and for the three months ended March 31, 1998 and 1999,
respectively.
Total future minimum rental payments under noncancelable operating leases at
December 31, 1998 were as follows:
<TABLE>
<S> <C>
1999................................................................ $ 444
2000................................................................ 416
2001................................................................ 336
2002................................................................ 311
2003................................................................ 311
Thereafter.......................................................... 726
------
$2,544
======
</TABLE>
F-157
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 7--EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) savings plan. The plan is
available to all full time employees and members who have completed one year of
employment and worked a minimum of 1,000 hours. The Company contributes an
amount equal to 15 percent of the compensation earned by each eligible
participant up to $1. At its discretion, the Company may also contribute a
portion of its net income. No discretionary contributions were made to the plan
during 1998. Contributions to the plan by the Company amounted to $22, $8
(unaudited) and $7 (unaudited) for the fiscal year ended December 31, 1998 and
the three months ended March 31, 1998 and 1999, respectively.
NOTE 8--RELATED PARTY TRANSACTIONS
The Company is indebted to a partnership comprised of certain managers of
the Company. The unsecured note payable is due in 36 monthly installments of
$2, including interest at 10 percent through April 1, 2000.
The Company leases office space from a partnership, including two of the
managers. The lease is classified as an operating lease and provides for month
to month rentals of $1.
NOTE 9--CONTINGENCIES
Litigation:
The Company, two managers, and two predecessor firms are defendants in a
lawsuit filed by a former client claiming fraud, negligence, and breach of
fiduciary duty, among other allegations. The plaintiff seeks unspecified
damages but has indicated through responses to discovery that damages could
exceed $1,000. The Company and outside counsel for the Company believe the suit
to be without merit and intend to defend the suit vigorously.
NOTE 10--SUBSEQUENT EVENTS (UNAUDITED)
In March 1999, the Company and its members entered into a definitive
agreement with Centerprise Advisors, Inc. (Centerprise) pursuant to which the
Company will transfer all of its assets and liabilities other than the assets
and liabilities relating to the provision of attest services to a newly formed
Delaware limited liability company ("SSLD LLC"). Thereafter, SSLD LLC will
merge with and into a wholly-owned subsidiary of Centerprise. All of the
members' equity in SSLD LLC will be exchanged for cash and common stock of
Centerprise concurrently with the consummation of the initial public offering
of the common stock of Centerprise.
In order to comply with standards of the accounting profession and
applicable state regulations governing the profession, Centerprise is requiring
that the Company cease providing attest services prior to the closing of the
acquisition. Following the closing, all attest services formerly provided by
the Company will be provided by a newly created separate legal entity (the
Attest Firm) which will be owned by former members of the Company who are
certified public accountants. Pursuant to a services agreement, Centerprise
will provide professional and other personnel, equipment, office space and
business and administrative services necessary to operate the Attest Firm.
F-158
<PAGE>
Appendix A
CALIFORNIA DISSENTERS' RIGHTS
(S) 1300. Reorganization or short-form merger; dissenting shares; corporate
purchase at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as
defined in subdivision (b). The fair market value shall be determined as of the
day before the first announcement of the terms of the proposed reorganization
or short-form merger, excluding any appreciation or depreciation in consequence
of the proposed action, but adjusted for any stock split, reverse stock split,
or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302. (c) As used in this chapter, "dissenting
shareholder" means the recordholder of dissenting shares and includes a
transferee of record.
(S) 1301. Notice to holders of dissenting shares in reorganizations; demand
for purchase; time; contents (a) If, in the case of a reorganization, any
shareholders of a corporation have a right under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require
the corporation to purchase their shares for cash, such corporation shall mail
to each such shareholder a notice of the approval of the reorganization by its
outstanding shares (Section 152) within 10 days after the date of such
approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this
section, a statement of the price determined by the corporation to represent
the fair market value of the dissenting shares, and a brief description of the
procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes an
offer by the corporation to purchase at the price stated any dissenting shares
as defined in subdivision (b) of Section 1300, unless they lose their status as
dissenting shares under Section 1309. (b) Any shareholder who has a right to
require the corporation to purchase the
A-1
<PAGE>
shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder. (c) The demand shall state the number and class of
the shares held of record by the shareholder which the shareholder demands that
the corporation purchase and shall contain a statement of what such shareholder
claims to be the fair market value of those shares as of the day before the
announcement of the proposed reorganization or short-form merger. The statement
of fair market value constitutes an offer by the shareholder to sell the shares
at such price.
(S) 1302. Submission of share certificates for endorsement; uncertificated
securities within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
(S) 1303. Payment of agreed price with interest; agreement fixing fair
market value; filing; time of payment (a) If the corporation and the
shareholder agree that the shares are dissenting shares and agree upon the
price of the shares, the dissenting shareholder is entitled to the agreed price
with interest thereon at the legal rate on judgments from the date of the
agreement. Any agreements fixing the fair market value of any dissenting shares
as between the corporation and the holders thereof shall be filed with the
secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
(S) 1304. Action to determine whether shares are dissenting shares or fair
market value; limitation; joinder; consolidation; determination of issues;
appointment of appraisers (a) If the corporation denies that the shares are
dissenting shares, or the corporation and the shareholder fail to agree upon
the fair market value of the shares, then the shareholder demanding purchase of
such shares as dissenting shares or any interested corporation, within six
months after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares
are dissenting shares or the fair market value of the dissenting shares or both
or may intervene in any action pending on such a complaint. (b) Two or more
dissenting shareholders may join as plaintiffs or be joined as defendants in
any such action and two or more such actions may be consolidated. (c) On the
trial of the action, the court shall determine the issues. If the status of the
shares as dissenting shares is in issue, the court shall first determine that
issue. If the fair market value of the dissenting shares is in issue, the court
shall determine, or shall appoint one or more impartial appraisers to
determine, the fair market value of the shares.
A-2
<PAGE>
Appendix B
Delaware Dissenters' Rights
Section 262 Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to (S)
251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or (S) 264
of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except: a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository receipts in
respect thereof; b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository receipts
in respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu
of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a. and b. of this paragraph; or d. Any combination
of the shares of stock, depository receipts and cash in lieu of fractional
shares or fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
B-1
<PAGE>
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows: (1) If a proposed merger
or consolidation for which appraisal rights are provided under this section is
to be submitted for approval at a meeting of stockholders, the corporation, not
less than 20 days prior to the meeting, shall notify each of its stockholders
who was such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or (c) hereof
that appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of the
vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy
or vote against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or (S)
253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such
notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders on or
within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice,
each constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that if
the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record date
is fixed and the notice is given prior to the effective date, the record date
shall be the close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value
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of the stock of all such stockholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or consolidation,
any stockholder shall have the right to withdraw such stockholder's demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days after such
stockholder's written request for such a statement is received by the surviving
or resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by one or more
publications at least one week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees
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in the Court of Chancery may be enforced, whether such surviving or resulting
corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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Appendix C
Washington Dissenters' Rights (Corporations)
23B.13.020. Right to dissent
(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions: (a) Consummation of a plan of merger to which the
corporation is a party (i) if shareholder approval is required for the merger
by RCW 23B.11.030, 23B.11.080, or the articles of incorporation and the
shareholder is entitled to vote on the merger, or (ii) if the corporation is a
subsidiary that is merged with its parent under RCW 23B.11.040; (b)
Consummation of a plan of share exchange to which the corporation is a party
as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan; (c) Consummation of a sale or exchange of all,
or substantially all, of the property of the corporation other than in the
usual and regular course of business, if the shareholder is entitled to vote
on the sale or exchange, including a sale in dissolution, but not including a
sale pursuant to court order or a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be distributed
to the shareholders within one year after the date of sale; (d) An amendment
of the articles of incorporation that materially reduces the number of shares
owned by the shareholder to a fraction of a share if the fractional share so
created is to be acquired for cash under RCW 23B.06.040; or (e) Any corporate
action taken pursuant to a shareholder vote to the extent the articles of
incorporation, bylaws, or a resolution of the board of directors provides that
voting or nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any
one of the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(c) The shareholder's demand for payment is withdrawn with the written
consent of the corporation.
23B.13.030. Dissent by nominees and beneficial owners
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a
partial dissenter under this subsection are determined as if the shares as to
which the dissenter dissents and the dissenter's other shares were registered
in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.
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23B.13.200. Notice of dissenters' rights
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert
dissenters' rights under this chapter and be accompanied by a copy of this
chapter.
(2) If corporate action creating dissenters' rights under RCW 23B.13.020 is
taken without a vote of shareholders, the corporation, within ten days after
[the] effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in RCW 23B.13.220.
23B.13.210. Notice of intent to demand payment
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must (a) deliver to the corporation before
the vote is taken written notice of the shareholder's intent to demand payment
for the shareholder's shares if the proposed action is effected, and (b) not
vote such shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) of
this section is not entitled to payment for the shareholder's shares under this
chapter.
23B.13.220. Dissenters' notice
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.
(2) The dissenters' notice must be sent within ten days after the effective
date of the corporate action, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date;
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the
date the notice in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this chapter.
23B.13.230. Duty to demand payment
(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220 must
demand payment, certify whether the shareholder acquired beneficial ownership
of the shares before the date required to be set forth in the dissenters'
notice pursuant to RCW 23B.13.220(2)(c), and deposit the shareholder's
certificates in accordance with the terms of the notice.
(2) The shareholder who demand payment and deposits the shareholder's share
certificates under subsection (1) of this section retains all other rights of a
shareholder until the proposed corporate action is effected.
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(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
23B.13.240. Share restrictions
(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is effected or the restriction is released under RCW 23B.13.260.
(2) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until the effective date of
the proposed corporate action.
23B.13.250. Payment
(1) Except as provided in RCW 23B.13.270, within thirty days of the later of
the effective date of the proposed corporate action, or the date the payment
demand is received, the corporation shall pay each dissenter who complied with
RCW 23B.13.230 the amount the corporation estimates to be the fair value of the
shareholder's shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair value of
the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and
(e) A copy of this chapter.
23B.13.260. Failure to take action
(1) If the corporation does not effect the proposed action within sixty days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment
demand procedure.
23B.13.270. After-acquired shares
(1) A corporation may elect to withhold payment required by RCW 23B.13.250
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares, an explanation of
how the interest was calculated, and a statement of the dissenter's right to
demand payment under RCW 23B.13.280.
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23B.13.280. Procedure if shareholder dissatisfied with payment or offer
(1) A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due, if:
(a) The dissenter believes that the amount paid under RCW 23B.13.250 or
offered under RCW 23B.13.270 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250 within
sixty days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section unless
the dissenter notifies the corporation of the dissenter's demand in writing
under subsection (1) of this section within thirty days after the corporation
made or offered payment for the dissenter's shares.
23B.13.300. Court action
(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding
within the sixty-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the superior court of
the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign
corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this chapter. If the court
determines that such shareholder has not complied with the provisions of this
chapter, the shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are entitled
to the same discovery rights as parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation,
or (b) for the fair value, plus accrued interest, of the dissenter's after-
acquired shares for which the corporation elected to withhold payment under RCW
23B.13.270.
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23B.13.310. Court costs and counsel fees
(1) The court in a proceeding commenced under RCW 23B.13.300 shall determine
all costs of the proceeding, including the reasonable compensation and expenses
of appraisers appointed by the court. The court shall assess the costs against
the corporation, except that the court may assess the costs against all or some
of the dissenters, in amounts the court finds equitable, to the extent the
court finds the dissenters acted arbitrarily, vexatiously, or not in good faith
in demanding payment under RCW 23B.13.280.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of RCW 23B.13.200 through 23B.13.280; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by chapter 23B.13.RCW.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefitted.
Washington Dissenters' Rights (Limited Liability Companies)
25.15.425. Definitions
As used in this article, unless the context otherwise requires:
(1) "Limited liability company" means the domestic limited liability company
in which the dissenter holds or held a membership interest, or the surviving
limited liability company, limited partnership, or corporation by merger,
whether foreign or domestic, of that limited liability company.
(2) "Dissenter" means a member who is entitled to dissent from a plan of
merger and who exercises that right when and in the manner required by this
article.
(3) "Fair value," with respect to a dissenter's limited liability company
interest, means the value of the member's limited liability company interest
immediately before the effectuation of the merger to which the dissenter
objects, excluding any appreciation or depreciation in anticipation of the
merger unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the merger until
the date of payment, at the average rate currently paid by the limited
liability company on its principal bank loans or, if none, at a rate that is
fair and equitable under all the circumstances.
25.15.430. Member--Dissent--Payment of fair value
(1) Except as provided in RCW 25.15.440 or 25.15.450(2), a member of a
domestic limited liability company is entitled to dissent from, and obtain
payment of, the fair value of the member's interest in a limited liability
company in the event of consummation of a plan of merger to which the limited
liability company is a party as permitted by RCW 25.15.395 or 25.15.415.
(2) A member entitled to dissent and obtain payment for the member's
interest in a limited liability company under this article may not challenge
the merger creating the member's entitlement unless the merger fails to comply
with the procedural requirements imposed by this title, Title 23B RCW, RCW
25.10.800 through 25.10.840, or the limited liability company agreement, or is
fraudulent with respect to the member or the limited liability company.
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(3) The right of a dissenting member in a limited liability company to
obtain payment of the fair value of the member's interest in the limited
liability company shall terminate upon the occurrence of any one of the
following events:
(a) The proposed merger is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
merger; or
(c) The member's demand for payment is withdrawn with the written
consent of the limited liability company.
25.15.435. Dissenters' rights--Notice--Timing
(1) Not less than ten days prior to the approval of a plan of merger, the
limited liability company must send a written notice to all members who are
entitled to vote on or approve the plan of merger that they may be entitled to
assert dissenters' rights under this article. Such notice shall be accompanied
by a copy of this article.
(2) The limited liability company shall notify in writing all members not
entitled to vote on or approve the plan of merger that the plan of merger was
approved, and send them the dissenters' notice as required by RCW 25.15.445.
25.15.440. Member--Dissent--Voting restriction
A member of a limited liability company who is entitled to vote on or
approve the plan of merger and who wishes to assert dissenters' rights must not
vote in favor of or approve the plan of merger. A member who does not satisfy
the requirements of this section is not entitled to payment for the member's
interest in the limited liability company under this article.
25.15.445. Members--Dissenters' notice--Requirements
(1) If the plan of merger is approved, the limited liability company shall
deliver a written dissenters' notice to all members who satisfied the
requirements of RCW 25.15.440.
(2) The dissenters' notice required by RCW 25.15.435(2) or by subsection (1)
of this section must be sent within ten days after the approval of the plan of
merger, and must:
(a) State where the payment demand must be sent;
(b) Inform members as to the extent transfer of the member's interest in
the limited liability company will be restricted as permitted by RCW
25.15.455 after the payment demand is received;
(c) Supply a form for demanding payment;
(d) Set a date by which the limited liability company must receive the
payment demand, which date may not be fewer than thirty nor more than sixty
days after the date the notice under this section is delivered; and
(e) Be accompanied by a copy of this article.
25.15.450. Member--Payment demand--Entitlement
(1) A member of a limited liability company who demands payment retains all
other rights of a member of such company until the proposed merger becomes
effective.
(2) A member of a limited liability company sent a dissenters' notice who
does not demand payment by the date set in the dissenters' notice is not
entitled to payment for the member's interest in the limited liability company
under this article.
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25.15.455. Member's interests--Transfer restriction
The limited liability company agreement may restrict the transfer of
members' interests in the limited liability company from the date the demand
for their payment is received until the proposed merger becomes effective or
the restriction is released under this article.
25.15.460. Payment of fair value--Requirements for compliance
(1) Within thirty days of the later of the date the proposed merger becomes
effective, or the payment demand is received, the limited liability company
shall pay each dissenter who complied with RCW 25.15.450 the amount the
limited liability company estimates to be the fair value of the dissenting
member's interest in the limited liability company, plus accrued interest.
(2) The payment must be accompanied by:
(a) Copies of the financial statements for the limited liability company
for its most recent fiscal year;
(b) An explanation of how the limited liability company estimated the
fair value of the member's interest in the limited liability company;
(c) An explanation of how the accrued interest was calculated;
(d) A statement of the dissenter's right to demand payment; and
(e) A copy of this article.
25.15.465. Merger--Not effective within sixty days--Transfer restrictions
(1) If the proposed merger does not become effective within sixty days
after the date set for demanding payment, the limited liability company shall
release any transfer restrictions imposed as permitted by RCW 25.15.455.
(2) If, after releasing transfer restrictions, the proposed merger becomes
effective, the limited liability company must send a new dissenters' notice as
provided in RCW 25.15.435(2) and 25.15.445 and repeat the payment demand
procedure.
25.15.470. Dissenter's estimate of fair value--Notice
(1) A dissenting member may notify the limited liability company in writing
of the dissenter's own estimate of the fair value of the dissenter's interest
in the limited liability company, and amount of interest due, and demand
payment of the dissenter's estimate, less any payment under RCW 25.15.460, if:
(a) The dissenter believes that the amount paid is less than the fair
value of the dissenter's interest in the limited liability company, or that
the interest due is incorrectly calculated;
(b) The limited liability company fails to make payment within sixty
days after the date set for demanding payment; or
(c) The limited liability company, having failed to effectuate the
proposed merger, does not release the transfer restrictions imposed on
members' interests as permitted by RCW 25.15.455 within sixty days after
the date set for demanding payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the limited liability company of the dissenter's
demand in writing under subsection (1) of this section within thirty days
after the limited liability company made payment for the dissenter's interest
in the limited liability company.
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25.15.475. Unsettled demand for payment--Proceeding--Parties--Appraisers
(1) If a demand for payment under RCW 25.15.450 remains unsettled, the
limited liability company shall commence a proceeding within sixty days after
receiving the payment demand and petition the court to determine the fair value
of the dissenting member's interest in the limited liability company, and
accrued interest. If the limited liability company does not commence the
proceeding within the sixty-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
(2) The limited liability company shall commence the proceeding in the
superior court. If the limited liability company is a domestic limited
liability company, it shall commence the proceeding in the county where its
registered office is maintained.
(3) The limited liability company shall make all dissenters (whether or not
residents of this state) whose demands remain unsettled parties to the
proceeding as in an action against their membership interests in the limited
liability company and all parties must be served with a copy of the petition.
Nonresidents may be served by registered or certified mail or by publication as
provided by law.
(4) The limited liability company may join as a party to the proceeding any
member who claims to be a dissenter but who has not, in the opinion of the
limited liability company, complied with the provisions of this article. If the
court determines that such member has not complied with the provisions of this
article, the member shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced is
plenary and exclusive. The court may appoint one or more persons as appraisers
to receive evidence and recommend decisions on the question of fair value. The
appraisers have the powers described in the order appointing them or in any
amendment to it. The dissenters are entitled to the same discovery rights as
parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of the
dissenter's membership interest in the limited liability company, plus
interest, exceeds the amount paid by the limited liability company.
25.15.480. Unsettled demand for payment--Costs--Fees and expenses of counsel
(1) The court in a proceeding commenced under RCW 25.15.475 shall determine
all costs of the proceeding, including the reasonable compensation and expenses
of appraisers appointed by the court. The court shall assess the costs against
the limited liability company, except that the court may assess the costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or
not in good faith demanding payment.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the limited liability company and in favor of any or all
dissenters if the court finds the limited liability company did not
substantially comply with the requirements of this article; or
(b) Against either the limited liability company or a dissenter, in
favor of any other party, if the court finds that the party against whom
the fees and expenses are assessed acted arbitrarily, vexatiously, or not
in good faith with respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the limited liability
company, the court may award to these counsel reasonable fees to be paid out of
the amounts awarded to the dissenters who were benefitted.
C-8
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Centerprise's certificate of incorporation provides that Centerprise shall,
to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law, as amended from time to time, indemnify all persons whom it
may indemnify pursuant thereto.
Section 145 of the Delaware General Corporation Law permits a corporation,
under specified circumstances, to indemnify its directors, officers, employees
or agents against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action, suit or proceeding brought by third parties by
reason of the fact that they were or are directors, officers, employees, or
agents of the corporation, if such directors, officers, employees or agents
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent
that the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to be indemnified for such expenses despite such
adjudication of liability.
Centerprise's certificate of incorporation provides that Centerprise's
directors will not be personally liable to Centerprise or its stockholders for
monetary damages resulting from breaches of their fiduciary duty as directors
except (a) for any breach of the duty of loyalty to Centerprise or its
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 164 of
the Delaware General Corporation Law, which makes directors liable for unlawful
dividends or unlawful stock repurchase or redemptions or (d) for transactions
from which directors derive improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Item 21. Exhibits and Financial Statement Schedules
(a) The following exhibits are filed with this Registration Statement:
Exhibits
<TABLE>
<C> <S>
2.1* Merger Agreement between Centerprise, Reznick Fedder & Silverman,
Certified Public Accountants, A Professional Corporation, Reznick
Mergersub Inc., Reznick Fedder & Silverman, C.P.A.s, L.L.C., and the
members of Reznick Fedder & Silverman, C.P.A.s, L.L.C., dated as of
March 31, 1999.
2.2* Merger Agreement between Centerprise, Robert F. Driver Co., Inc., RFD
Mergersub Inc. and the stockholders of Robert F. Driver Co., Inc., dated
as of March 31, 1999.
2.3* Merger Agreement between Centerprise, Follmer, Rudzewicz & Company,
P.C., FRF Holding LLC, FRC Mergersub Inc. and the stockholders of
Follmer Rudzewicz & Company, P.C., dated as of March 31, 1999.
2.4* Merger Agreement between Centerprise, Mann Frankfort Stein & Lipp, P.C.,
MFSL Mergersub Inc. and the stockholders of Mann Frankfort & Stein &
Lipp, P.C., dated as of March 31, 1999.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
2.5* Merger Agreement between Centerprise, Berry, Dunn, McNeil & Parker,
Chartered, Berry Dunn Mergersub Inc., BDM&P Holdings, LLC and certain
members of BDM&P Holdings, LLC, dated as of March 31, 1999.
2.6* Merger Agreement between Centerprise, Urbach Kahn & Werlin, PC, a New
York professional corporation, Urbach, Kahn & Werlin, P.C., UKW
Mergersub Inc., UKW Management LLC and the members of UKW LLC, dated
as of March 31, 1999.
2.7* Merger Agreement between Centerprise, Self Funded Benefits, Inc.
(d/b/a Insurance Design Administrators), IDA Mergersub Inc. and the
stockholders of Self Funded Benefits, Inc. (d/b/a Insurance Design
Administrators), dated as of March 31, 1999.
2.8* Merger Agreement between Centerprise, Holthouse Carlin & Van Trigt
LLP, certain merger subsidiaries of Centerprise, the partners of
Holthouse Carlin & Van Trigt LLP, the members of the LLC Partner and
the stockholders of the Corporate Partners, dated as of March 31,
1999.
2.9* Merger Agreement between Centerprise, Grace & Company, P.C., Grace
Capital, LLP, Grace Mergersub Inc. and the partners of Grace Capital,
LLP, dated as of March 31, 1999.
2.10* Merger Agreement between Centerprise, The Reppond Company Inc.,
Reppond Administrators, LLC, Vera Source Excess Risk Ltd., Reppond
Mergersub Inc., RA Mergersub LLC and Verasource Mergersub Inc., dated
as of March 31, 1999.
2.11* Merger Agreement between Centerprise, Simione, Scillia, Larrow &
Dowling LLC, SSLD Mergersub LLC and the members of Simione, Scillia,
Larrow & Dowling LLC, dated as of March 31, 1999.
2.12* Voting Agreement by and among Centerprise and named members of
Reznick, Fedder & Silverman, C.P.A.s, L.L.C., dated March 31, 1999.
2.13* Voting Agreement by and among Centerprise and named stockholders of
Robert F. Driver Co., Inc., dated March 31, 1999.
2.14* Voting Agreement by and among Centerprise and named stockholders of
Follmer, Rudzewicz & Company, P.C., dated March 31, 1999.
2.15* Voting Agreement by and among Centerprise and named stockholders of
Mann Frankfort Stein & Lipp, P.C., dated March 31, 1999.
2.16* Voting Agreement by and among Centerprise and named stockholders of
Berry, Dunn, McNeil & Parker, Chartered, dated March 31, 1999.
2.17* Voting Agreement by and among Centerprise and named stockholders of
Urbach, Kahn & Werlin, P.C., dated March 31, 1999.
2.18* Voting Agreement by and among Centerprise and named stockholders of
Self Funded Benefits, Inc. (d/b/a Insurance Design Administrators),
dated March 31, 1999.
2.19* Voting Agreement by and among Centerprise and the partners of
Holthouse Carlin & Van Trigt LLP, dated March 31, 1999.
2.20* Voting Agreement by and among Centerprise and named partners of Grace
& Company, P.C., dated March 31, 1999.
2.21* Voting Agreement by and among Centerprise and the stockholders of The
Reppond Company, Inc., dated March 31, 1999.
2.22* Voting Agreement by and among Centerprise and the members of Reppond
Administrators, L.L.C., dated March 31, 1999.
2.23* Voting Agreement by and among Centerprise and the stockholders of
VeraSource Excess Risk Ltd., dated March 31, 1999.
2.24* Voting Agreement by and among Centerprise, Simione, Scillia, Larrow &
Dowling LLC, and the managers of Simione, Scillia, Larrow & Dowling
LLC, dated March 31, 1999.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1** Specimen stock certificate representing common stock.
5*** Opinion of Katten Muchin & Zavis as to the legality of the securities
being registered (including consent).
8.1** Opinion of Katten Muchin & Zavis as to tax matters.
10.1** Form of Employment Agreement between Centerprise and Robert C. Basten.
10.2** Form of Employment Agreement between Centerprise and DeAnn L. Brunts.
10.3** Form of Employment Agreement between Centerprise and Rondol E. Eagle.
10.4** Form of Employment Agreement between Centerprise and Dennis W. Bikun.
10.5* Form of Employment Agreement between Self Funded Benefits, Inc. (d/b/a
Insurance Design Administrators) and Robert F. Gallo.
10.6* Form of Employment Agreement between Centerprise, Robert F. Driver
Co., Inc. and Thomas W. Corbett.
10.7* Form of Stockholders' Agreement.
10.8* Form of Incentive Compensation Agreement.
10.9* Form of Separate Practice Agreement.
10.10* Form of Services Agreement.
10.11* Form of Employee Incentive Compensation Plan.
10.12* Form of Stock Plan.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of KPMG LLP.
23.3*** Consent of Katten Muchin & Zavis (contained in its opinion to be filed
as Exhibit 5 hereto).
23.4* Consent of Proposed Director (David Reznick)
23.5* Consent of Proposed Director (Thomas W. Corbett)
23.6* Consent of Proposed Director (Richard H. Stein)
23.7* Consent of Proposed Director (Anthony P. Frabotta)
23.8* Consent of Proposed Director (Charles H. Roscoe)
23.9* Consent of Proposed Director (Steven N. Fischer)
23.10* Consent of Proposed Director (Robert F. Gallo)
23.11* Consent of Proposed Director (Wayne J. Grace)
23.12* Consent of Proposed Director (Philip J. Holthouse)
23.13* Consent of Proposed Director (Anthony P. Scillia)
23.14* Consent of Proposed Director (Louis C. Fornetti)
23.15* Consent of Proposed Director (William J. Lynch)
23.16 Consent of Proposed Director (John M. Cook)
24*** Power of Attorney (see signature page).
99.1 Form of Rescission Acceptance Form
99.2 Form of Rescission Rejection Form
</TABLE>
- --------
* Incorporated by reference to the corresponding exhibit to the Registrant's
registration statement on Form S-1 (file no. 333-75863).
** To be filed by amendment.
*** Previously filed.
II-3
<PAGE>
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, the registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned thereunto duly authorized, in the City of
Chicago, State of Illinois, on the 10th day of August, 1999.
Centerprise Advisors, Inc.
/s/ Robert C. Basten
By: _________________________________
Robert C. Basten
President and Chief Executive
Officer
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>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Robert C. Basten Chairman of the Board, August 10, 1999
______________________________________ President and Chief
Robert C. Basten Executive Officer
* Executive Vice President, August 10, 1999
______________________________________ Chief Financial Officer
DeAnn L. Brunts and a Director
* Vice President and Chief August 10, 1999
______________________________________ Accounting Officer
Dennis W. Bikun
* Director August 10, 1999
______________________________________
Scott H. Lang
</TABLE>
/s/ Robert C. Basten
<TABLE>
<S> <C> <C>
August 10, 1999
</TABLE>
*By: ____________________________
Robert C. Basten
Attorney-in-fact
II-6
<PAGE>
Exhibit 23.1 Consent of Independent Accountants
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
registration statement on Form S-4 of our reports dated as shown below,
relating to the respective financial statements which appear in such
prospectus.
<TABLE>
<CAPTION>
Company Opinion Date
- ------- -----------------
<S> <C>
Centerprise Advisors, Inc................................... August 9, 1999
Reznick Fedder & Silverman, P.C............................. January 29, 1999
Robert F. Driver Co., Inc................................... February 10, 1999
Mann Frankfort Stein & Lipp, P.C............................ June 17, 1999
Follmer, Rudzewicz & Company, P.C........................... July 26, 1999
Berry, Dunn, McNeil & Parker, Chartered..................... January 9, 1999
Urbach Kahn & Werlin PC..................................... February 9, 1999
Self Funded Benefits, Inc. d/b/a Insurance Design
Administrators............................................. February 5, 1999
Grace & Company, P.C........................................ February 12, 1999
Holthouse Carlin & Van Trigt LLP............................ January 31, 1999
The Reppond Companies....................................... January 29, 1999
Simione, Scillia, Larrow & Dowling LLC...................... January 29, 1999
</TABLE>
We also consent to the references to us under the heading "Experts" in such
Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 10, 1999
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
The Board of Directors
Robert F. Driver Co., Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
San Diego, California
August 10, 1999
<PAGE>
Exhibit 23.16
Consent
I, John M. Cook, do hereby consent to the inclusion of biographical
information about me, including my name, age, positions to be held with
Centerprise Advisors, Inc., a Delaware corporation (the "Company") and its
subsidiary, my expected term as a director of the Company and the other
information required to be provided in the Company's Registration Statements on
Form S-1 and S-4 (the "Registration Statements") to be filed with the Securities
and Exchange Commission which information will appear principally in the section
entitled "Management -- Executive Officers and Directors." I further consent to
the filing of this consent as an exhibit to the Registration Statements.
/s/ John M. Cook
------------------------------------
John M. Cook
Dated: July 1, 1999
<PAGE>
EXHIBIT 99.1
RESCISSION ACCEPTANCE FORM
The undersigned hereby ACCEPTS the Rescission Offer made by Centerprise
Advisors, Inc. by a Prospectus dated ____________, 1999.
Date: ___________, 1999 _______________________________
Print
Name: _________________________
<PAGE>
EXHIBIT 99.2
RESCISSION REJECTION FORM
The undersigned hereby REJECTS the Rescission Offer made by Centerprise
Advisors, Inc. by a Prospectus dated ____________, 1999.
Date: ___________, 1999 _______________________________
Print
Name: _________________________
