<PAGE>
As filed with the Securities and Exchange Commission on November 3, 1999
Registration No. 333-75863
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Amendment No. 5
to
FORM S-1
REGISTRATION STATEMENT
Under
the Securities Act of 1933
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CENTERPRISE ADVISORS, INC.
(Exact name of registrant as specified in its charter)
--------------
Delaware 8700 36-4272852
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification No.)
of incorporation or Classification Code No.)
organization)
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. MICHAEL A. CAMPBELL, ESQ.
MARGUERITE M. ELIAS, ESQ. Mayer Brown & Platt
Katten Muchin & Zavis 190 South LaSalle Street
525 West Monroe Street, Suite 1600 Chicago, Illinois 60603
Chicago, Illinois 60661 (312) 782-0600
(312) 902-5200
--------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 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(c)
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: [_]
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: [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until 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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. +
+Centerprise may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus is not an offer to sell these securities and it is not soliciting +
+an offer to buy these securities in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated November 3, 1999
PROSPECTUS
10,500,000 Shares
Common Stock
-----------
This is the initial public offering of common stock of Centerprise
Advisors, Inc. The underwriters will offer 10,500,000 shares in the United
States and Canada. This is a firm commitment underwriting.
Centerprise expects the public offering price to be between $11.50 and
$13.50 per share. Currently, no public market exists for the shares. The common
stock has been approved for listing on The New York Stock Exchange under the
symbol "CAI."
Investing in the common stock involves risks that are described in the
"Risk Factors" section beginning on page 9 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price.................................... $ $
Underwriting discount.................................... $ $
Proceeds, before expenses, to Centerprise................ $ $
</TABLE>
The underwriters may also purchase up to an additional 1,575,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The underwriters expect to deliver the shares in New York on ,
1999.
-----------
Merrill Lynch & Co.
Lehman Brothers
CIBC World Markets
-----------
The date of this prospectus is , 1999.
<PAGE>
[U.S. map with the locations of the Centerprise Companies]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 9
Forward-Looking Statements............................................... 19
The Company.............................................................. 20
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 25
Selected Financial Data.................................................. 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Industry Overview........................................................ 53
Business................................................................. 55
Management............................................................... 69
Certain Transactions..................................................... 77
Principal Stockholders................................................... 82
Description of Capital Stock............................................. 84
Shares Eligible for Future Sale.......................................... 85
Underwriting............................................................. 87
Legal Matters............................................................ 90
Experts.................................................................. 90
Where You May Find Additional Information................................ 91
Index to Financial Statements............................................ F-1
</TABLE>
----------------
Centerprise's principal executive offices are located at 225 West
Washington Street, 16th Floor, Chicago, Illinois 60606, and its phone number is
(312) 578-9600.
You should rely only on the information contained in this prospectus.
Centerprise has not, and the underwriters 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 underwriters 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 prospectus is accurate as of the date on
the front cover of this prospectus only. Centerprise's business, financial
condition, results of operations and prospects may have changed since that
date.
3
<PAGE>
PROSPECTUS SUMMARY
At the same time as, and as a condition to, the closing of the offering,
Centerprise will acquire, in separate mergers, ten companies that collectively
provide professional, business and financial services and products. For more
information about these companies and the mergers, see "The Company" and
"Certain Transactions."
This summary highlights selected information from this prospectus and may
not contain all of the information that may be important to you. You should
read the entire prospectus carefully, including the financial data and related
notes, before you decide whether to invest in Centerprise. Unless stated
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 212.05817-for-1 stock split that will occur
prior to the closing of the offering; and
. assume that the underwriters' over-allotment option is not
exercised.
The Company
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 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 29.5 years. On a combined historical basis, their revenues increased
from $161.9 million in fiscal 1997 to $191.1 million in fiscal 1998,
representing an annual growth rate of 18.0%.
Industry Overview
The professional and business and financial services market is growing
and changing as clients increasingly look to outside service providers to meet
their complex needs. 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. According to the U.S.
Department of Commerce, the accounting profession is facing greater demand for
consulting services. This expansion of services has fueled significant growth
in Centerprise's industry.
Centerprise believes that the Big Five accounting firms have focused
primarily on developing diversified business, financial and consulting services
in response to the needs of their largest corporate clients. However,
Centerprise believes that the needs of middle-market clients are also
increasingly complex, creating opportunities for large regional accounting
firms to expand their service and product offerings. According to Accounting
Today, revenues of the top 100 accounting firms other than the Big Five totaled
$4.9 billion in 1998. When comparing 1998 and 1997, consulting revenues for
such firms were the most significant contributor to the growth that this
segment of the industry experienced, outpacing growth in revenues for tax
services and for accounting and auditing services. Centerprise believes that
clients are increasingly demanding diverse professional services, including
consulting, as well as other business and financial services and products, and
that these demands are creating a new and rapidly emerging diversified industry
where trusted advisors provide clients with a variety of services and products.
4
<PAGE>
Centerprise's 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.
. Create national practices that extend its existing industry,
service and product expertise.
. Expand its strong local presence.
. Integrate its management and its information systems.
. Use a compensation program designed to provide Centerprise with a
baseline level of earnings before corporate expenses.
In addition, Centerprise will implement a growth strategy that focuses on
expanding its services and products in order to better service existing clients
and attract new clients. To execute this strategy, Centerprise will:
. Build upon existing "trusted advisor" relationships by using its
professional services firms as the focal points for delivering its
services and products.
. Encourage cooperation among its business units by instituting
incentives for client and knowledge sharing.
. Pursue acquisitions and alliances to build and enhance
Centerprise's national practices, increase its presence and
capacity in key markets and add new professional, business and
financial services and products.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by
Centerprise..................... 10,500,000 shares
Common stock to be outstanding
after the offering.............. 26,700,000 shares
Use of proceeds.................. To pay the cash portion of the purchase
price for the acquisition of the founding
companies, to repay indebtedness and fund
other obligations of these companies and
for general corporate purposes, including
future acquisitions.
Proposed New York Stock Exchange
symbol.......................... CAI
</TABLE>
In addition to the 26,700,000 shares of common stock to be outstanding
after the offering, Centerprise may issue the following:
. 1,997,442 shares of common stock issuable upon the exercise of
options to be granted to Centerprise's management, other employees
and non-employee directors upon the closing of the offering;
. 100,000 shares of common stock issuable upon the exercise of
warrants to be issued upon the closing of the offering; and
. 5,762,046 shares reserved for issuance under Centerprise's
incentive compensation and stock purchase plans.
6
<PAGE>
Summary Unaudited Pro Forma Combined Financial Data
(in thousands, except share and per share data)
Centerprise will acquire ten companies simultaneously with the closing of
the offering. 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 and other data assume
that the mergers and the offering were completed on January 1, 1998. The pro
forma combined balance sheet data assume that the mergers were completed on
June 30, 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
----------------------------------
Six Months Ended
Year Ended June 30,
December 31, ---------------------
1998 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Professional services (1)............... $ 140,746 $ 80,011 $ 94,859
Business and financial services......... 52,691 28,497 36,571
---------- ---------- ----------
Total revenues........................ 193,437 108,508 131,430
Expenses:
Professional services compensation and
related costs (2)...................... 87,689 48,259 61,530
Business and financial services
compensation and related costs (2)..... 35,458 17,961 21,488
Other operating expenses................ 35,169 17,128 20,745
Non-cash stock compensation (3)......... 17,503 -- 3,763
Amortization of goodwill (4)............ 16,039 8,019 8,019
Depreciation expense.................... 4,854 2,425 2,090
---------- ---------- ----------
Income (loss) from operations............. (3,275) 14,716 13,795
Other income, net (5)..................... 101 280 389
---------- ---------- ----------
Income (loss) before income taxes......... (3,174) 14,996 14,184
Provision for income taxes (6)............ 5,146 9,206 8,881
---------- ---------- ----------
Net income (loss)......................... $ (8,320) $ 5,790 $ 5,303
========== ========== ==========
Net income (loss) per share, basic and
diluted.................................. $ (0.32) $ 0.22 $ 0.20
========== ========== ==========
Shares used in computing net income (loss)
per share (7)............................ 26,169,905 26,169,905 26,169,905
========== ========== ==========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Combined
As Adjusted
June 30,
1999
-----------
<S> <C>
Balance Sheet Data:
Working capital................................................... $ 828
Total assets...................................................... 335,996
Total long-term debt, net of current portion...................... 7,981
Stockholders' equity.............................................. 243,804
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Combined
----------------------------
Six Months
Year Ended Ended June 30,
December 31, ---------------
1998 1998 1999
------------ ------- -------
<S> <C> <C> <C>
Other Data:
EBITDA (8)...................................... $18,491 $25,765 $24,916
Income from operations before goodwill
amortization (8)............................... 12,764 22,735 21,814
Net income before goodwill amortization(8)...... 7,719 13,809 13,322
</TABLE>
- --------
(1) Includes pro forma revenues associated with services agreements of $62,600,
$35,833 and $41,583 for the year ended December 31, 1998 and the six months
ended June 30, 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 $26,569, $16,471 and $15,217 for the year ended December 31,
1998 and the six months ended June 30, 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 $17,503 and $2,656 in the
year ended December 31, 1998 and the six months ended June 30, 1999,
respectively, and the issuance of stock to Driver employees of $1,107 in
the six months ended June 30, 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
$240,580 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, $234 and
$884 for the year ended December 31, 1998 and the six months ended June 30,
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) 12,488,981 shares to be issued to the owners and employees of the
founding companies in the mergers;
(b) 3,711,019 shares held by initial investors and management of
Centerprise; and
(c) 9,969,905 of the 10,500,000 shares of common stock sold in the
offering, 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 offering.
(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. Centerprise
uses a 15-year life for amortization of goodwill, which management believes
is substantially lower than that used by other companies which may provide
similar services. Management believes this useful life to be appropriate,
and because of its relative conservatism and the material nature of the
charge, management further believes that analysts and investors will find
it useful to have this Other Data when evaluating Centerprise's performance
versus its competitors which may use a substantially longer life for
amortization of goodwill.
8
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before deciding whether to purchase Centerprise common
stock.
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 these 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 $64.8 million for the year ended December 31, 1998 and $42.7
million for the six months ended June 30, 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
revenues from "services agreements" 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
"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
9
<PAGE>
licensed to practice accountancy and in which Centerprise will have no
ownership interest. Pursuant to services 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--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 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
required by the accounting profession and the SEC. 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 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, affiliates or significant stockholders
with an attest firm client will be regarded as a business relationship between
the attest firm and the client for purposes of applying the independence rules.
10
<PAGE>
The accounting profession and the SEC view an attest firm as lacking
independence from entities involved in the offering or in making a market for
or otherwise facilitating the trading of Centerprise's common stock in the
secondary market. Accordingly, an attest firm's independence would be impaired
with respect to all members of the syndicate underwriting the offering 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, affiliates and significant
stockholders and the attest firms are viewed as one entity for purposes of the
accounting profession's and the SEC's independence rules, Centerprise and its
officers, directors, affiliates or significant stockholders 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 accounting profession's and 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, and Centerprise, its directors, officers, affiliates and significant
stockholders, its professional employees and members of their respective
households will be prohibited from owning stock in an SEC reporting client of
an attest firm. In addition, the accounting profession and the SEC view an
attest firm as lacking independence with respect to an SEC reporting client
where that client or its directors, officers, affiliates or significant
stockholders own stock in Centerprise or Centerprise's affiliates.
Centerprise and the attest firms have agreed to implement policies and
procedures designed to enable them to maintain independence in accordance with
applicable standards. 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. There can be no assurance that following
the policies and procedures implemented by Centerprise and the attest firms
will enable the attest firms to avoid circumstances that would cause the attest
firm to lack independence from an SEC reporting client.
.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
Centerprise's relationship with the attest firms or their clients, harm
Centerprise's business or reduce its revenues or earnings.
11
<PAGE>
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 these companies offer
different services, use different internal accounting policies and procedures,
employ 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 members of management of 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.
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.
. 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.
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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. See "Dilution."
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 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.
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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 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;
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. 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 $240.6 million, or 71.6%, of Centerprise's pro forma as
adjusted total assets as of June 30, 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 $16.0 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. Management believes that Centerprise's 15-year life for
amortization of goodwill is substantially lower than that used by other
companies which may provide similar services. Although management believes this
useful life to be appropriate, there can be no assurance that its relative
shortness and relative impact on net income and earnings per share will not
negatively impact the market price of the common stock.
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 $600,000 to
$650,000, of which an estimated $420,000 had been incurred as of June 30, 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 founding 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 "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.
If the price of the common stock declined, it is possible that founding company
owners and some employees could pursue rescission claims against Centerprise
despite their acceptance of a registered rescission offer previously extended
to them
On September 10, 1999, Centerprise extended to the founding company
owners and some Reznick employees a registered offer to rescind alleged
unregistered offers to sell and/or sales of common stock that may have
previously taken place. In making the rescission offer, Centerprise did not
admit that any violation of securities laws occurred. Centerprise believes that
as a consequence of the acceptance of the rescission offer by all recipients,
Centerprise's potential liability to founding company owners and the Reznick
employees in connection with the previous alleged unregistered offers and/or
sales of common stock has been eliminated. However, if during the one-year
period following the alleged violations the value of the common stock declined
below the value of the consideration paid for it by the persons who received
the rescission offer, it is possible that such persons could make a claim that
a federal right of rescission survived despite their acceptance of the
rescission offer. No person has asserted or threatened to assert such a claim.
Centerprise believes that there is no basis for any such claim. If any
recipients of the rescission offer pursued and were successful in such claims,
however, Centerprise could be required to repurchase such persons' shares at a
price equal to the consideration originally paid or a cash equivalent, which
could have a material adverse effect on Centerprise. While federal rights of
rescission may in some circumstances survive rescission offers, Centerprise
believes that such a determination would be incorrect in this case and that the
likelihood of a successful rescission claim is very remote.
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 offering, Centerprise's management, its initial investors and
the owners and employees of the founding companies will own approximately 60.7%
of the outstanding shares of common stock, or 57.3% 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 "Principal
Stockholders" 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
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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 Capital Stock" for a description of these provisions.
Purchasers of shares in the offering will experience immediate and substantial
dilution
Purchasers of shares of common stock in the offering will experience
immediate dilution in the net tangible book value of their shares of
approximately $12.38 per share. See "Dilution."
The number of shares eligible for public sale after the offering may cause a
decline in Centerprise's stock price
Sales, or the availability for sale, of substantial amounts of the common
stock in the public market after the offering could cause a decline in the
market price of the common stock and impair Centerprise's ability to raise
equity capital, or finance acquisitions using equity capital, in the future.
See "Shares Eligible for Future Sale" for information regarding the number of
shares of common stock eligible for public sale after the offering.
Founding company owners may be acquiring common stock at a discount
Under GAAP purchase accounting rules, the owners of the founding
companies will be deemed to have acquired their shares of common stock in the
mergers at a 15% discount from the initial public offering price. This discount
reflects the significant transfer restrictions to which the founding company
owners will agree. Upon expiration of these restrictions, it is possible that
the founding company owners could sell their common stock for a profit at a
price lower than the price at which purchasers in the offering could achieve a
profit or suffer a smaller loss than such purchasers selling their common stock
at the same price.
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. The
common stock has been authorized for listing 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. See "Underwriting" for
more information regarding how the initial public offering price will be
determined.
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;
. 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.
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Centerprise could be required to engage another accounting firm to reaudit its
and the founding companies' financial statements if PricewaterhouseCoopers were
determined not to be independent.
The independence of the accounting firm of PricewaterhouseCoopers, which
audited historical financial statements of Centerprise and the founding
companies included in this prospectus, could be called into question if
Centerprise's chief financial officer, previously a partner in the firm, was
determined to have an appearance of continuing influence in the firm based upon
her connection to the professional services previously provided by the firm to
Centerprise and her subsequent employment by Centerprise. Centerprise is
responsible, under applicable securities laws, for providing financial
statements audited by an independent auditor. If PricewaterhouseCoopers were
ultimately determined not to be independent of Centerprise, Centerprise would
be required to engage another independent accounting firm to reaudit its and
the founding companies' financial statements, including audited financial
statements included in this prospectus. Both Centerprise and
PricewaterhouseCoopers believe that PricewaterhouseCoopers is independent of
Centerprise.
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FORWARD-LOOKING STATEMENTS
This 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" set forth above, as well as other cautionary
language in this 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 COMPANY
Centerprise is a leading provider of professional, business and financial
services and products to middle-market clients. Centerprise's goal is 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 29.5 years. Five of the seven
companies that are professional services firms were named in Accounting Today's
1999 Top 100 Accounting Firms (the "Accounting Top 100") which ranks the
largest accounting firms in the United States in terms of total revenues for
their respective 1998 fiscal years. Based on the pro forma combined revenues of
these seven firms for the fiscal year ended December 31, 1998, Centerprise
would have been ranked No. 13 in the Top 100 had the firms been combined
throughout such period.
Each of the founding companies represents an integral component of
Centerprise's business and growth strategies and was selected to fill a
specific role in the development of Centerprise's professional, business and
financial services platforms. These companies, each of which is prominent in
its market, have collectively achieved substantial growth in recent years. On a
combined historical basis, their revenues increased from $161.9 million in
fiscal 1997 to $191.1 million in fiscal 1998, representing an annual growth
rate of 18.0%.
A brief description of each founding company, its principal areas of
expertise and its anticipated contribution to the execution of Centerprise's
strategy is set forth below. Except as noted, the following table represents
revenues for the fiscal years ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
Revenues
-----------------
Founding Company Headquarters 1997 1998
---------------- ------------- -------- --------
(In thousands)
<S> <C> <C> <C>
Professional Services
Reznick Fedder & Silverman(a)........... Bethesda, MD $ 35,103 $ 47,877
Mann Frankfort Stein & Lipp............. Houston, TX 17,475 21,631
Follmer, Rudzewicz & Company(b)......... Detroit, MI 17,954 19,417
Berry, Dunn, McNeil & Parker(c)......... Portland, ME 16,812 17,916
Urbach Kahn & Werlin(d)................. Albany, NY 16,012 17,085
Grace & Company......................... St. Louis, MO 8,524 9,691
Simione, Scillia, Larrow & Dowling...... New Haven, CT 5,244 6,217
Business and Financial Services
Robert F. Driver Co.(e)................. San Diego, CA 28,170 32,886
Insurance Design Administrators......... Oakland, NJ 9,661 10,496
Reppond................................. Bellevue, WA 6,962 7,892
-------- --------
Total revenues.......................... $161,917 $191,108
======== ========
</TABLE>
- --------
(a) For the fiscal years ended September 30, 1997 and 1998.
(b) For the fiscal years ended May 31, 1997 and 1998.
(c) For the fiscal years ended June 30, 1997 and 1998.
(d) For the fiscal years ended October 31, 1997 and 1998.
(e) For the fiscal years ended July 31, 1997 and 1998.
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Professional Services
Reznick Fedder & Silverman
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 Accounting Top 100 and is the largest non-Big Five firm headquartered in
the Mid-Atlantic region. 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.
Mann Frankfort Stein & Lipp
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
is Houston's largest accounting firm other than the Big Five based on the
number of professionals, and was ranked No. 44 in the Accounting 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.
Follmer, Rudzewicz & Company
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 Accounting 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.
Berry, Dunn, McNeil & Parker
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 Accounting 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.
Urbach Kahn & Werlin
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,
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New York; and Poughkeepsie, New York. Urbach, ranked No. 48 in the Accounting
Top 100, will provide regional 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.
Grace & Company
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. After the Big Five,
Grace 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.
Simione, Scillia, Larrow & Dowling
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 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.
Business and Financial Services
Robert F. Driver Co.
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.
Insurance Design Administrators
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.
Reppond
The Reppond Company, Inc., Reppond Administrators, LLC, and VeraSource
Excess Risk Ltd. (collectively, "Reppond"), 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.
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USE OF PROCEEDS
Centerprise estimates that the net proceeds from the sale of the
10,500,000 shares of common stock offered by this prospectus, after deducting
the underwriting discount and estimated offering expenses, will be
approximately $111.1 million, or approximately $129.4 million if the
underwriters' over-allotment option is exercised in full. This estimate assumes
an initial public offering price of $12.50 per share. Estimated offering
expenses include amounts advanced by initial investors on behalf of Centerprise
in payment of legal, accounting and other fees.
Of the net proceeds, Centerprise intends to use
. approximately $82.8 million to pay the cash portion of the
purchase price for the acquisition of the founding companies other
than the contingent payments described in "Certain Transactions--
The Mergers";
. approximately $17.8 million to repay a portion of the indebtedness
assumed by Centerprise in the mergers;
. $4.0 million to fund the redemption by Driver of its outstanding
preferred stock; and
. $250,000 to settle a consulting agreement entered into by Driver.
Centerprise intends to use the remaining $6.2 million of net proceeds, or
$24.5 million if the underwriters' over-allotment option is exercised in full,
for working capital and general corporate purposes including future
acquisitions. Pending such uses, Centerprise will invest the net proceeds in
short term, interest bearing, U.S. government securities.
The indebtedness Centerprise intends to repay bears interest at effective
rates up to 12% with a weighted average interest rate of 8.8%, and would
otherwise mature on various dates through May 2005. Such indebtedness was
incurred in connection with a recapitalization at one of the founding companies
and for purchases of equipment, working capital requirements and general
corporate purposes.
Centerprise is required to obtain a credit facility of at least $75
million as a condition to the closing of the mergers. Centerprise has obtained
commitments from six banks for a $100 million five-year revolving credit
facility, subject to consummation of the offering and to customary closing
conditions. Centerprise cannot assure you that it will be able to obtain this
facility, or other financing it may need, on acceptable terms. Centerprise
anticipates borrowing up to $30.0 million under the credit facility during the
six months following the closing of the offering 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
offering.
DIVIDEND POLICY
Centerprise intends to retain its earnings, if any, to finance the
expansion of its business and for general corporate purposes, and does not
anticipate paying any cash dividends on its common stock in the foreseeable
future. Any payment of future dividends will be at the discretion of the board
of directors and will depend upon, among other things, Centerprise's earnings,
financial condition, capital requirements and level of indebtedness, any
contractual restrictions on the payment of dividends and other factors the
board of directors believes to be relevant. In addition, the credit facility is
expected to include restrictions on Centerprise's ability to pay dividends
without the consent of the lender.
23
<PAGE>
CAPITALIZATION
The following table shows the current maturities of the short-term and
long-term debt and capitalization of Centerprise at June 30, 1999 on a pro
forma combined basis to give effect to the mergers, and as adjusted to give
effect to the offering and the application of the estimated net proceeds of the
offering after deducting the underwriting discount and estimated offering
expenses. This table assumes an initial public offering price of $12.50 per
share. You should read this information together with Centerprise's unaudited
pro forma combined financial statements and the accompanying notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
---------------------
Pro
Forma Pro Forma
Combined As Adjusted
-------- -----------
(In thousands)
<S> <C> <C>
Short-term debt, including current maturities of
long-term debt..................................... $ 14,835 $ 12,230
======== ========
Long-term debt, less current maturities............. $ 23,210 $ 7,981
Redeemable preferred stock.......................... 4,000 --
Stockholders' equity:
Preferred Stock, par value $.01 per share,
10,000,000 shares authorized; none issued and
outstanding...................................... -- --
Common stock, par value $.01 per share, 50,000,000
shares authorized; 16,200,000 shares issued and
outstanding, pro forma combined; 26,700,000
shares issued and outstanding, pro forma as
adjusted......................................... 162 267
Additional paid-in-capital.......................... 152,886 265,589
Retained earnings (deficit)......................... (22,052) (22,052)
-------- --------
Total stockholders' equity...................... 130,996 243,804
-------- --------
Total capitalization............................ $158,206 $251,785
======== ========
</TABLE>
The share information in the table is based on the number of shares of
common stock outstanding on June 30, 1999, and does not include the following
shares that Centerprise may issue:
. 1,997,442 shares of common stock issuable upon the exercise of
options to be granted to Centerprise's management, other employees
and non-employee directors upon the closing of the offering;
. 100,000 shares of common stock issuable upon the exercise of warrants
to be issued upon the closing of the offering; and
. 5,762,046 shares reserved for issuance under Centerprise's incentive
compensation and stock purchase plans.
24
<PAGE>
DILUTION
The deficit in Centerprise's pro forma net tangible book value as of June
30, 1999 was approximately $109.6 million, or $6.76 per share of common stock,
after giving effect to the mergers. The pro forma net tangible book value per
share represents Centerprise's pro forma net tangible assets less total
liabilities divided by the number of shares of common stock to be outstanding
after giving effect to the mergers. After giving effect to the sale of the
10,500,000 shares of common stock offered by this prospectus, assuming an
initial public offering price of $12.50 per share, and the application of the
estimated net proceeds from the offering after deducting the estimated
underwriting discount and offering expenses, Centerprise's pro forma net
tangible book value at June 30, 1999 would have been approximately $3.2 million
or $0.12 per share. This represents an immediate increase in pro forma net
tangible book value of $6.88 per share to existing stockholders and an
immediate dilution of $12.38 per share to new investors purchasing the shares
in the offering. The following table illustrates this pro forma dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share.......................... $12.50
Pro forma net tangible book value per share before the
offering............................................... $(6.76)
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 6.88
------
Pro forma net tangible book value per share after the
offering................................................. 0.12
------
Dilution per share to new investors....................... $12.38
======
</TABLE>
The following table illustrates, on a pro forma basis to give effect to
the mergers as of June 30, 1999, the number of shares of common stock purchased
from Centerprise, the total consideration paid and the average price per share
paid by existing stockholders, after giving effect to the mergers, and the new
investors purchasing shares of common stock in the offering at an assumed
initial public offering price of $12.50 per share:
<TABLE>
<CAPTION>
Total Average
Shares Purchased Consideration Price
------------------ ------------- Per
Number Percent Amount Share
---------- ------- ------------- -------
<S> <C> <C> <C> <C>
Existing stockholders............ 16,200,000 60.7% $(59,766,000) $(3.69)
New investors.................... 10,500,000 39.3% 131,250,000 12.50
---------- ------ ------------
Total........................ 26,700,000 100.0% $ 71,484,000
========== ====== ============
</TABLE>
As shown in the table, total consideration paid by existing stockholders
represents the combined stockholders' equity of Centerprise and the founding
companies before the offering, adjusted to reflect the cash consideration
payable to the owners of the founding companies in the mergers, other than the
contingent payments described in "Certain Transactions--The Mergers."
25
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except share and per share data)
Centerprise will acquire ten companies simultaneously with the completion
of the offering. 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 offering were completed on January 1, 1998. The pro forma
combined balance sheet data assume that the mergers were completed on June 30,
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 founding 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
----------------------------------
Six Months Ended
Year Ended June 30,
December 31, ---------------------
1998 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Professional services (1)................. $ 140,746 $ 80,011 $ 94,859
Business and financial services........... 52,691 28,497 36,571
---------- ---------- ----------
Total revenues.......................... 193,437 108,508 131,430
Expenses:
Professional services compensation and
related costs (2)........................ 87,689 48,259 61,530
Business and financial services
compensation and related costs (2)....... 35,458 17,961 21,488
Other operating expenses.................. 35,169 17,128 20,745
Non-cash stock compensation (3)........... 17,503 -- 3,763
Amortization of goodwill (4).............. 16,039 8,019 8,019
Depreciation expense...................... 4,854 2,425 2,090
---------- ---------- ----------
Income (loss) from operations............... (3,275) 14,716 13,795
Other income, net (5)....................... 101 280 389
---------- ---------- ----------
Income (loss) before income taxes........... (3,174) 14,996 14,184
Provision for income taxes (6).............. 5,146 9,206 8,881
---------- ---------- ----------
Net income (loss)........................... $ (8,320) $ 5,790 $ 5,303
========== ========== ==========
Net income (loss) per share................. $ (0.32) $ 0.22 $ 0.20
========== ========== ==========
Shares used in computing net income (loss)
per share (7).............................. 26,169,905 26,169,905 26,169,905
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
--------------------
Pro Forma As
Combined Adjusted
--------- ---------
<S> <C> <C>
Balance Sheet Data:
Working capital (deficit)................................ $(92,751) $ 828
Total assets............................................. 337,627 335,996
Total long-term debt, net of current portion............. 23,210 7,981
Stockholders' equity..................................... 130,996 243,804
</TABLE>
26
<PAGE>
- --------
(1) Includes pro forma revenues associated with services agreements of $62,600,
$35,833 and $41,583 for the year ended December 31, 1998 and the six months
ended June 30, 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 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 $26,569, $16,471 and $15,217 for the year ended
December 31, 1998 and the six months ended June 30, 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 $17,503 and $2,656 in the
year ended December 31, 1998 and the six months ended June 30, 1999,
respectively, and the issuance of stock to Driver employees of $1,107 in
the six months ended June 30, 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
$240,580 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, $234 and
$884 for the year ended December 31, 1998 and the six months ended June 30,
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) 12,488,981 shares to be issued to the owners and employees of the
founding companies in the mergers;
(b) 3,711,019 shares held by initial investors and management of
Centerprise; and
(c) 9,969,905 of the 10,500,000 shares of common stock sold in the
offering, 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 offering.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following in conjunction with "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 professional,
business and financial services and products to 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 offering. 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 $193.4 million, of which approximately 73% was derived from
professional services and approximately 27% 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>
$117,124 $139,834
</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.
28
<PAGE>
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>
$44,793 $51,274
</TABLE>
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 six months
ended June 30, 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>
Year Ended Six Months Ended June 30,
December 31, ------------------------------
1998 1998 1999
--------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Professional services...... $140,746 72.8 % $ 80,011 73.7% $ 94,859 72.2%
Business and financial
services.................. 52,691 27.2 28,497 26.3 36,571 27.8
-------- ----- -------- ----- -------- -----
193,437 100.0 108,508 100.0 131,430 100.0
Expenses:
Compensation and related
costs..................... 123,147 63.7 66,220 61.0 83,018 63.2
Other operating expenses... 35,169 18.2 17,128 15.8 20,745 15.8
Non-cash stock
compensation.............. 17,503 9.0 -- -- 3,763 2.9
Amortization of goodwill... 16,039 8.3 8,019 7.4 8,019 6.1
Depreciation............... 4,854 2.5 2,425 2.2 2,090 1.6
-------- ----- -------- ----- -------- -----
Income (loss) from
operations.................. $ (3,275) (1.7)% $ 14,716 13.6% $ 13,795 10.5%
======== ===== ======== ===== ======== =====
</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.
29
<PAGE>
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 of the excess of purchase price over the fair value of assets
acquired. Because goodwill amortization is a non-cash charge and is not
deductible for tax purposes, it has a direct (dollar for dollar) effect in
reducing income from operations and net income. Centerprise uses a 15-year life
for amortization of goodwill, which management believes is substantially lower
than that used by other companies which may provide similar services.
Management believes this useful life to be appropriate, and because of its
relative conservatism and the material nature of the charge, management further
believes that analysts and investors will find it useful to have additional
data when evaluating Centerprise's performance versus its competitors which may
use a substantially longer life for amortization of goodwill. In the unaudited
pro forma combined results of operations, the loss from operations and the net
loss were approximately $3.3 million and $8.3 million, respectively, for the
year ended December 31, 1998, and income from operations and net income were
approximately $14.7 million and $5.8 million, respectively, for the six months
ended June 30, 1998 and approximately $13.8 million and $5.3 million,
respectively, for the six months ended June 30, 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 $12.8 million and $7.7 million, respectively, for the year ended
December 31, 1998, approximately $22.7 million and $13.8 million, respectively,
for the six months ended June 30, 1998 and approximately $21.8 million and
$13.3 million, respectively, for the six months ended June 30, 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--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 Six Months
December 31, Ended June
1998 30, 1999
------------ ----------
(Dollars in thousands)
<S> <C> <C>
Operating Earnings.................................... $51,803 $41,643
Centerprise Base Earnings............................. $29,671 $20,211
------- -------
Senior professionals' compensation.................... $22,132 $21,432
Senior professionals' compensation as a percentage of
Operating Earnings................................... 42.7% 51.5%
</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
30
<PAGE>
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 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 30% of its revenues in
the first quarter, 24% in the second quarter, 23% in the third quarter and 23%
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 $64.8
million, $36.9 million and $42.7 million in the year ended December 31, 1998
and the six months ended June 30, 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
31
<PAGE>
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 revenues from "services agreements" 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 six months
ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
Estimated Historical
Attest Revenues
----------------------------
Six months
Year ended ended June 30,
December 31, ---------------
1998 1998 1999
------------ ------- -------
(In thousands)
<S> <C> <C> <C>
Reznick............................................ $24,999 $15,361 $18,126
Mann Frankfort..................................... 5,439 3,572 4,260
Follmer (a)........................................ 7,973 4,436 5,168
Berry Dunn......................................... 9,925 5,243 5,223
Urbach (b)......................................... 10,706 5,246 6,662
Grace.............................................. 2,623 1,494 1,463
Simione............................................ 3,094 1,564 1,756
------- ------- -------
$64,759 $36,916 $42,658
======= ======= =======
</TABLE>
- --------
(a) For the year ended November 30, 1998 and the six months ended May 31, 1998
and 1999.
(b) For the year ended January 31, 1999 and the six months ended July 31, 1998
and 1999.
Pro forma Combined Results for the Six Months Ended June 30, 1999 Compared to
the Six Months Ended June 30, 1998
Revenues. Professional services revenues increased $14.8 million, or
18.6%, from $80.0 million in the six months ended June 30, 1998 to $94.9
million in the six months ended June 30, 1999, primarily due to the expansion
of the professional services firms' practices, increases in billing rates and
billable hours, the addition of clients and an increase in revenues derived
from special projects. Business and financial services revenues increased $8.1
million, or 28.3%, from $28.5 million in the six months ended June 30, 1998 to
$36.6 million in the six months ended June 30, 1999 primarily 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
$16.8 million, or 25.4%, from $66.2 million in the six months ended June 30,
1998 to $83.0 million in the six months ended June 30, 1999, primarily due to
salary increases and staff additions. As a percentage of revenues, these
expenses increased from 61.0% in the six months ended June 30, 1998 to 63.2% in
the six months ended June 30, 1999.
Other Operating Expenses. Other operating expenses increased $3.6
million, or 21.1%, from $17.1 million in the six months ended June 30, 1998 to
$20.7 million in the six months ended June 30, 1999, primarily due to an
increase in occupancy costs, selling, general and administrative expenses and
legal fees related to the mergers. As a percentage of revenues, these expenses
remained constant at 15.8% in the six months ended June 30, 1998 and 1999.
32
<PAGE>
Non-cash Stock Compensation. Non-cash, non-recurring stock compensation
in the six months ended June 30, 1999 totaled $3.8 million, or 2.9% of
revenues. This reflects charges resulting from the issuance of stock to
employees of $2.7 million at Centerprise and $1.1 million at Driver.
Centerprise anticipates no such stock compensation charges for issuances of
stock in the future.
Depreciation. Depreciation expense decreased $335,000, or 13.8%, from
$2.4 million in the six months ended June 30, 1998 to $2.1 million in the six
months ended June 30, 1999, primarily due to sales of property, plant and
equipment. As a percentage of revenues, these expenses decreased from 2.2% in
the six months ended June 30, 1998 to 1.6% in the six months ended June 30,
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 offering, Centerprise will have working capital of
approximately $828,000. Centerprise expects to repay approximately $17.8
million of short-term and long-term debt of Driver from the net proceeds of the
offering. Driver incurred such debt in connection with a recapitalization and
for purchases of equipment, working capital requirements and general corporate
purposes.
Centerprise has obtained commitments from six banks for a $100 million
five-year revolving credit facility, subject to consummation of the offering
and to customary closing conditions. Centerprise cannot assure you that it will
be able to obtain this facility or other financing it may need on acceptable
terms. It is expected that the facility, if obtained, will require Centerprise
to comply with various loan covenants, including maintenance of certain
financial ratios, such as 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. In order to
demonstrate to the founding companies its ability to obtain financing for
working capital and possible future acquisitions, Centerprise agreed that
obtaining a credit facility in an amount not less than $75 million would be a
condition to the closing of the mergers.
Capital expenditures for the founding companies were $4.9 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 offering, 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
up to $30.0 million under the facility during the six months following the
closing of the offering 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 offering.
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, and lack of financing could constrain its operations and limit its
growth."
33
<PAGE>
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 $240.6 million will be
amortized over a period of 15 years as a non-cash charge to Centerprise's
income. This amortization will be approximately $16.0 million per year.
Amortization of Intangible Assets
The $240.6 million of goodwill resulting from the mergers represents
approximately 71.6% of Centerprise's pro forma total assets as of June 30,
1999. The non-cash amortization of this intangible asset over 15 years at $16.0
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 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 Financial Accounting Standards Board
("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.
Professional Services
Each Centerprise professional services firm has operated as an
independent, privately-owned entity throughout the periods presented. The
results of operations of these firms reflect varying historical levels of
owners' compensation which were determined at the discretion of the owners. The
owners of each of these
34
<PAGE>
firms have agreed to reductions in their compensation and related benefits that
will take effect upon the closing of the mergers. See the unaudited pro forma
combined financial statements and notes thereto for additional information.
Results of Operations--Reznick
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, Nine Months Ended June 30,
----------------------------------------------- -------------------------------
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% $37,809 100.0% $42,835 100.0%
Expenses:
Member compensation and
related costs......... 7,784 24.7 8,170 23.3 13,516 28.2 12,735 33.7 13,700 32.0
Employee compensation
and related costs..... 17,477 55.5 19,617 55.9 25,792 53.9 18,856 49.9 22,394 52.3
Other operating
expenses.............. 6,231 19.8 7,530 21.4 8,502 17.8 6,253 16.5 6,956 16.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating (loss)
income................. $ (9) (0.0)% $ (214) (0.6)% $ 67 0.1% $ (35) (0.1)% $ (215) (0.5)%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Results for the Nine Months Ended June 30, 1999 Compared to the Nine Months
Ended June 30, 1998--Reznick
Revenues. Revenues increased $5.0 million, or 13.3%, from $37.8 million
in the nine months ended June 30, 1998 to $42.8 million in the nine months
ended June 30, 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 $965,000, or 7.6%, from $12.7 million in the nine months ended
June 30, 1998 to $13.7 million in the nine months ended June 30, 1999,
primarily due to an increase in operating income available for member
compensation. As a percentage of revenues, these expenses decreased from 33.7%
in the nine months ended June 30, 1998 to 32.0% in the nine months ended June
30, 1999.
Employee Compensation and Related Costs. Employee compensation and
related costs increased $3.5 million, or 18.8%, from $18.9 million in the nine
months ended June 30, 1998 to $22.4 million in the nine months ended June 30,
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 49.9% in the nine months ended June 30, 1998 to
52.3% in the nine months ended June 30, 1999.
Other Operating Expenses. Other operating expenses increased $703,000, or
11.2%, from $6.3 million in the nine months ended June 30, 1998 to $7.0 million
in the nine months ended June 30, 1999. The increase was primarily due to
higher occupancy, selling, general and administrative expenses. As a percentage
of revenues, these expenses decreased from 16.5% in the nine months ended June
30, 1998 to 16.2% in the nine months ended June 30, 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.
35
<PAGE>
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
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.
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 $2.0
million in the nine months ended June 30, 1999. In the nine months ended June
30, 1998, Reznick generated net cash from operating activities of $251,000. 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 nine months ended June 30, 1999 and 1998, net cash used
in investing activities was approximately $525,000 and $1.2 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
purchases of property and equipment. In the nine months ended June 30, 1999,
net
36
<PAGE>
cash provided by financing activities was approximately $1.7 million,
principally from proceeds of short-term borrowings and long-term debt. For the
nine months ended June 30, 1998, net cash used in financing activities was
approximately $60,000, principally for payments to former shareholders. Reznick
used net cash of approximately $402,000 in financing activities in the year
ended September 30, 1998, primarily for 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 June 30, 1999,
Reznick had working capital of $2.2 million.
Results of Operations--Mann Frankfort
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, Six Months Ended June 30,
------------------------------------------- ----------------------------
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% $11,828 100.0% $16,630 100.0%
Expenses:
Member compensation
and related costs.... 4,423 33.3 6,636 38.0 8,921 41.2 3,942 33.3 4,916 29.5
Employee compensation
and related costs.... 4,896 36.8 6,405 36.7 8,829 40.8 4,532 38.3 5,888 35.4
Other operating
expenses............. 2,307 17.4 2,996 17.1 3,347 15.5 1,923 16.3 2,572 15.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from operations.. $ 1,666 12.5% $ 1,438 8.2% $ 534 2.5% $ 1,431 12.1% $ 3,254 19.6%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Results for the Six Months Ended June 30, 1999 Compared to the Six Months Ended
June 30, 1998--Mann Frankfort
Revenues. Revenues increased $4.8 million, or 40.6%, from $11.8 million
for the six months ended June 30, 1998 to $16.6 million for the six months
ended June 30, 1999, primarily due to increases in billing rates and billable
hours, increased revenues derived from the Company's litigation support
practice and the addition of new clients.
Member Compensation and Related Costs. Member compensation and related
costs increased $974,000, or 24.7%, from $3.9 million for the six months ended
June 30, 1998 to $4.9 million for the six months ended June 30, 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 33.3% in the six months ended June 30,
1998 to 29.5% in the six months ended June 30, 1999.
Employee Compensation and Related Costs. Employee compensation and
related costs increased $1.4 million, or 29.9%, from $4.5 million in the six
months ended June 30, 1998 to $5.9 million in the six months ended June 30,
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 38.3% in the six months ended June 30, 1998 to 35.4% in
the six months ended June 30, 1999.
Other Operating Expenses. Other operating expenses increased $649,000, or
33.7%, from $1.9 million in the six months ended June 30, 1998 to $2.6 million
in the six months ended June 30, 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 16.3% in the six months
ended June 30, 1998 to 15.5% in the six months ended June 30, 1999.
37
<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, primarily due to 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 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 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 necessary to support Mann Frankfort's expanded practice and transaction
costs related to its merger with Schulse Hartwig Richter & Company. 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.
38
<PAGE>
Liquidity and Capital Resources--Mann Frankfort
Mann Frankfort generated net cash flow from operating activities of
approximately $2.0 million and $1.7 million in the six months ended June 30,
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 $230,000 and $164,000 in
the six months ended June 30, 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, principally for purchases of property and
equipment. Cash provided by financing activities was approximately $449,000 and
$292,000 in the six months ended June 30, 1999 and 1998, respectively,
consisting principally of repayments 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 repayments of long-
term debt. At June 30, 1999, Mann Frankfort had working capital of $4.9
million.
Results of Operations--Follmer
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, Three Months Ended August 31,
------------------------------------------------ --------------------------------------
1997 1998 1999 1998 1999
-------------- -------------- -------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $17,954 100.0% $19,417 100.0% $22,525 100.0% $4,263 100.0% $5,367 100.0%
Expenses:
Member compensation and
related costs......... 6,646 37.0 7,339 37.8 8,797 39.0 1,553 36.4 2,406 44.8
Employee compensation
and related costs..... 7,567 42.1 8,225 42.4 9,949 44.2 1,979 46.4 2,275 42.4
Other operating
expenses.............. 4,042 22.6 3,891 20.0 4,688 20.8 1,166 27.4 1,079 20.1
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Income (loss) from
operations............. $ (301) (1.7)% $ (38) (0.2)% $ (909) (4.0)% $ (435) (10.2)% $ (393) (7.3)%
======= ===== ======= ===== ======= ===== ====== ===== ====== =====
</TABLE>
Results for the Three Months Ended August 31, 1999 Compared to the Three Months
Ended August 31, 1998--Follmer
Revenues. Revenues increased $1.1 million, or 25.9%, from $4.3 million
for the three months ended August 31, 1998 to $5.4 million for the three months
ended August 31, 1999, primarily due to an increase in the firm's realized
billing rates as demand for its services increased.
Member Compensation and Related Costs. Member compensation and related
costs increased $853,000, or 54.9%, from $1.6 million for the three months
ended August 31, 1998 to $2.4 million for the three months ended August 31,
1999 primarily due to a corresponding increase in the firm's operating income
over the period. As a percentage of revenues, these expenses increased from
36.4% in the three months ended August 31, 1998 to 44.8% in the three months
ended August 31, 1999.
Employee Compensation and Related Costs. Employee compensation and
related costs increased $296,000, or 15.0%, from $2.0 million in the three
months ended August 31, 1998 to $2.3 million in the three months ended August
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
decreased from 46.4% in the three months ended August 31, 1998 to 42.4% in the
three months ended August 31, 1999.
Other Operating Expenses. Other operating expenses decreased $87,000, or
7.5%, from $1.2 million in the three months ended August 31, 1998 to $1.1
million in the three months ended August 31, 1999. The
39
<PAGE>
decrease was primarily due to a decrease in office operating, selling and
general and administrative expenses. As a percentage of revenues, these
expenses decreased from 27.4% in the three months ended August 31, 1998 to
20.1% in the three months ended August 31, 1999.
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.
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.
40
<PAGE>
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 generated cash from operating activities of approximately $1.5
million and $387,000 in the three months ended August 31, 1999 and 1998,
respectively. Follmer used net 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 $120,000 and $278,000 in the three months ended August 31, 1999
and 1998, respectively, primarily for the purchase of property and equipment
and from an increase in the cash surrender value of life insurance. Net cash
used in investing activities was approximately $1.1 million, $927,000 and $1.2
million in the years ended May 31, 1999, 1998 and 1997, respectively, primarily
for property and equipment purchases. Net cash used in financing activities in
the three months ended August 31, 1999 and 1998 was approximately $1.6 million
and $649,000, respectively, consisting principally of net repayments to
shareholders and the repayment of short-term debt. 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 a 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 August 31, 1999, Follmer had a working capital deficit of
$1.9 million.
Results of Operations--Berry Dunn
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>
Year Ended June 30,
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $16,812 100.0% $17,916 100.0% $18,604 100.0%
Expenses:
Member compensation and related
costs.......................... 6,214 37.0 7,113 39.7 6,574 35.3
Employee compensation and
related costs.................. 6,441 38.3 6,318 35.3 7,513 40.4
Other operating expenses........ 4,113 24.4 4,405 24.6 4,461 24.0
------- ----- ------- ----- ------- -----
Income from operations............ $ 44 0.3% $ 80 0.4% $ 56 0.3%
======= ===== ======= ===== ======= =====
</TABLE>
41
<PAGE>
Results for the Year Ended June 30, 1999 Compared to the Year Ended June 30,
1998--Berry Dunn
Revenues. Revenues increased $688,000, or 3.8%, from $17.9 million in the
year ended June 30, 1998 to $18.6 million in the year ended June 30, 1999,
primarily due to a net increase in billings for recurring services as well as
special projects.
Member Compensation and Related Costs. Member compensation and related
costs decreased $539,000, or 7.6%, from $7.1 million in the year ended June 30,
1998 to $6.6 million in the year ended June 30, 1999, primarily due to the
departure of two members. As a percentage of revenues, these expenses decreased
from 39.7% in the year ended June 30, 1998 to 35.3% in the year ended June 30,
1999.
Employee Compensation and Related Costs. Employee compensation and
related costs increased $1.2 million, or 18.9%, from $6.3 million in the year
ended June 30, 1998 to $7.5 million in the year ended June 30, 1999, primarily
due to staff additions and salary increases. As a percentage of revenues, these
expenses increased from 35.3% in the year ended June 30, 1998 to 40.4% in the
year ended June 30, 1999.
Other Operating Expenses. Other operating expenses increased $56,000, or
1.3%, from $4.4 million in the year ended June 30, 1998 to $4.5 million in the
year ended June 30, 1999, primarily due to increased business development
costs, depreciation, occupancy costs and expenditures for new tax software. As
a percentage of revenues, these expenses decreased from 24.6% in the year ended
June 30, 1998 to 24.0% in the year ended June 30, 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.
Liquidity and Capital Resources--Berry Dunn
Berry Dunn generated net cash flow from operating activities of
approximately $897,000, $1.6 million and $1.1 million in the years ended June
30, 1999, 1998 and 1997, respectively. Net cash used in investing activities
was approximately $1.5 million for the year ended June 30, 1999 and $1.1
million for each of the years ended June 30, 1998 and 1997. Net cash used in
financing activities was approximately $1.3 million for the year ended June 30,
1999, principally due to payments of debt net of capital contributed by
principals and
42
<PAGE>
repayments from related parties. In the years ended June 30, 1998 and 1997, net
cash provided by financing activities was approximately $337,000 and $1.1
million, respectively, principally from repayments from related parties,
proceeds from debt and capital contributed by principals. At June 30, 1999,
Berry Dunn had a working capital deficit of $2.4 million.
Results of Operations--Urbach
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, Nine Months Ended July 31,
---------------------------- -----------------------------
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% $13,192 100.0% $15,997 100.0%
Expenses:
Shareholders
compensation and
related costs......... 4,798 30.0 4,853 28.4 3,774 28.6 6,434 40.2
Employee compensation
and related costs..... 6,590 41.1 7,147 41.8 5,363 40.7 5,997 37.5
Other operating
expenses.............. 4,317 27.0 4,860 28.5 3,673 27.8 3,577 22.4
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) from
operations............. $ 307 1.9% $ 225 1.3% $ 382 2.9% $ (11) (0.1)%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Results for the Nine Months Ended July 31, 1999 Compared to the Nine Months
Ended July 31, 1998--Urbach
Revenues. Revenues increased $2.8 million, or 21.3%, from $13.2 million
for the nine months ended July 31, 1998 to $16.0 million for the nine months
ended July 31, 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 $2.7 million, or 70.5%, from $3.8 million for the nine
months ended July 31, 1998 to $6.4 million for the nine months ended July 31,
1999, primarily due to an increase in the net operating income available for
shareholder compensation. As a percentage of revenues, these expenses increased
from 28.6% in 1998 to 40.2% in 1999.
Employee Compensation and Related Costs. Employee compensation and
related costs increased $634,000, or 11.8%, from $5.4 million in the nine
months ended July 31, 1998 to $6.0 million in the nine months ended July 31,
1999, primarily due to an increase in professional and administrative staff
resulting from the acquisition in 1998 of an accounting firm, as well as
performance-based compensation increases. As a percentage of revenues, these
expenses decreased from 40.7% in the nine months ended July 31, 1998 to 37.5%
in the nine months ended July 31, 1999.
Other Operating Expenses. Other operating expenses decreased $96,000, or
2.6%, from $3.7 million in the nine months ended July 31, 1998 to $3.6 million
in the nine months ended July 31, 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 27.8% in the
nine months ended July 31, 1998 to 22.4% in the nine months ended July 31,
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 1998 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.
43
<PAGE>
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
1998 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 1998
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 $1.6 million
and $109,000 in the nine months ended July 31, 1999 and 1998, 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 provided by
investing activities was approximately $1.1 million in the nine months ended
July 31, 1999, primarily generated from the sale of investments. Net cash used
in investing activities was approximately $279,000 in the nine months ended
July 31, 1998, principally from purchases of equipment and advances to
shareholders. Net cash used in investing activities was approximately $349,000
and $178,000 in the years ended October 31, 1998 and 1997, respectively,
primarily for purchases of equipment and advances to shareholders in the year
ended October 31, 1998. In the nine months ended July 31, 1999, net cash used
in financing activities was approximately $679,000, principally for the
repayment of debt. In the nine months ended July 31, 1998, cash provided by
financing activities was approximately $287,000, 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
July 31, 1999, Urbach had working capital of approximately $4.2 million.
Results of Operations--Grace
The following table sets forth selected financial data for Grace on a
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
Year Ended --------------------------
December 31, 1998 1998 1999
------------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................... $ 9,691 100.0% $5,684 100.0% $6,269 100.0%
Expenses:
Member compensation and
related costs........... 2,709 28.0 1,395 24.6 1,464 23.4
Employee compensation and
related costs........... 5,075 52.4 2,713 47.7 2,955 47.1
Other operating
expenses................ 1,380 14.2 761 13.4 838 13.4
--------- -------- ------ ----- ------ -----
Income from operations..... $ 527 5.4% $ 815 14.3% $1,012 16.1%
========= ======== ====== ===== ====== =====
</TABLE>
44
<PAGE>
Results for the Six Months Ended June 30, 1999 Compared to the Six Months Ended
June 30, 1998-- Grace
Revenues. Revenues increased $585,000, or 10.3%, from $5.7 million for
the six months ended June 30, 1998 to $6.3 million for the six months ended
June 30, 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 approximately $1.4 million for the six
months ended June 30, 1998 and 1999, respectively. As a percentage of revenues,
these expenses decreased from 24.6% in the six months ended June 30, 1998 to
23.4% in the six months ended June 30, 1999.
Employee Compensation and Related Costs. Employee compensation and
related costs increased $242,000, or 8.9%, from $2.7 million in the six months
ended June 30, 1998 to $3.0 million in the six months ended June 30, 1999,
primarily due to annual performance-based compensation increases. As a
percentage of revenues, these expenses decreased from 47.7% in the six months
ended June 30, 1998 to 47.1% in the six months ended June 30, 1999.
Other Operating Expenses. Other operating expenses increased $77,000, or
10.1%, from $761,000 in the six months ended June 30, 1998 to $838,000 in the
six months ended June 30, 1999. The increase was primarily due to increased
occupancy costs related to a recent expansion. As a percentage of revenues,
these expenses remained constant at 13.4% in the six months ended June 30, 1998
and 1999, respectively.
Liquidity and Capital Resources--Grace
Grace used cash in operating activities of approximately $59,000 in the
six months ended June 30, 1999. Cash provided by operating activities was
approximately $613,000 for the six months ended June 30, 1998. For the six
months ended June 30, 1999 and 1998, net cash used in investing activities was
approximately $80,000 and $176,000, respectively, principally for property and
equipment purchases and an increase in the cash surrender value of life
insurance. In the six months ended June 30, 1999, net cash provided by
financing activities was approximately $152,000, principally from short-term
borrowings. Net cash used in financing activities was $446,000 for the six
months ended June 30, 1998, principally for repayments of short-term
borrowings. At June 30, 1999, Grace had working capital of approximately
$196,000.
Results of Operations--Simione
The following table sets forth selected financial data for Simione on a
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
Year Ended --------------------------
December 31, 1998 1998 1999
------------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 6,217 100.0% $3,283 100.0% $4,180 100.0%
Expenses:
Membership
compensation and
related expenses..... 2,104 37.1 1,037 31.6 1,145 27.4
Employee compensation
and related costs.... 2,292 33.6 1,173 35.7 1,291 30.9
Other operating
expenses............. 1,364 21.9 653 19.9 738 17.6
--------- -------- ------ ----- ------ -----
Income from operations.. $ 457 7.4% $ 420 12.8% $1,006 24.1%
========= ======== ====== ===== ====== =====
</TABLE>
45
<PAGE>
Results for the Six Months Ended June 30, 1999 Compared to the Six Months Ended
June 30, 1998--Simione
Revenues. Revenues increased $897,000, or 27.3%, from $3.3 million for
the six months ended June 30, 1998 to $4.2 million for the six months ended
June 30, 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 $108,000, or 10.4%, from $1.0 million for the six months ended
June 30, 1998 to $1.1 million for the six months ended June 30, 1999, primarily
due to the addition of three members. As a percentage of revenues, these
expenses decreased from 31.6% for the six months ended June 30, 1998 to 27.4%
for the six months ended June 30, 1999.
Employee Compensation and Related Costs. Employee compensation and
related costs increased $118,000, or 10.1%, from $1.2 million for the six
months ended June 30, 1998 to $1.3 million for the six months ended June 30,
1999, primarily due to staff additions. As a percentage of revenues, these
expenses decreased from 35.7% for the six months ended June 30, 1998 to 30.9%
for the six months ended June 30, 1999.
Other Operating Expenses. Other operating expenses increased $85,000, or
13.0%, from $653,000 for the six months ended June 30, 1998 to $738,000 for the
six months ended June 30, 1999, primarily due to increased occupancy and
practice development expenses. As a percentage of revenues, these expenses
decreased from 19.9% for the six months ended June 30, 1998 to 17.6% for the
six months ended June 30, 1999.
Liquidity and Capital Resources--Simione
Simione generated net cash flow from operating activities of
approximately $47,000 and $55,000 for the six months ended June 30, 1999 and
1988, respectively. Net cash used in financing activities was $22,000 and
$16,000 for the six months ended June 30, 1999 and 1998, respectively,
primarily for payments of debt. At June 30, 1999, Simione had working capital
of approximately $1.2 million.
Business and Financial Services
Results of Operations--Driver
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>
Year Ended July 31,
------------------------------------------------
1997 1998 1999
------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commissions and fees.... $28,170 100.0% $32,886 100.0% $41,607 100.0%
Expenses:
Producer compensation.. 12,965 46.0 15,422 46.9 16,250 39.0
Employee compensation
and related costs..... 7,433 26.4 8,475 25.8 13,438 32.3
Other operating
expenses.............. 6,548 23.3 6,631 20.1 8,819 21.2
------- ----- ------- ----- ------- -----
Income (loss) from
operations............. $ 1,224 4.3% $ 2,358 7.2% $ 3,100 7.5%
======= ===== ======= ===== ======= =====
</TABLE>
Results for the Year Ended July 31, 1999 Compared to the Year Ended July 31,
1998--Driver
Commissions and Fees. Revenues increased $8.7 million, or 26.5%, from
$32.9 million in the year ended July 31, 1998 to $41.6 million in the year
ended July 31, 1999, primarily due to revenues derived from four insurance
brokerage firms acquired in 1998 and 1999.
46
<PAGE>
Producer Compensation. Producer compensation increased $828,000, or 5.4%,
from $15.4 million in the year ended July 31, 1998 to $16.3 million in the year
ended July 31, 1999 due to the addition of ten producers in 1998 and the
related compensation expense. As a percentage of revenues, these expenses
decreased from 46.9% in the year ended July 31, 1998 to 39.0% in the year ended
July 31, 1999.
Employee Compensation and Related Costs. Employee compensation and
related costs increased $5.0 million, or 58.6%, from $8.5 million in the year
ended July 31, 1998 to $13.4 million in the year ended July 31, 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 25.8% in the year ended July 31, 1998 to 32.3% in the year ended
July 31, 1999.
Other Operating Expenses. Other operating expenses increased $2.2
million, or 33.0%, from $6.6 million in the year ended July 31, 1998 to $8.8
million in the year ended July 31, 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 20.1% in the year ended July 31, 1998
to 21.2% in the year ended July 31, 1999.
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. A significant portion 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.
47
<PAGE>
Liquidity and Capital Resources--Driver
Driver generated net cash flow from operating activities of approximately
$2.7 million, $2.5 million and $426,000 in the years ended July 31, 1999, 1998
and 1997, respectively. Net cash used in investing activities was approximately
$5.5 million in the year ended July 31, 1999, primarily for purchases of
property and equipment and acquisitions. 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 in the year ended July 31,
1997, primarily for purchases of property and equipment. Net cash provided by
financing activities was approximately $2.8 million in the year ended July 31,
1999, consisting primarily of proceeds from the repayment of stockholder notes
and proceeds from issuance of debt. In the year ended July 31, 1998, cash
generated by financing activities was approximately $16.6 million consisting
primarily of proceeds from the issuance of debt. Net cash used in financing
activities in the year ended July 31, 1997 was approximately $64,000. At July
31, 1999, Driver had a working capital deficit of $2.1 million.
Results of Operations--IDA
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>
Year Ended December 31, Six Months Ended June 30,
--------------------------- --------------------------
1997 1998 1998 1999
------------ ------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $9,661 100.0% $10,496 100.0% $4,992 100.0% $5,502 100.0%
Expenses:
Employee compensation
and related costs.... 6,047 62.6 6,461 61.6 2,930 58.7 3,156 57.4
Other operating
expenses............. 2,668 27.6 2,751 26.2 1,588 31.8 1,708 31.0
------ ----- ------- ----- ------ ----- ------ -----
Income from operations.. $ 946 9.8% $ 1,284 12.2% $ 474 9.5% $ 638 11.6%
====== ===== ======= ===== ====== ===== ====== =====
</TABLE>
Results for the Six Months Ended June 30, 1999 Compared to the Six Months Ended
June 30, 1998--IDA
Revenues. Revenues increased $510,000, or 10.2%, from $5.0 million for
the six months ended June 30, 1998 to $5.5 million for the six months ended
June 30, 1999, primarily due to an increase in the number of lives for which
IDA provides benefits administration services.
Employee Compensation and Related Costs. Employee compensation and
related costs increased $226,000, or 7.7%, from $2.9 million in the six months
ended June 30, 1998 to $3.2 million in the six months ended June 30, 1999,
primarily due to staff additions, an increase in overtime compensation, salary
increases and bonuses. As a percentage of revenues, these expenses decreased
from 58.7% in the six months ended June 30, 1998 to 57.4% in the six months
ended June 30, 1999.
Other Operating Expenses. Other operating expenses increased $120,000, or
7.6%, from $1.6 million for the six months ended June 30, 1998 to $1.7 million
for the six months ended June 30, 1999, primarily due to increases in
commission and postage expenses. As a percentage of revenues, these expenses
decreased from 31.8% in the six months ended June 30, 1998 to 31.0% in the six
months ended June 30, 1999.
Results for the Year Ended December 31, 1998 Compared to the Year Ended
December 31, 1997--IDA
Revenues. Revenues increased $835,000, or 8.6%, from $9.7 million for the
year ended December 31, 1997 to $10.5 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.
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<PAGE>
Employee Compensation and Related Costs. Employee compensation and
related costs increased $414,000, or 6.8%, from $6.0 million in the year ended
December 31, 1997 to $6.5 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 62.6% in the year ended December 31, 1997 to 61.6% in
the year ended December 31, 1998.
Other Operating Expenses. Other operating expenses remained relatively
constant at $2.7 million for the year ended December 31, 1997 and 1998. As a
percentage of revenues, these expenses decreased from 27.6% in the year ended
December 31, 1997 to 26.2% in the year ended December 31, 1998.
Liquidity and Capital Resources--IDA
IDA generated net cash flow from operating activities of approximately
$810,000 and $1.1 million in the six months ended June 30, 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 six months ended June 30, 1999 and 1998, net cash used in
investing activities was approximately $59,000 and $10,000, 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, primarily for purchases of property and equipment. In the
six months ended June 30, 1999 and 1998, net cash used in financing activities
was approximately $972,000 and $761,000, 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, payments of long-term debt of $202,000 in 1998 and
net proceeds from the issuance of long-term debt of $250,000 in 1997. At June
30, 1999, IDA had working capital of approximately $516,000.
Results of Operations--Reppond
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>
Six Months Ended June 30,
Year Ended --------------------------
December 31, 1998 1998 1999
----------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 7,892 100.0% $4,093 100.0% $4,353 100.0%
Expenses:
Producer compensation and
related costs............... 2,359 29.9 1,267 30.9 1,364 31.3
Employee compensation and
related costs............... 2,708 34.3 1,217 29.7 1,310 30.1
Other operating expenses..... 2,314 29.3 993 24.3 1,415 32.5
--------- -------- ------ ----- ------ -----
Income from operations......... $ 511 6.5 $ 616 15.1% $ 264 6.1%
========= ======== ====== ===== ====== =====
</TABLE>
Results for the Six Months Ended June 30, 1999 Compared to the Six Months Ended
June 30, 1998--Reppond
Revenues. Revenues increased $260,000, or 6.4%, from $4.1 million for the
six months ended June 30, 1998 to $4.4 million for the six months ended June
30, 1999, primarily due to premium increases and the addition of several new
customers.
Producer Compensation. Producer compensation increased $97,000, or 7.7%,
from $1.3 million for the six months ended June 30, 1998 to $1.4 million for
the six months ended June 30, 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 increased from 30.9% in 1998 to 31.3% in
1999.
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<PAGE>
Employee Compensation and Related Costs. Employee compensation and
related costs increased $93,000, or 7.6%, from $1.2 million in the six months
ended June 30, 1998 to $1.3 million in the six months ended June 30, 1999,
primarily due to annual performance-based compensation increases and staff
additions. As a percentage of revenues, these expenses increased from 29.7% in
the six months ended June 30, 1998 to 30.1% in the six months ended June 30,
1999.
Other Operating Expenses. Other operating expenses increased $422,000, or
42.5%, from $993,000 in the six months ended June 30, 1998 to $1.4 million in
the six months ended June 30, 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
24.3% in the six months ended June 30, 1998 to 32.5% in the six months ended
June 30, 1999.
Liquidity and Capital Resources--Reppond
Reppond used cash in operating activities of approximately $99,000 in the
six months ended June 30, 1999 and generated net cash flow from operating
activities of approximately $528,000 in the six months ended June 30, 1998. For
the six months ended June 30, 1999 and 1998, net cash used in investing
activities was approximately $194,000 and $122,000, respectively, principally
for property and equipment purchases. In the six months ended June 30, 1999,
net cash provided by financing activities was approximately $353,000,
principally from the issuance of short-term debt. In the six months ended June
30, 1998, net cash used in financing activities was approximately $384,000,
principally for the repayment of long-term and short-term debt. At June 30,
1999, Reppond had a working capital deficit of approximately $195,000.
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.
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
50
<PAGE>
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.
. 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 is in the process
of replacing a non-year 2000 compliant voicemail system. The
replacement is scheduled to be completed by November 20, 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 $600,000 to $650,000, of which an
estimated $420,000 had been incurred as of June 30, 1999. Of the estimated
total year 2000 costs, approximately $200,000 represents costs associated with
repair of software problems and approximately $425,000 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.
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<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 November 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 founding 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.
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<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 seven
professional services firms for the fiscal year ended December 31, 1998,
Centerprise would have been ranked No. 13 in the Accounting Top 100 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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<PAGE>
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 Accounting 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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<PAGE>
BUSINESS
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 29.5 years. On a combined historical basis, their revenues increased
from $161.9 million in fiscal 1997 to $191.1 million in fiscal 1998,
representing an annual growth rate of 18.0%.
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 its 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 existing 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.
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<PAGE>
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
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;
. the 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
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<PAGE>
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.
. 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 provides 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.
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<PAGE>
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 also 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
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.
. Mergers and Acquisitions Services. Centerprise provides
accounting, tax and business advisory services to clients
considering complex business transactions such as the purchase or
sale of a business.
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 relationships 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.
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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 a 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 generate and maintain
business as they have historically. In addition, because of their prominence
and client relationships, Centerprise anticipates 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 merger 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
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firm and varies from firm to firm. Agreed-upon Centerprise Base Earnings range
from 36.0% to 68.9% of the adjusted earnings of the respective professional
services firms in the four calendar quarters ending June 30, 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.
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.
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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.
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 professional services firms and pursue and
integrate acquisitions. See "Management--Employment Agreements; Covenants-Not-
to-Compete."
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
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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.
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. Centerprise'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 Centerprise'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.
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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;
.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 accounting 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 and maintain separate mailing addresses,
signage, phone and fax numbers, 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 its 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
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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.
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.
Until recently, the laws of all states prohibited 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. Under the terms of the Uniform Accountancy Act as
proposed, these prohibitions would not apply to clients for whom no attest
services are provided, and 33 states and the District of Columbia have already
adopted this feature of the Uniform Accountancy Act. Centerprise will comply
with all such restrictions on a state by state basis in implementing its fee
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 from
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 all
applicable requirements related to independence and avoidance of conflicts of
interest.
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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.
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 107 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 cross-service
its existing clients through multiple Centerprise business units with
complementary service or product expertise. To encourage cross-selling and
servicing of clients,
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Centerprise intends to establish incentives among its business 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 June 30, 1999, Centerprise had a total of 2,015 employees, of which
1,475 were employed by Centerprise's professional services firms, 536 were
employed by Centerprise's business and financial services firms and four were
members of Centerprise's corporate management. Of the 1,475 people employed in
connection with professional services, approximately 570 are licensed CPAs. Of
the 407 people employed in connection with insurance brokerage services, 107
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 its and the founding companies' relations with their employees are good.
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Facilities
Centerprise currently operates 35 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 4,500
Houston, TX........... Mann Frankfort--Professional Services 52,200
Lebanon, NH........... Berry Dunn--Professional Services 5,000
Los Angeles, CA....... Urbach--Professional Services 5,200
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
Yakima, WA............ Reppond--Insurance Brokerage 1,700
</TABLE>
Litigation
In May 1999, Gilburt Kasenetz & Associates, Inc. filed a lawsuit against
Reznick and Tony Gilburt, an employee of Reznick, in the Circuit Court for
Montgomery County, Maryland. The complaint alleges misappropriation of trade
secrets and tortious interference with business relations against Reznick in
connection with Mr. Gilburt's termination of employment with the plaintiff and
subsequent employment by Reznick, and seeks compensatory damages of $3.0
million and punitive damages of $6.0 million. Reznick believes that the claims
are without merit and intends to vigorously defend the litigation. Under the
Reznick merger agreement and related documents, Reznick, Fedder & Silverman,
C.P.A.s, L.L.C., an entity owned by the former owners
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of Reznick, has agreed to indemnify Centerprise for all losses, including
litigation costs, incurred by Reznick in connection with the Gilburt matter. In
addition, under Reznick's incentive compensation agreement, Centerprise may
deduct from participants' compensation any amounts owed and not paid under the
indemnification provision. While Centerprise cannot at this early stage predict
with certainty the outcome of the litigation, management believes that this
dispute will not have a material adverse effect on Centerprise's business,
results of operations or financial condition.
Centerprise is not involved in any other legal proceedings which it
believes are material to its business, financial condition or results of
operations.
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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.
<TABLE>
<CAPTION>
Name Age Position
--------------------- --- ----------------------------------------------
<C> <C> <S>
Robert C. Basten..... 39 Chairman of the board, president and chief
executive officer
Richard H. Stein..... 46 Vice chairman of the board
Thomas W. Corbett.... 53 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,
secretary and treasurer
David Reznick........ 62 Director
Anthony P. Frabotta.. 49 Director
Charles H. Roscoe.... 55 Director
Steven N. Fischer.... 56 Director
Robert F. Gallo...... 53 Director
Wayne J. Grace....... 59 Director
Anthony P. Scillia... 42 Director
Scott H. Lang........ 53 Director
Louis C. Fornetti.... 49 Director
William J. Lynch..... 57 Director
John M. Cook......... 57 Director
Peter I. Mason....... 47 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.
Richard H. Stein will become the vice chairman of Centerprise's board of
directors 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, a predecessor to Ernst
& Young, from 1974 to 1977.
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
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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.
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, secretary 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.
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, a predecessor to PricewaterhouseCoopers, 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.
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.
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
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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.
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., a publicly-traded 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.
Peter I. Mason will become a director of Centerprise upon the closing of
the offering. Since November 1998, Mr. Mason has been the president of Talus
Advisors, L.L.C., a private investment and advisory company. Mr. Mason served
as chairman of the board, president and chief executive officer of May & Speh,
Inc., a publicly-traded provider of computer-based information management
services, from May 1997 until its merger with Acxiom Corporation in November
1998. From 1983 until 1997, Mr. Mason was a partner in the law firm of Freeborn
& Peters, which he co-founded in 1983, and he served as chairman of its
operating committee from 1986 to 1996.
Board of Directors
After completion of the mergers, the board of directors of Centerprise
will consist of 16 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 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 offering.
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.
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Employment Agreements; Covenants-Not-To-Compete
Corporate Management
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 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, Centerprise will pay severance in
a lump sum within 30 days of the termination date.
Cause is defined under the agreements to include:
. 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;
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. 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
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.
Under Mr. Basten's agreement, the definition of "good reason" also includes the
failure to re-elect Mr. Basten to, or the removal of Mr. Basten from, the
position of chairman of the board of directors. Under Ms. Brunts' agreement,
the definition of "good reason" also includes the failure to re-elect Ms.
Brunts to, or the removal of Ms. Brunts from, the board of directors.
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.
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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 $250,000 and $200,000,
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 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;
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. 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--Employee Incentives--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
The board of directors and stockholders of Centerprise have adopted an
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 5,759,488 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 offering, Centerprise will grant non-qualified
stock options to purchase a total of 1,997,442 shares of common stock to
corporate management, employees of the founding companies and non-employee
directors. 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
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aggregate of 1,632,442 shares to the employees of the founding companies. The
grants will be effective as of the date of the offering 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 provides for 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 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 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
The board of directors and stockholders of Centerprise have adopted 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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CERTAIN TRANSACTIONS
Organization of Centerprise
Centerprise was incorporated in November 1998 and is currently a wholly-
owned subsidiary of CPA Holdings, LLC, a Delaware limited liability company.
CPA Holdings is 71.4% owned by a group of investors that includes BGL Capital,
Reznick, Fedder & Silverman, C.P.A.s, L.L.C., MFSL Investments, L.P., 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, and other individuals. William J. Lynch will
become a director of Centerprise upon the closing of the offering. 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
offering, 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
offering, is a managing member of the general partner of MFSL Investments.
The remaining 28.6% of CPA Holdings' outstanding membership interests are
held by Mr. Basten, Ms. Brunts, Mr. Eagle, Mr. Bikun, Jonathan R. Rutenberg and
Reznick LLC.
Following the offering, 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.
Following the 212.05817-for-one stock split to be effected prior to the
closing of the offering, the 17,500 shares of common stock initially issued by
Centerprise to its initial investors and management will total 3,711,019
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."
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The Mergers
The aggregate purchase price to be paid by Centerprise in the mergers
consists of approximately $82.8 million in cash, promissory notes for
approximately $4.2 million and 12,488,981 shares of common stock, plus
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 offering.
<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 $ -- 1,810,554 6.8%
Driver........................ 500 -- 2,944,445 11.1
Mann Frankfort................ 19,223 -- 2,059,629 7.7
Follmer....................... 14,416 -- 1,544,571 5.8
Berry Dunn.................... 6,821 -- 931,357 3.5
Urbach........................ 10,006 -- 1,149,014 4.3
IDA........................... 7,814 -- 837,240 3.1
Grace......................... 2,840 -- 304,286 1.1
Reppond....................... -- 4,176 447,428 1.7
Simione....................... 4,297 -- 460,457 1.7
------- ------ ---------- ----
Total..................... $82,816 $4,176 12,488,981 46.8%
======= ====== ========== ====
</TABLE>
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 $148,618,879.
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 $3,155,027. 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 and the founding company.
Each merger agreement contains standard representations and warranties of
each party. 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 and
Centerprise;
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. 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.
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 founding companies will indemnify
Centerprise for any payments required to be made with respect to dissenting
shares.
Pursuant to agreements to be signed prior to the closing, the owners of
the founding companies will make representations and warranties and will
indemnify Centerprise for breaches of representations and warranties and
certain liabilities under federal securities laws. The owners will also agree
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. In addition, the owners of the founding
companies will agree 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. For a description of these transfer restrictions, see "Shares
Eligible for Future Sale."
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.................................. -- 510,536
Richard H. Stein................................... 3,234,191 332,982
Anthony P. Frabotta................................ 1,787,033 197,638
Charles H. Roscoe.................................. 380,000 45,142
Steven N. Fischer.................................. 793,000 87,040
Robert F. Gallo.................................... 4,453,980 477,227
Wayne J. Grace..................................... 583,000 54,714
Anthony P. Scillia................................. 695,757 71,228
</TABLE>
For information regarding these individuals' beneficial ownership of
Centerprise's common stock, see "Principal Stockholders."
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<PAGE>
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 and Scillia will be
parties to their firms' incentive compensation agreements. For a more detailed
description of these agreements, see "Business--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.
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 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
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<PAGE>
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 would still be 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."
Other Transactions
As of June 30, 1999, BGL Capital had funded $2.4 million in expenses in
connection with Centerprise's formation, the offering 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 and CPA Holdings on Centerprise's
behalf prior to completion of the offering. All amounts advanced by BGL Capital
and CPA Holdings to Centerprise or paid by BGL Capital under the consulting
agreements, together, in the case of advances by BGL Capital, with interest at
an annual rate of 8% from the date of payment, will be repaid by Centerprise
from the proceeds of the offering.
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 June 30, 1999, the outstanding balance of working capital advances to
Grace from Wayne J. Grace was approximately $60,000.
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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<PAGE>
PRINCIPAL STOCKHOLDERS
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 offering;
(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).............................. 3,711,019 22.9 13.9
Reznick, Fedder & Silverman, C.P.A.s, L.L.C.(3).. 2,297,797 14.2 8.3
FRF Holdings, LLC(4)............................. 1,544,571 9.5 5.8
Robert C. Basten(5).............................. 599,752 3.7 2.2
DeAnn L. Brunts(5)............................... 221,178 1.4 *
Rondol E. Eagle(5)............................... 73,653 * *
Dennis W. Bikun(5)............................... 33,171 * *
David Reznick(6)................................. 2,297,797 14.2 8.3
Thomas W. Corbett................................ 510,536 3.2 1.9
Richard H. Stein(7).............................. 775,340 4.8 2.9
Anthony P. Frabotta(8)........................... 1,544,571 9.5 5.8
Charles H. Roscoe(9)............................. 0 * *
Steven N. Fischer(10)............................ 1,149,014 7.1 4.3
Robert F. Gallo.................................. 477,227 2.9 1.8
Wayne J. Grace(11)............................... 304,286 1.9 1.1
Anthony P. Scillia(12)........................... 448,133 2.8 1.7
Scott H. Lang(2)(13)(14)......................... 3,726,019 23.0 14.0
Louis C. Fornetti(14)............................ 15,000 * *
William J. Lynch(14)(16)......................... 44,339 * *
John M. Cook(14)................................. 15,000 * *
Peter I. Mason(14)............................... 15,000 * *
All directors and executive officers as a group
(18
persons)(5)(6)(7)(8)(9)(10)(11)(12)(13)(15)(16).. 10,363,322 63.7 38.7
</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. 487,243 of these shares are
currently held, and are shown above as beneficially owned, by CPA
Holdings. These shares will be distributed to Reznick LLC following the
closing of the offering. 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 currently held, and are shown above as beneficially
owned, by CPA Holdings. These shares will be distributed to management
following the closing of the offering.
(6) These shares are held by Reznick LLC as shown above. 487,243 of these
shares are currently held, and are shown above as beneficially owned, by
CPA Holdings. Such shares will be distributed to Reznick LLC following the
closing of the offering. As a member of the operating committee of Reznick
LLC,
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<PAGE>
Mr. Reznick shares voting and investment power with respect to the shares
held by Reznick LLC. Mr. Reznick disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest therein.
(7) Includes 442,358 shares of common stock held by MFSL Investments. These
442,358 shares are currently held, and are shown above as beneficially
owned, by CPA Holdings. These shares will be distributed to MFSL
Investments following the closing of the offering. 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 will share 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.
(8) These shares are held by FRF Holdings as shown above. 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
these shares except to the extent of his pecuniary interest therein.
(9) As a member of BDM&P Holdings, LLC, Mr. Roscoe has an indirect interest
in the shares held by BDM&P Holdings, LLC to the extent of his pecuniary
interest therein.
(10) These shares are held by UKW Management LLC. As a member of the
management committee of UKW Management LLC, Mr. Fischer shares voting and
investment power with respect to such shares. Mr. Fischer disclaims
beneficial ownership of these shares except to the extent of his
pecuniary interest therein.
(11) These shares are held by Grace Capital LLP. As a member of the operating
committee 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
therein.
(12) These shares are held 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 except to the
extent of his pecuniary interest therein.
(13) Includes 3,711,019 shares held by CPA Holdings as shown above . 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,
including members shown in this table, 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.
(14) Includes 15,000 shares of common stock issuable upon the exercise of
options which will be granted and vest upon completion of the offering.
(15) Includes 29,339 shares that are currently held, and are shown above as
beneficially owned, by CPA Holdings. These shares will be distributed to
Mr. Lynch following the closing of the offering.
(16) Includes 75,000 shares of common stock issuable upon the exercise of
options which will be granted and vest upon completion of the offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of the offering, 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, 26,700,000 shares
will be outstanding upon completion of the offering. 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 offered
by this prospectus when issued and paid for 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 16 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'
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<PAGE>
agreement sets forth the manner and terms by which 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
offering. 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. See "Shares Eligible for Future Sale."
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.
SHARES ELIGIBLE FOR FUTURE SALE
After the offering, 26,700,000 shares of common stock will be
outstanding. The 10,500,000 shares being sold in the offering are freely
tradable without restriction unless acquired by Centerprise's affiliates. The
holders of common stock who did not purchase shares in the offering will own
16,200,000 shares of common stock, including 12,488,981 shares to be issued in
connection with the mergers to the owners and employees of the Centerprise
companies, and 3,711,019 shares owned by the initial investors and corporate
management of Centerprise. The shares to be issued in connection with the
mergers have been registered on a registration statement on Form S-4. The
shares registered on the S-4 will be freely tradeable under federal securities
laws unless acquired by Centerprise's affiliates. The 3,711,019 shares issued
to the initial investors and corporate management of Centerprise will not be
registered and, therefore, may not be sold unless subsequently registered under
the Securities Act or sold pursuant to an exemption from registration, such as
the exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year may sell,
within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of:
. one percent of the then outstanding shares of the common stock; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the date on which a notice of such sale is filed
with the SEC.
In addition, a person who is not deemed to have been an affiliate of
Centerprise at any time for 90 days preceding a sale and who has beneficially
owned the shares proposed to be sold for at least two years would be entitled
to sell such shares under Rule 144 without regard to these volume restrictions.
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<PAGE>
Under agreements to be signed prior to the closing, all of Centerprise's
stockholders other than purchasers in the offering will agree, subject to
limited exceptions, not to sell, transfer or otherwise dispose of any of their
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.
Shares issued to corporate management and to owners of the founding
companies in the mergers are subject to additional restrictions. If such
person's employment is terminated within 30 months of the offering, other than
under specified circumstances, restricted shares then held by such stockholder
will remain restricted until the fifth anniversary of the offering. Beginning
on the second anniversary of the offering, such persons have the right to
include shares that have been released from transfer restrictions in
registration statements relating to Centerprise's securities. The certificates
representing the shares issued in the mergers and shares issued to initial
investors and Centerprise's management will bear a legend or legends describing
the applicable transfer restrictions.
Centerprise and all of its stockholders, other than purchasers in the
offering, have agreed, for a period of 180 days after the date of this
prospectus, not to offer or sell any shares of common stock or securities
convertible into or exchangeable for common stock without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, on behalf of the
underwriters. See "Underwriting" for more detailed information regarding these
restrictions and permitted exceptions.
Sales, or the availability for sale of, substantial amounts of the common
stock in the public market after the offering could adversely affect prevailing
market prices of the common stock and the ability of Centerprise to raise
equity capital, or finance acquisitions using equity capital, in the future.
Transfer Agent and Registrar
The transfer agent and registrar for Centerprise's common stock is First
Chicago Trust Company of New York.
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<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc.
and CIBC World Markets Corp. are acting as representatives of each of the
underwriters named below. Subject to the terms and conditions set forth in an
underwriting agreement between Centerprise and the underwriters, Centerprise
has agreed to sell to the underwriters, and each of the underwriters severally
has agreed to purchase from Centerprise, the number of shares of common stock
set forth opposite its name below.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................................
Lehman Brothers Inc............................................
CIBC World Markets Corp........................................
----------
Total..................................................... 10,500,000
==========
</TABLE>
In the underwriting agreement, the several underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of common stock being sold under such agreement if any of the shares of
common stock being sold under such agreement are purchased.
The representatives have advised Centerprise that the underwriters
propose initially to offer the shares of common stock to the public at the
public offering price set forth on the cover page of this prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may reallow, a discount not
in excess of $ per share of common stock on sales to certain other
dealers. After the public offering, the public offering price, concession and
discount may be changed.
Centerprise has granted an option to the underwriters, exercisable for 30
days after the date of this prospectus, to purchase up to an aggregate of
1,575,000 additional shares of common stock at the public offering price set
forth on the cover page of this prospectus, less the underwriting discount. The
underwriters may exercise this option to cover over-allotments, if any, made on
the sale of the common stock offered by this prospectus. To the extent that the
underwriters exercise this option, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of common
stock proportionate to such underwriter's initial amount reflected in the
foregoing table.
The following table shows the per share and total underwriting discounts
and commissions to be paid by Centerprise to the underwriters. This information
is presented assuming either no exercise or full exercise by the underwriters
of their over-allotment option.
<TABLE>
<CAPTION>
Without With
Per Share Option Option
--------- ------- ------
<S> <C> <C> <C>
Public offering price............................. $ $ $
Underwriting discount............................. $ $ $
Proceeds, before expenses, to Centerprise......... $ $ $
</TABLE>
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<PAGE>
The expenses of the offering are estimated at $11.0 million and are
payable entirely by Centerprise. Such expenses include amounts advanced by BGL
Capital on Centerprise's behalf. See "Certain Transactions--Other
Transactions."
Centerprise, its executive officers and directors and substantially all
of the existing stockholders have agreed not to offer or sell any other shares
of common stock or common stock equivalents for 180 days after the date of this
prospectus, without the prior written consent of Merrill Lynch, Pierce, Fenner
& Smith Incorporated, on behalf of the underwriters. Common stock equivalents
include securities convertible into or exchangeable for common stock. During
the 180-day period, Centerprise, its executive officers and directors and the
existing stockholders have also agreed not to:
. sell to third parties any call option or other right to acquire common
stock or common stock equivalents;
. purchase from third parties any put option or other right to sell common
stock or common stock equivalents; or
. enter into any swap or other arrangement that transfers the economic
consequences of ownership of common stock or common stock equivalents, in
each case, without the prior written consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, on behalf of the underwriters.
There are some exceptions to these restrictions. Centerprise may issue
common stock in connection with acquisitions as long as such issued stock is
subject to the same restrictions for the remainder of the restrictive period,
may grant stock options under existing employee benefit plans and may issue
common stock upon the exercise of stock options. Centerprise's stockholders may
make bona fide gifts of shares of common stock and stockholders that are
members of CPA Holdings may distribute shares of common stock to their members
or partners; provided in each case that the transferee is subject to the same
restrictions for the balance of the restricted period.
Prior to the offering, there has been no public market for Centerprise's
common stock. The initial public offering price will be determined through
negotiations between Centerprise and the representatives of the underwriters.
The factors considered in determining the initial public offering price, in
addition to prevailing market conditions, will be price-earnings ratios of
publicly traded companies that the representatives believe to be comparable to
Centerprise, certain of its financial information, the history of, and the
prospects for, Centerprise and the industry in which it competes, an assessment
of its management, its past and present operations, the prospects for, and
timing of, its future revenues, the present state of its development, and the
above factors in relation to market values and various valuation measures of
other companies engaged in activities similar to Centerprise. There can be no
assurance that an active trading market will develop for the common stock or
that the common stock will trade in the public market subsequent to the
offering at or above the public offering price.
The common stock has been authorized for listing on The New York Stock
Exchange under the symbol "CAI."
The underwriters do not intend to confirm sales of the common stock
offered hereby to any accounts over which they exercise discretionary
authority.
Centerprise has agreed to indemnify the underwriters against certain
liabilities, including certain liabilities under the Securities Act.
Until the distribution of the common stock is completed, rules of the SEC
may limit the ability of the underwriters and certain selling group members to
bid for and purchase the common stock. As an exception to these rules, the
representatives are permitted to engage in certain transactions that stabilize
the price of the common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the common
stock.
88
<PAGE>
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the representatives
may reduce that short position by purchasing common stock in the open market.
The representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The representatives may also impose a penalty bid on certain underwriters
and selling group members. This means that if the representatives purchase
shares of common stock in the open market to reduce the underwriters' short
position or to stabilize the price of the common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group
members who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the common stock to the extent
that it were to discourage resales of the common stock.
Neither Centerprise nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock. In
addition, neither Centerprise nor any of the underwriters makes any
representation that the representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
At Centerprise's request, the underwriters have reserved up to 5% of the
shares of common stock offered by this prospectus for sale, at the initial
public offering price, to certain of its directors, officers, employees, and
business associates of, and certain other persons designated by Centerprise who
have expressed an interest in purchasing such shares of common stock. The
number of shares of common stock available for sale to the general public in
the offering will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares which are not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares
offered by this prospectus.
Affiliates of CIBC World Markets Corp., one of the representatives of the
underwriters, are members of BGL Capital, which is an initial investor in
Centerprise.
89
<PAGE>
LEGAL MATTERS
The legality of the shares of common stock offered by this prospectus
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. Certain
legal matters concerning the offering will be passed upon for the underwriters
by Mayer, Brown & Platt, Chicago, Illinois.
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 1999 and for each of the two years in
the period ended July 31, 1999;
. 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, 1998 and 1999 and for each of the
three years in the period ended June 30, 1999;
. the financial statements of Urbach Kahn & Werlin PC as of October
31, 1998 and July 31, 1999 and for each of the two years in the
period ended October 31, 1998 and for the nine months ended July
31, 1999;
. 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 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. for
the year 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.
90
<PAGE>
WHERE YOU MAY FIND ADDITIONAL INFORMATION
Centerprise has filed a registration statement on Form S-1 (which
includes all amendments to such registration statement) with the SEC under the
Securities Act concerning the common stock offered by this prospectus. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules. The material terms of
each contract or other document are described in this prospectus. 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 and schedules.
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's SEC filings are also available to you on the SEC Internet site
(http://www.sec.gov.).
Centerprise intends to furnish its stockholders with an annual report
containing audited financial statements and an opinion of such registration
statement expressed by independent auditors for each fiscal year and with
quarterly reports containing unaudited summary information for the first three
quarters of each fiscal year.
91
<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-26
Consolidated Balance Sheet............................................... F-27
Consolidated Statement of Income......................................... F-28
Consolidated Statement of Changes in Shareholders' Equity................ F-29
Consolidated Statement of Cash Flows..................................... F-30
Notes to Consolidated Financial Statements............................... F-31
Robert F. Driver Co., Inc.
Report of Independent Accountants........................................ F-40
Independent Auditors' Report............................................. F-41
Consolidated Balance Sheet............................................... F-42
Consolidated Statement of Income......................................... F-43
Consolidated Statement of Stockholders' Equity........................... F-44
Consolidated Statement of Cash Flows..................................... F-45
Notes to Consolidated Financial Statements............................... F-47
Mann Frankfort Stein & Lipp, P.C.
Report of Independent Accountants........................................ F-59
Balance Sheet............................................................ F-60
Statement of Income...................................................... F-61
Statement of Shareholders' Equity and Partners' Capital.................. F-62
Statement of Cash Flows.................................................. F-63
Notes to Financial Statements............................................ F-64
Follmer, Rudzewicz & Company, P.C.
Report of Independent Accountants........................................ F-69
Consolidated Balance Sheet............................................... F-70
Consolidated Statement of Operations..................................... F-71
Consolidated Statement of Shareholders' Equity........................... F-72
Consolidated Statement of Cash Flows..................................... F-73
Notes to Consolidated Financial Statements............................... F-74
Berry, Dunn, McNeil & Parker, Chartered
Report of Independent Accountants........................................ F-82
Consolidated Balance Sheet............................................... F-83
Consolidated Statement of Income......................................... F-84
Consolidated Statement of Shareholders' Equity........................... F-85
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Consolidated Statement of Cash Flows.................................... F- 86
Notes to Consolidated Financial Statements.............................. F- 87
Urbach Kahn & Werlin P.C.
Report of Independent Accountants....................................... F- 94
Balance Sheet........................................................... F- 95
Statement of Income..................................................... F- 96
Statement of Shareholders' Equity....................................... F- 97
Statement of Cash Flows................................................. F- 98
Notes to Financial Statements........................................... F- 99
Self Funded Benefits, Inc. d/b/a Insurance Design Administrators
Report of Independent Accountants....................................... F-108
Balance Sheet........................................................... F-109
Statement of Income..................................................... F-110
Statement of Shareholders' Equity....................................... F-111
Statement of Cash Flows................................................. F-112
Notes to Financial Statements........................................... F-113
Grace & Company, P.C.
Report of Independent Accountants....................................... F-118
Balance Sheet........................................................... F-119
Statement of Income..................................................... F-120
Statement of Shareholders' Equity....................................... F-121
Statement of Cash Flows................................................. F-122
Notes to Financial Statements........................................... F-123
The Reppond Companies
Report of Independent Accountants....................................... F-129
Combined Balance Sheet.................................................. F-130
Combined Statement of Income............................................ F-131
Combined Statement of Shareholders' Equity.............................. F-132
Combined Statement of Cash Flows........................................ F-133
Notes to Combined Financial Statements.................................. F-134
Simione, Scillia, Larrow & Dowling LLC
Report of Independent Accountants....................................... F-140
Balance Sheet........................................................... F-141
Statement of Income..................................................... F-142
Statement of Members' Equity............................................ F-143
Statement of Cash Flows................................................. F-144
Notes to Financial Statements........................................... F-145
</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"); 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 June 30, 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
June 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Merger Pro
Center- Mann Berry Adjustments Forma
ASSETS prise Reznick Driver Frankfort Follmer Dunn Urbach IDA Grace Reppond Simione (See Note 3) Combined
- ------ ------- ------- ------- --------- ------- ------ ------- ------ ------ ------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents....... $ 21 $ 4,944 $ 2,315 $ 1,881 $ 823 $ 69 $ 2,174 $ 636 $ 19 $ 208 $ 189 $(11,154) $ 2,125
Funds held for
customers......... -- -- 30,380 -- 13 -- -- 568 -- -- -- -- 30,961
Investments....... -- -- -- -- -- -- -- -- -- -- -- -- --
Receivables,
net............... -- 16,293 24,076 6,982 5,749 3,873 8,520 631 2,404 956 2,142 (38,413) 33,213
Unbilled fees at
net realizable
value............. -- 7,308 -- 1,205 2,657 1,556 684 -- 1,151 -- 443 (7,188) 7,816
Notes
receivable........ -- -- -- -- -- -- -- -- -- -- 12 (12) --
Due from related
parties and
stockholders...... -- -- -- 8 -- -- 550 -- -- -- -- (558) --
Prepaid expenses
and other current
assets............ -- 130 243 81 668 117 400 80 258 150 112 (95) 2,144
Deferred offering
costs............. 7,793 -- -- -- -- -- -- -- -- -- -- -- 7,793
Deferred income
taxes............. -- 1,589 -- -- -- -- -- -- -- -- -- (1,201) 388
------ ------- ------- ------- ------- ------ ------- ------ ------ ------ ------ -------- --------
Total current
assets.......... 7,814 30,264 57,014 10,157 9,910 5,615 12,328 1,915 3,832 1,314 2,898 (58,621) 84,440
Property and
equipment, net..... -- 2,626 1,216 1,196 1,411 1,548 980 702 488 833 122 (530) 10,592
Goodwill and other
intangible assets,
net................ -- 391 28,821 -- -- 1,247 -- -- -- -- -- 210,121 240,580
Long-term
investments........ -- -- -- -- -- -- 900 -- -- -- -- (831) 69
Deferred income
taxes.............. -- 1,404 237 -- 1,478 423 2,252 -- 11 7 -- (4,563) 1,249
Other assets....... 25 683 396 6 3,590 -- 331 38 1,039 23 103 (5,537) 697
------ ------- ------- ------- ------- ------ ------- ------ ------ ------ ------ -------- --------
Total assets.... $7,839 $35,368 $87,684 $11,359 $16,389 $8,833 $16,791 $2,655 $5,370 $2,177 $3,123 $140,039 $337,627
====== ======= ======= ======= ======= ====== ======= ====== ====== ====== ====== ======== ========
<CAPTION>
Offering
Adjustments As
ASSETS (See Note 3) Adjusted
- ------ ------------ --------
<S> <C> <C>
Current assets:
Cash and cash
equivalents....... $ 6,162 $ 8,287
Funds held for
customers......... -- 30,961
Investments....... -- --
Receivables,
net............... -- 33,213
Unbilled fees at
net realizable
value............. -- 7,816
Notes
receivable........ -- --
Due from related
parties and
stockholders...... -- --
Prepaid expenses
and other current
assets............ -- 2,144
Deferred offering
costs............. (7,793) --
Deferred income
taxes............. -- 388
------------ --------
Total current
assets.......... (1,631) 82,809
Property and
equipment, net..... -- 10,592
Goodwill and other
intangible assets,
net................ -- 240,580
Long-term
investments........ -- 69
Deferred income
taxes.............. -- 1,249
Other assets....... -- 697
------------ --------
Total assets.... $(1,631) $335,996
============ ========
</TABLE>
F-4
<PAGE>
CENTERPRISE ADVISORS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
June 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
LIABILITIES AND Merger
STOCKHOLDERS' Center- Mann Berry Adjustments
EQUITY prise Reznick Driver Frankfort Follmer Dunn Urbach IDA Grace Reppond Simione (See Note 3)
- --------------- -------- ------- ------- --------- ------- ------ ------- ------ ------ ------- ------- -----------
<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.... $ -- $ 2,661 $ 6,870 $ 101 $ 1,103 $1,631 $ 446 $ 140 $1,296 $ 587 $1,258 $ (1,258)
Accounts
payable........... -- 1,354 5,604 218 83 106 393 127 92 161 135 --
Insurance
premiums
payable........... -- -- 46,219 -- -- -- -- -- -- -- -- --
Accrued
compensation and
related costs..... -- 23,988 -- 2,179 5,444 860 3,930 35 776 218 -- (26,997)
Deferred
compensation...... -- 91 -- -- -- 529 247 -- -- -- -- (91)
Income taxes
payable........... -- -- 462 (4) -- -- -- -- -- -- -- --
Deferred income
taxes............. -- -- -- 2,760 1,299 653 2,022 -- 1,153 153 -- (7,098)
Current portion
of customer
deposits.......... -- -- -- -- -- -- -- 568 -- -- -- --
Due to related
parties........... 2,790 -- -- -- 3,798 3,973 -- -- 229 -- 175 74,641
Other accrued
liabilities....... 6,749 -- -- -- -- 239 1,060 529 90 -- 164 250
-------- ------- ------- ------- ------- ------ ------- ------ ------ ------ ------ --------
Total current
liabilities..... 9,539 28,094 59,155 5,254 11,727 7,991 8,098 1,399 3,636 1,119 1,732 39,447
Long-term debt, net
of current
maturities......... -- 1,264 15,229 799 -- -- 1,269 95 389 264 -- 3,901
Deferred
compensation....... -- 724 26 -- 4,280 495 5,077 -- -- -- -- (8,854)
Deferred income
taxes.............. -- -- -- 78 -- -- -- -- -- -- -- 138
Other long-term
liabilities........ -- 2,539 -- -- -- -- 149 -- -- -- 117 (2,539)
-------- ------- ------- ------- ------- ------ ------- ------ ------ ------ ------ --------
Total
liabilities..... 9,539 32,621 74,410 6,131 16,007 8,486 14,593 1,494 4,025 1,383 1,849 32,093
Redeemable
preferred stock of
subsidiary......... -- -- 4,000 -- -- -- -- -- -- -- -- --
Stockholders'
equity:
Members' equity... -- -- -- -- -- -- -- -- -- 54 1,274 (1,328)
Common stock...... 37 -- 11 2 8 924 -- -- 17 1 -- (838)
Additional paid-
in capital........ 20,315 1,422 10,184 61 1,234 -- 3,364 208 350 56 -- 115,692
Retained earnings
(deficit)......... (22,052) 1,325 (141) 5,165 (720) (216) (1,166) 1,117 1,067 711 -- (7,142)
Note receivable
from
shareholder....... -- -- (780) -- -- (361) -- -- -- (28) -- 1,169
Accumulated other
comprehensive
income............ -- -- -- -- -- -- -- -- -- -- -- --
Treasury stock.... -- -- -- -- (140) -- -- (164) (89) -- -- 393
-------- ------- ------- ------- ------- ------ ------- ------ ------ ------ ------ --------
Total
stockholders'
equity.......... (1,700) 2,747 9,274 5,228 382 347 2,198 1,161 1,345 794 1,274 107,946
-------- ------- ------- ------- ------- ------ ------- ------ ------ ------ ------ --------
Total liabilities
and stockholders'
equity............. $ 7,839 $35,368 $87,684 $11,359 $16,389 $8,833 $16,791 $2,655 $5,370 $2,177 $3,123 $140,039
======== ======= ======= ======= ======= ====== ======= ====== ====== ====== ====== ========
<CAPTION>
LIABILITIES AND Pro Offering
STOCKHOLDERS' Forma Adjustments As
EQUITY Combined (See Note 3) Adjusted
- --------------- --------- ------------ ---------
<S> <C> <C> <C>
Current
liabilities:
Short-term debt,
including current
maturities of
long-term debt.... $ 14,835 $ (2,605) $ 12,230
Accounts
payable........... 8,273 -- 8,273
Insurance
premiums
payable........... 46,219 -- 46,219
Accrued
compensation and
related costs..... 10,433 -- 10,433
Deferred
compensation...... 776 -- 776
Income taxes
payable........... 458 -- 458
Deferred income
taxes............. 942 -- 942
Current portion
of customer
deposits.......... 568 -- 568
Due to related
parties........... 85,606 (85,606) --
Other accrued
liabilities....... 9,081 (6,999) 2,082
--------- ------------ ---------
Total current
liabilities..... 177,191 (95,210) 81,981
Long-term debt, net
of current
maturities......... 23,210 (15,229) 7,981
Deferred
compensation....... 1,748 -- 1,748
Deferred income
taxes.............. 216 -- 216
Other long-term
liabilities........ 266 -- 266
--------- ------------ ---------
Total
liabilities..... 202,631 (110,439) 92,192
Redeemable
preferred stock of
subsidiary......... 4,000 (4,000) --
Stockholders'
equity:
Members' equity... -- -- --
Common stock...... 162 105 267
Additional paid-
in capital........ 152,886 112,703 265,589
Retained earnings
(deficit)......... (22,052) -- (22,052)
Note receivable
from
shareholder....... -- -- --
Accumulated other
comprehensive
income............ -- -- --
Treasury stock.... -- -- --
--------- ------------ ---------
Total
stockholders'
equity.......... 130,996 112,808 243,804
--------- ------------ ---------
Total liabilities
and stockholders'
equity............. $337,627 $ (1,631) $335,996
========= ============ =========
</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 Reppond Simione
----------- ------- ------- --------- ------- ------- ------- ------- ------ ------- -------
<S> <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 $ -- $6,217
Services
agreements...... -- -- -- -- -- -- -- -- -- -- --
--------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total
professional
services........ -- 48,387 -- 21,631 20,564 18,662 17,753 -- 9,691 -- 6,217
Business and
financial
services........ -- -- 34,303 -- -- -- -- 10,496 -- 7,892 --
--------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total revenues.. -- 48,387 34,303 21,631 20,564 18,662 17,753 10,496 9,691 7,892 6,217
Expenses:
Professional
services
compensation and
related costs... -- 39,825 -- 17,750 16,629 13,722 12,612 -- 7,784 -- 4,396
Business and
financial
services
compensation and
related costs... -- -- 25,470 -- -- -- -- 6,461 -- 5,067 --
Other operating
expenses........ 1,232 7,575 6,060 3,081 3,711 3,753 4,510 2,509 1,190 1,982 1,333
Non-cash stock
compensation.... 17,503 -- -- -- -- -- -- -- -- -- --
Amortization of
goodwill........ -- 11 590 -- -- 65 -- -- -- -- --
Depreciation.... -- 965 1,074 266 539 935 280 242 190 332 31
--------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Income (loss)
from
operations...... (18,735) 11 1,109 534 (315) 187 351 1,284 527 511 457
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) (43) --
Other, net...... -- (143) (417) (26) 14 126 (486) 82 (95) 22 50
--------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Income (loss)
before income
taxes............ (18,735) (335) 1,339 571 (390) -- 282 1,247 523 460 277
Provision
(benefit) for
income taxes..... -- (109) 688 213 165 -- 176 25 232 113 --
--------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Net income
(loss)........... $ (18,735) $ (226) $ 651 $ 358 $ (555) $ -- $ 106 $ 1,222 $ 291 $ 347 $ 277
========= ======= ======= ======= ======= ======= ======= ======= ====== ====== ======
Net loss per
share:
Basic........... $ (30.10)
=========
Diluted......... $ (5.55)
=========
Shares used in
computing net
loss per share
(see Note 5):
Basic........... 622,348
=========
Diluted......... 3,375,265
=========
<CAPTION>
Pro Forma
Adjustments
(See Note Pro Forma
4) Combined
-------------- -----------
<S> <C> <C>
Revenues:
Professional
services........ $(64,759)(A) $ 78,146
Services
agreements...... 62,600 (A) 62,600
-------------- -----------
Total
professional
services........ (2,159) 140,746
Business and
financial
services........ -- 52,691
-------------- -----------
Total revenues.. (2,159) 193,437
Expenses:
Professional
services
compensation and
related costs... (25,029)(B) 87,689
Business and
financial
services
compensation and
related costs... (1,540)(B) 35,458
Other operating
expenses........ (1,767)(A) 35,169
Non-cash stock
compensation.... -- 17,503
Amortization of
goodwill........ 15,373 (C) 16,039
Depreciation.... -- 4,854
-------------- -----------
Income (loss)
from
operations...... 10,804 (3,275)
Other (income)
expense:
Interest
expense......... (939)(E) 2,118
Interest
income.......... 156 (F) (1,346)
Other, net...... -- (873)
-------------- -----------
Income (loss)
before income
taxes............ 11,587 (3,174)
Provision
(benefit) for
income taxes..... 3,643 (G) 5,146
-------------- -----------
Net income
(loss)........... $ 7,944 $ (8,320)
============== ===========
Net loss per
share:
Basic........... $ (0.32)
===========
Diluted......... $ (0.32)
===========
Shares used in
computing net
loss per share
(see Note 5):
Basic........... 26,169,905
===========
Diluted......... 26,169,905
===========
</TABLE>
F-6
<PAGE>
CENTERPRISE ADVISORS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the six months ended June 30, 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Center- Mann Berry (See Note
prise Reznick Driver Frankfort Follmer Dunn Urbach IDA Grace Reppond Simione 4)
------- ------- ------ --------- ------- ------- ------ ------ ------ ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Professional
services........ $ -- $28,471 $ -- $11,828 $11,627 $10,687 $9,514 $ -- $5,684 $ -- $3,283 $(36,916)(A)
Services
agreements...... -- -- -- -- -- -- -- -- -- -- -- 35,833 (A)
----- ------- ------ ------- ------- ------- ------ ------ ------ ------ ------ --------
Total
professional
services........ -- 28,471 -- 11,828 11,627 10,687 9,514 -- 5,684 -- 3,283 (1,083)
Business and
financial
services........ -- -- 19,412 -- -- -- -- 4,992 -- 4,093 -- --
----- ------- ------ ------- ------- ------- ------ ------ ------ ------ ------ --------
Total revenues.. -- 28,471 19,412 11,828 11,627 10,687 9,514 4,992 5,684 4,093 3,283 (1,083)
Expenses:
Professional
services
compensation and
related costs... -- 24,402 -- 8,474 9,632 8,407 6,711 -- 4,108 -- 2,210 (15,685)
Business and
financial
services
compensation and
related costs... -- -- 13,333 -- -- -- -- 2,930 -- 2,484 -- (786)(B)
Other operating
expenses........ -- 3,566 3,282 1,811 1,629 1,796 2,345 1,468 657 837 637 (900)(A)
Non-cash stock
compensation.... -- -- -- -- -- -- -- -- -- -- -- -- (D)
Amortization of
goodwill........ -- -- 116 -- -- 26 -- -- -- -- -- 7,877 (C)
Depreciation ... -- 515 572 112 303 406 121 120 104 156 16 --
----- ------- ------ ------- ------- ------- ------ ------ ------ ------ ------ --------
Income (loss)
from
operations...... -- (12) 2,109 1,431 63 52 337 474 815 616 420 8,411
Other (income)
expense: --
Interest
expense......... -- 206 238 33 34 132 355 18 62 42 67 (234)(E)
Interest
income.......... -- (19) (393) (15) (40) (94) (26) (33) (6) (2) -- -- (F)
Other, net...... -- (50) (162) 13 (172) 14 (195) -- (62) 9 -- --
----- ------- ------ ------- ------- ------- ------ ------ ------ ------ ------ --------
Income (loss)
before income
taxes............ -- (149) 2,426 1,400 241 -- 203 489 821 567 353 8,645
Provision
(benefit) for
income taxes..... -- (43) 1,064 498 214 -- 108 21 334 156 -- 6,854 (F)
----- ------- ------ ------- ------- ------- ------ ------ ------ ------ ------ --------
Net income
(loss)........... $ -- $ (106) $1,362 $ 902 $ 27 $ -- $ 95 $ 468 $ 487 $ 411 $ 353 $ 1,791
===== ======= ====== ======= ======= ======= ====== ====== ====== ====== ====== ========
Net income per
share
Basic...........
Diluted.........
Shares used in
computing net
income per share
(see Note 5)
Basic...........
Diluted.........
<CAPTION>
Pro Forma
Combined
------------
<S> <C>
Revenues:
Professional
services........ $ 44,178
Services
agreements...... 35,833
------------
Total
professional
services........ 80,011
Business and
financial
services........ 28,497
------------
Total revenues.. 108,508
Expenses:
Professional
services
compensation and
related costs... 48,259
Business and
financial
services
compensation and
related costs... 17,961
Other operating
expenses........ 17,128
Non-cash stock
compensation.... --
Amortization of
goodwill........ 8,019
Depreciation ... 2,425
------------
Income (loss)
from
operations...... 14,716
Other (income)
expense:
Interest
expense......... 953
Interest
income.......... (628)
Other, net...... (605)
------------
Income (loss)
before income
taxes............ 14,996
Provision
(benefit) for
income taxes..... 9,206
------------
Net income
(loss)........... $ 5,790
============
Net income per
share
Basic........... $ 0.22
============
Diluted......... $ 0.22
============
Shares used in
computing net
income per share
(see Note 5)
Basic........... 26,169,905
============
Diluted......... 26,169,905
============
</TABLE>
F-7
<PAGE>
CENTERPRISE ADVISORS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the six months ended June 30, 1999
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Center- Mann Berry
prise Reznick Driver Frankfort Follmer Dunn Urbach IDA Grace Reppond Simione
--------- ------- ------- --------- ------- ------- ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Professional
services........ $ -- $32,987 $ -- $16,630 $13,588 $10,629 $11,651 $ -- $6,269 $ -- $4,180
Services
agreements...... -- -- -- -- -- -- -- -- -- -- --
--------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Total
professional
services........ -- 32,987 -- 16,630 13,588 10,629 11,651 -- 6,269 -- 4,180
Business and
financial
services........ -- -- 26,716 -- -- -- -- 5,502 -- 4,353 --
--------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Total revenues.. -- 32,987 26,716 16,630 13,588 10,629 11,651 5,502 6,269 4,353 4,180
Expenses:
Professional
services
compensation and
related costs... -- 28,388 -- 10,804 11,749 8,772 9,393 -- 4,419 -- 2,436
Business and
financial
services
compensation and
related costs... -- -- 16,444 -- -- -- -- 3,156 -- 2,674 --
Other operating
expenses........ 661 4,207 4,100 2,396 2,121 1,572 2,264 1,604 736 1,262 722
Non-cash stock
compensation.... 2,656 -- 1,107 -- -- -- -- -- -- -- --
Amortization of
goodwill........ -- -- 721 -- -- 22 -- -- -- -- --
Depreciation.... -- 528 244 176 249 342 176 104 102 153 16
--------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Income from
operations...... (3,317) (136) 4,100 3,254 (531) (79) (182) 638 1,012 264 1,006
Other (income)
expense:
Interest
expense......... -- 233 1,194 44 28 180 308 10 95 25 64
Interest
income.......... -- (62) (365) (28) (22) (142) (21) (29) (4) (1) --
Other, net...... -- (132) 16 4 (266) (117) (610) -- (17) 2 108
--------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Income (loss)
before income
taxes............ (3,317) (175) 3,255 3,234 (271) -- 141 657 938 238 834
Provision
(benefit) for
income taxes..... -- (60) 1,703 1,184 (107) -- 79 10 387 120 --
--------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Net income
(loss)........... $ (3,317) $ (115) $ 1,552 $ 2,050 $ (164) $ -- $ 62 $ 647 $ 551 $ 118 $ 834
========= ======= ======= ======= ======= ======= ======= ====== ====== ====== ======
Net income (loss)
per share:
Basic........... $ (1.06)
=========
Diluted......... $ (0.92)
=========
Shares used in
computing net
income (loss) per
share:
Basic........... 3,133,548
=========
Diluted......... 3,618,775
=========
<CAPTION>
Pro Forma
Adjustments
(See Note Pro Forma
4) Combined
-------------- ------------
<S> <C> <C>
Revenues:
Professional
services........ $(42,658) $ 53,276
Services
agreements...... 41,583 (A) 41,583
-------------- ------------
Total
professional
services........ (1,075) 94,859
Business and
financial
services........ -- 36,571
-------------- ------------
Total revenues.. (1,075) 131,430
Expenses:
Professional
services
compensation and
related costs... (14,431)(B) 61,530
Business and
financial
services
compensation and
related costs... (786)(B) 21,488
Other operating
expenses........ (900)(A) 20,745
Non-cash stock
compensation.... -- 3,763
Amortization of
goodwill........ 7,276 (C) 8,019
Depreciation.... -- 2,090
-------------- ------------
Income from
operations...... 7,766 13,795
Other (income)
expense:
Interest
expense......... (884)(E) 1,297
Interest
income.......... -- (F) (674)
Other, net...... -- (1,012)
-------------- ------------
Income (loss)
before income
taxes............ 8,650 14,184
Provision
(benefit) for
income taxes..... 5,565 (G) 8,881
-------------- ------------
Net income
(loss)........... $ 3,085 $ 5,303
============== ============
Net income (loss)
per share:
Basic........... $ 0.20
============
Diluted......... $ 0.20
============
Shares used in
computing net
income (loss) per
share:
Basic........... 26,169,905
============
Diluted......... 26,169,905
============
</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
ten 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 July 31, 1999 and for the year ended January 31,
1999 and the six month periods ended July 31, 1998 and 1999. The financial
statements for Follmer are as of May 31, 1999 and for the year ended November
30, 1998 and the six month periods ended May 31, 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 Accounting Principles Board Opinion No. 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,
promissory notes and shares of common stock to the stockholders of each of the
Centerprise Companies.
<TABLE>
<CAPTION>
Shares of
Promissory Common Value of Total
Cash Notes (1) Stock Shares (2) Consideration (3)
------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Reznick................. $16,899 $ -- 1,810,554 $ 19,237 $ 36,136
Driver.................. 500 -- 2,944,445 31,285 31,785
Mann Frankfort.......... 19,223 -- 2,059,629 21,884 41,107
Follmer................. 14,416 -- 1,544,571 16,411 30,827
Berry Dunn.............. 6,821 -- 931,357 9,896 16,717
Urbach.................. 10,006 -- 1,149,014 12,208 22,213
IDA..................... 7,814 -- 837,240 8,896 16,710
Grace................... 2,840 -- 304,286 3,233 6,073
Reppond................. -- 4,176 447,428 4,754 8,930
Simione................. 4,297 -- 460,457 4,892 9,190
------- ------ ---------- -------- --------
$82,816 $4,176 12,488,981 $132,696 $219,688
======= ====== ========== ======== ========
</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, promissory notes will be
issued for the acquisition of Reppond. The interest rate on the notes 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 stockholders' agreements to be signed prior
to the mergers, the former owners of the Centerprise Companies and the
initial investors and management of Centerprise will agree, 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
$3,155. 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 $ (618) $ 36,754
Driver................................... 31,785 (21,064) 52,849
Mann Frankfort........................... 41,107 384 40,723
Follmer.................................. 30,827 647 30,180
Berry Dunn............................... 16,717 59 16,658
Urbach................................... 22,213 (510) 22,723
IDA...................................... 16,710 476 16,234
Grace.................................... 6,073 (1,094) 7,167
Reppond.................................. 8,930 794 8,136
Simione.................................. 9,190 34 9,156
-------- -------- --------
$219,688 $(20,892) $240,580
======== ======== ========
</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............ $(11,154) $ -- $ -- $(11,154) $120,601 $(114,439) $ 6,162
Receivables, net........ (37,357) (1,056) -- (38,413) -- -- --
Unbilled fees at net
realizable value....... (7,188) -- -- (7,188) -- -- --
Notes receivable........ -- (12) -- (12) -- -- --
Due from related
parties................ -- (558) -- (558) -- -- --
Prepaid expenses and
other current assets... -- (95) -- (95) -- -- --
Deferred offering
costs.................. -- -- -- -- (7,793) -- (7,793)
Deferred income taxes... -- (1,201) -- (1,201) -- -- --
-------- -------- -------- -------- -------- --------- ---------
Total current
assets.............. (55,699) (2,922) -- (58,621) 112,808 (114,439) (1,631)
Property and equipment,
net.................... -- (530) -- (530) -- -- --
Goodwill, net........... -- (30,459) 240,580 210,121 -- -- --
Long-term investments... -- (831) -- (831) -- -- --
Deferred income taxes... -- (4,563) -- (4,563) -- -- --
Other assets............ -- (5,537) -- (5,537) -- -- --
-------- -------- -------- -------- -------- --------- ---------
Total assets......... $(55,699) $(44,842) $240,580 $140,039 $112,808 $(114,439) $ (1,631)
======== ======== ======== ======== ======== ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Short-term debt,
including current
maturities of long-term
debt................... $ -- $ (1,258) $ -- $ (1,258) $ -- $ (2,605) $ (2,605)
Accrued compensation and
related costs.......... -- (26,997) -- (26,997) -- -- --
Deferred compensation... -- (91) -- (91) -- -- --
Deferred income taxes... -- (7,098) -- (7,098) -- -- --
Due to related parties.. -- (8,175) 82,816 76,641 -- (85,606) (85,606)
Other accrued
liabilities............ -- 250 -- 250 -- (6,999) (6,999)
-------- -------- -------- -------- -------- --------- ---------
Total current
liabilities......... -- (43,369) 82,816 39,447 -- (95,210) (95,210)
Long-term debt, net..... -- 3,901 -- 3,901 -- (15,229) (15,229)
Deferred compensation... -- (8,854) -- (8,854) -- -- --
Deferred income taxes... -- 138 -- 138 -- -- --
Other long-term
liabilities............ -- (2,539) -- (2,539) -- -- --
-------- -------- -------- -------- -------- --------- ---------
Total liabilities.... -- (50,723) 82,816 32,093 -- (110,439) (110,439)
Redeemable preferred
stock.................. -- -- -- -- -- (4,000) (4,000)
Stockholders' equity:
Members' equity........ (2,516) 1,276 (88) (1,328) -- -- --
Common stock........... -- -- (838) (838) 105 -- 105
Additional paid-in
capital................ -- (780) 116,472 115,692 112,703 -- 112,703
Retained earnings
(deficit).............. (53,183) 4,577 41,464 (7,142) -- -- --
Notes receivable from
shareholder............ -- 808 361 1,169 -- -- --
Treasury stock......... -- -- 393 393 -- -- --
-------- -------- -------- -------- -------- --------- ---------
Total stockholders'
equity.............. (55,699) 5,881 157,764 107,945 112,808 -- 112,808
-------- -------- -------- -------- -------- --------- ---------
Total liabilities and
stockholders'
equity.............. $(55,699) $(44,842) $240,580 $140,039 $112,808 $(114,439) $ (1,631)
======== ======== ======== ======== ======== ========= =========
</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, 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 $82,816 in cash, promissory notes
of $4,176 and 12,488,981 shares of common stock valued at $12.50 per share
(or a total of $132,696) for a total estimated purchase price of $219,688,
resulting in an excess purchase price over the fair value of assets
acquired of $240,580. 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 $17,834 of indebtedness of Driver; and (iv) pay $250
for settlement of a consulting agreement of Driver.
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 $2,159
F-12
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
in the year ended December 31, 1998 and $1,083 and $1,075 in the six months
ended June 30, 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 Six Months Ended Six Months Ended
December 31, 1998 June 30, 1998 June 30, 1999
------------------- ------------------ ------------------
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
------------------- ------------------ ------------------
<S> <C> <C> <C>
Professional services
revenues(1)............ $(64,759) $(36,916) $(42,658)
-------- -------- --------
Services agreement
fees................... 62,600 35,833 41,583
-------- -------- --------
Other operating
expenses............... (1,767) (900) (900)
-------- -------- --------
</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.
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.
F-13
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
(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>
Six Months
Year Ended Ended June 30,
December 31, ----------------
1998 1998 1999
------------ ------- -------
<S> <C> <C> <C>
Professional Services:
Reznick.................................. $ 6,110 $ 5,394 $ 5,509
Mann Frankfort........................... 6,566 2,911 1,017
Follmer.................................. 5,116 3,112 3,759
Berry Dunn............................... 2,079 1,637 1,825
Urbach................................... 3,462 2,230 2,704
Grace.................................... 576 (45) (244)
Simione.................................. 1,120 446 (139)
------- ------- -------
$25,029 $15,685 $14,431
======= ======= =======
Business and Financial Services:
Driver................................... $ (100) $ (50) $ (50)
IDA...................................... 1,092 546 546
Reppond.................................. 548 290 290
------- ------- -------
$ 1,540 $ 786 $ 786
======= ======= =======
</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--Employee Incentives--Professional Services"
for further explanation of the incentive compensation agreements.
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
$240,580 of goodwill to be recorded as a result of the Mergers net of
amortization expense already recorded in the accounts of the
F-14
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Centerprise Companies of $666 in the year ended December 31, 1998, resulting in
a net adjustment of $15,373. Elimination of amortization expense already
recorded in the accounts of the Centerprise Companies of $142 and $744 for the
six months ended June 30, 1998 and 1999 resulted in net adjustments of $7,787
and $7,276, 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
$939, $234 and $884 for the year ended December 31, 1998 and the six months
ended June 30, 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) 3,711,019
shares issued to the initial investors in and management of Centerprise; (ii)
12,488,981 shares to be issued to the owners of the Centerprise Companies in
connection with the Mergers; and (iii) 9,969,905 shares representing the number
of shares sold in this offering, net of the underwriting discount necessary to
pay the $82,816 cash portion of the consideration for the Mergers (excluding
certain contingent payments described in Note 2), to repay certain indebtedness
of $17,834 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.
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.
F-15
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
. 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.
In our opinion, the accompanying balance sheet and the related statements
of operations and of cash flows 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
September 24, 1999
F-17
<PAGE>
CENTERPRISE ADVISORS, INC.
BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ -- $ 21
Deferred offering costs............................. 800 7,793
-------- --------
Total current assets.............................. 800 7,814
Other asset........................................... -- 25
-------- --------
Total assets...................................... $ 800 $ 7,839
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued liabilities................................. $ 1,107 $ 6,749
Payable to related parties.......................... 892 2,790
-------- --------
Total liabilities................................. 1,999 9,539
-------- --------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 3,456,669 and 3,711,019 (unaudited)
shares issued and outstanding at December 31, 1998
and June 30, 1999, respectively.................... 35 37
Additional paid-in capital.......................... 17,615 20,315
Retained deficit.................................... (18,735) (22,052)
Stock subscriptions receivable...................... (114) --
-------- --------
Total stockholders' equity........................ (1,199) (1,700)
-------- --------
Total liabilities and stockholders' equity........ $ 800 $ 7,839
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-18
<PAGE>
CENTERPRISE ADVISORS, INC.
STATEMENT OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Period from
November 9, 1998 Six Months
(inception date) Ended
through December June 30,
31, 1998 1999
---------------- ----------
(Unaudited)
<S> <C> <C> <C>
Total revenues.............................. $ -- $ --
---------- ----------
Operating expenses.......................... 18,735 3,317
---------- ----------
Loss before income taxes.................... (18,735) (3,317)
Provision for income taxes.................. -- --
---------- ----------
Net loss.................................... $ (18,735) $ (3,317)
========== ==========
Net loss per share:
Basic..................................... $ (30.10) $ (1.06)
========== ==========
Diluted................................... $ (5.55) $ (0.92)
========== ==========
Shares used in computing net loss per share
(see Note 2):
Basic..................................... 622,348 3,133,548
========== ==========
Diluted................................... 3,375,265 3,618,775
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
F-19
<PAGE>
CENTERPRISE ADVISORS, INC.
STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Period from
November 9, 1998
(inception date) Six Months
through Ended
December 31, June 30,
1998 1999
---------------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(18,735) $(3,317)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash compensation charge on stock
issuance..................................... 17,503 2,656
Increase in deferred offering costs........... (800) (6,993)
Accrued expenses.............................. 1,107 5,642
-------- -------
Net cash used in operating activities......... (925) (2,012)
Cash flows from financing activities:
Proceeds from issuance of common stock.......... -- 114
Payment of deferred financing fees.............. -- (25)
Proceeds from notes payable..................... 925 1,944
-------- -------
Net cash provided by financing activities..... 925 2,033
-------- -------
Net change in cash............................ -- 21
Cash, beginning of period..................... -- --
-------- -------
Cash, end of period........................... $ -- $ 21
======== =======
</TABLE>
See accompanying Notes to Financial Statements.
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
ten 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, 3,383,016 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 September 24, 1999, the Board of Directors approved a 212.05817 stock
split which will occur prior to the closing of the Mergers and the Offering.
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:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"). For the Company, SFAS No. 128 is effective as of November 9,
1998 (inception date). 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. The following table
F-21
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
reconciles the numerators and denominators of the basic and diluted loss per
share computations for the respective periods:
<TABLE>
<CAPTION>
Period from
November 9, 1998
(inception date) Six Months
to Ended
December 31, 1998 June 30, 1999
----------------- -------------
<S> <C> <C>
Net loss................ $ (18,735) $ (3,317)
========= =========
Basic weighted average
shares of common
stock.................. 622,348 3,133,548
Effect of dilutive
securities:
Stock subscriptions
receivable............. 2,752,917 485,227
--------- ---------
Diluted weighted average
shares................. 3,375,265 3,618,775
========= =========
Basic EPS............... $ (30.10) $ (1.06)
========= =========
Diluted EPS............. $ (5.55) $ (0.92)
========= =========
</TABLE>
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. 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 June 30, 1999 and the results of
its operations and its cash flows for the six months ended June 30, 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, 1,580,520 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 six months ended June 30, 1999, 33,171 shares
(unaudited) were issued to Dennis Bikun, chief
F-22
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
accounting officer for $6 (unaudited) consideration, and 221,178 shares
(unaudited) were issued to DeAnn Brunts, chief financial officer for $40
(unaudited) consideration. For accounting purposes, compensation expense of
$17,503 and $2,656 (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 six months ended June 30, 1999, respectively.
Employee Incentive Compensation Plan:
The Company's Board of Directors and stockholders have adopted 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
up to 1,997,442 shares will be granted. Of such options, 1,922,000 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
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:
Centerprise has also adopted 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 Accounting Principles Board Opinion No.
25.
F-23
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Note 4--Related Party Transactions
As of December 31, 1998 and June 30, 1999, Centerprise has outstanding
payables to related parties of $892 and $2,790 (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 $1,447 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
six months ended June 30, 1999. Of these payables, $547 and $2,445 (unaudited)
were funded by BGL Capital as of December 31, 1998 and June 30, 1999,
respectively.
Note 5--Subsequent Events
Centerprise has signed definitive agreements to acquire all of the
outstanding common stock of ten 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"); 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 Accounting Principles
Board Opinion No. 16.
The following table reflects the consideration to be paid in cash,
promissory notes and shares of Common Stock:
<TABLE>
<CAPTION>
Promissory Shares of
Cash(1) Notes Common Stock
------- ---------- ------------
<S> <C> <C> <C>
Reznick.................................... $16,899 $ -- 1,810,554
Driver..................................... 500 -- 2,944,445
Mann Frankfort............................. 19,223 -- 2,059,629
Follmer.................................... 14,416 -- 1,544,571
Berry Dunn................................. 6,821 -- 931,357
Urbach..................................... 10,006 -- 1,149,014
IDA........................................ 7,814 -- 837,240
Grace...................................... 2,840 -- 304,286
Reppond.................................... -- 4,176 447,428
Simione.................................... 4,297 -- 460,457
------- ------ ----------
Total.................................. $82,816 $4,176 12,488,981
======= ====== ==========
</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
F-24
<PAGE>
CENTERPRISE ADVISORS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
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
$3,155. 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 the Offering.
F-25
<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-26
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30,
--------------- June 30,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 3,962 $ 5,774 $ 4,944
Fees receivable, net of allowance for doubtful
accounts of $3,036, $3,526 and $3,128 (unau-
dited), respectively............................ 11,934 14,528 16,293
Unbilled fees, at net realizable value........... 1,932 2,542 7,308
Deferred income taxes............................ 2,035 1,752 1,589
Prepaid expenses and other current assets........ 242 244 130
------- ------- -------
Total current assets........................... 20,105 24,840 30,264
Property and equipment, net........................ 2,389 2,863 2,626
Cash surrender value of life insurance............. 580 558 683
Intangible assets, net............................. 414 403 391
Deferred income taxes.............................. 1,147 1,327 1,404
------- ------- -------
Total assets................................... $24,635 $29,991 $35,368
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt.................................. $ -- $ -- $ 1,400
Current portion of long-term debt................ 1,201 1,063 1,261
Accounts payable and accrued expenses............ 1,347 1,217 1,354
Accrued compensation and related costs to
employees....................................... 1,384 2,274 978
Accrued compensation and related costs to
shareholders.................................... 13,252 18,214 23,010
Deferred compensation due to former shareholders
and shareholder................................. 106 91 91
------- ------- -------
Total current liabilities...................... 17,290 22,859 28,094
Long-term debt..................................... 1,150 999 1,264
Deferred compensation due to former shareholders... 963 865 724
Accrued bonus...................................... 2,090 2,347 2,539
------- ------- -------
Total liabilities.............................. 21,493 27,070 32,621
------- ------- -------
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 1,325
------- ------- -------
Total shareholders' equity..................... 3,142 2,921 2,747
------- ------- -------
Total liabilities and shareholders' equity..... $24,635 $29,991 $35,368
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-27
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
CONSOLIDATED STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended September 30, Ended June 30,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Professional services........... $31,483 $35,103 $47,877 $37,809 $42,835
------- ------- ------- ------- -------
Expenses:
Shareholder and officer
compensation and related
costs.......................... 7,784 8,170 13,516 12,735 13,700
Employee compensation and
related costs.................. 17,477 19,617 25,792 18,856 22,394
Occupancy costs................. 1,977 2,363 2,746 2,038 2,121
Office operating expenses....... 669 958 1,020 796 931
Depreciation and amortization... 732 869 984 769 774
Other selling, general and
administrative expenses........ 2,853 3,340 3,752 2,650 3,130
------- ------- ------- ------- -------
31,492 35,317 47,810 37,844 43,050
------- ------- ------- ------- -------
Operating income (loss)....... (9) (214) 67 (35) (215)
------- ------- ------- ------- -------
Other (income) expense:
Interest expense................ 399 430 543 275 291
Interest income................. (53) (242) (40) (32) (78)
Other........................... (125) (122) (112) (55) (168)
------- ------- ------- ------- -------
221 66 391 188 45
------- ------- ------- ------- -------
Loss before benefit for income
taxes............................ (230) (280) (324) (223) (260)
Benefit for income taxes.......... (74) (81) (103) (63) (86)
------- ------- ------- ------- -------
Net loss.......................... $ (156) $ (199) $ (221) $ (160) $ (174)
======= ======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-28
<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)......... -- -- -- (174) (174)
----- ----- ------ ------ ------
Balance at June 30, 1999
(unaudited)................... 2,900 $ -- $1,422 $1,325 $2,747
===== ===== ====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-29
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended September 30, Ended June 30,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activi-
ties:
Net loss........................ $ (156) $ (199) $ (221) $ (160) $ (174)
Adjustments to reconcile net in-
come to net cash
provided by (used in) operating
activities:
Depreciation and amortiza-
tion......................... 732 869 984 769 774
Changes in deferred income
taxes........................ 74 81 103 63 86
Changes in operating assets
and liabilities:
Fees receivable............. (1,273) (163) (2,594) (1,273) (1,765)
Unbilled fees............... (234) 64 (610) (4,788) (4,766)
Prepaid expenses and other
assets..................... 81 (215) 20 280 (11)
Accounts payable and accrued
expenses................... (119) 219 (130) (76) 137
Accrued compensation and re-
lated costs to employees... 552 (138) 890 (614) (1,296)
Accrued compensation and re-
lated costs to
shareholders............... 1,572 929 4,962 5,945 4,796
Accrued bonus............... 183 203 257 105 192
------- ------- ------- ------- -------
Net cash provided by (used
in) operating
activities............... 1,412 1,650 3,661 251 (2,027)
------- ------- ------- ------- -------
Cash flows from investing activi-
ties:
Purchase of property and equip-
ment........................... (684) (1,317) (1,447) (1,210) (525)
Business acquisition (net of
cash acquired)................. -- 9 -- -- --
------- ------- ------- ------- -------
Net cash used in investing
activities............... (684) (1,308) (1,447) (1,210) (525)
------- ------- ------- ------- -------
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) (1,079) (967)
Borrowings under short-term
debt........................... -- -- -- 1,000 1,400
Payments of short-term debt..... -- -- -- (1,000) --
Payments to former sharehold-
ers............................ (84) (111) (113) (65) (141)
Loan from shareholders.......... 643 641 647 647 897
Payments to shareholders........ (643) (641) (647) (647) (897)
------- ------- ------- ------- -------
Net cash (used in) pro-
vided by financing
activities............... (162) 509 (402) (60) 1,722
------- ------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents............. 566 851 1,812 (1,019) (830)
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 $ 2,943 $ 4,944
======= ======= ======= ======= =======
Supplemental disclosure of cash
flow information:
Cash paid during the period for:
Interest...................... $ 268 $ 264 $ 209 $ 275 $ 291
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 lia-
bility......................... $ -- $ 871 $ -- $ -- $ --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-30
<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.
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
F-31
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
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 June 30, 1999, and the
results of its operations and its cash flows for the nine months ended June 30,
1998 and 1999, as presented in the accompanying unaudited interim financial
statements.
F-32
<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-33
<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,
---------------- June 30,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Property and equipment, net:
Leasehold improvements................... $ 506 $ 589 $ 553
Furniture and fixtures................... 1,941 2,307 2,481
Land..................................... 67 67 67
Buildings................................ 460 445 445
Equipment................................ 2,712 3,322 2,820
------- ------- -------
5,686 6,730 6,366
Less accumulated depreciation and
amortization.............................. (3,297) (3,867) (3,740)
------- ------- -------
$ 2,389 $ 2,863 $ 2,626
======= ======= =======
Intangible assets, net:
Goodwill................................. $ 414 $ 414 $ 414
Less accumulated amortization............ -- (11) (23)
------- ------- -------
$ 414 $ 403 $ 391
======= ======= =======
Accounts payable and accrued liabilities:
Accrued insurance........................ $ 253 $ 353 $ 709
Accrued rent............................. 389 296 222
Accrued legal............................ 250 250 --
Other.................................... 455 318 423
------- ------- -------
$ 1,347 $ 1,217 $ 1,354
======= ======= =======
</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 September Nine Months
30, Ended
------------------------- June 30,
1996 1997 1998 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 4,225
Write-offs............................... (4,723) (5,885) (8,127) (4,623)
------- ------- ------- -------
Balance at end of period................. $ 2,116 $ 3,036 $ 3,526 $ 3,128
======= ======= ======= =======
</TABLE>
F-34
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
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: (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.
F-35
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
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 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 on November 27, 1999. Upon expiration, the Short-Term Credit Agreement
may be renewed, with the consent of the bank. No cash borrowings were
outstanding under this agreement at September 30, 1997 or 1998. At June 30,
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,
---------------- June 30,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Loans from bank.............................. $ 1,687 $ 1,719 $2,250
Mortgage loans............................... 289 281 275
Note payable................................. 125 62 --
Note payable to bank......................... 250 -- --
------- ------- ------
2,351 2,062 2,525
Less current portion......................... (1,201) (1,063) (1,261)
------- ------- ------
Total...................................... $ 1,150 $ 999 $1,264
======= ======= ======
</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.
F-36
<PAGE>
REZNICK FEDDER & SILVERMAN, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
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.
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, $275 (unaudited) and $291
(unaudited) for the fiscal years ended September 30, 1996, 1997 and 1998 and
the nine months ended June 30, 1998 and 1999, respectively.
NOTE 8--INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended September Ended
30, June 30,
----------------- ------------
1996 1997 1998 1998 1999
---- ---- ----- ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Deferred tax benefit:
Federal................................ $(64) $(71) $ (90) $ (55) $ (76)
State.................................. (10) (10) (13) (8) (10)
---- ---- ----- ----- -----
Total benefit for income taxes....... $(74) $(81) $(103) $ (63) $ (86)
==== ==== ===== ===== =====
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
September 30,
------------- June 30,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Accrual to cash adjustment..................... $2,035 $1,752 $1,589
Accrued bonuses................................ 836 939 1,016
Depreciation................................... 280 367 367
Net operating loss carryforwards............... 31 21 21
------ ------ ------
Net deferred tax assets.......................... $3,182 $3,079 $2,993
====== ====== ======
Net current deferred tax asset................... $2,035 $1,752 $1,589
Net long-term deferred tax asset................. 1,147 1,327 1,404
------ ------ ------
Net deferred tax asset........................... $3,182 $3,079 $2,993
====== ====== ======
</TABLE>
F-37
<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>
Nine
Fiscal Year Months
Ended Ended
September 30, June 30,
------------------ --------------
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 12 7
--- --- --- ----- -----
Total provision..................... (32)% (29)% (32)% (28)% (33)%
=== === === ===== =====
</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 nine months ended June 30, 1998 and
1999 was approximately $1,977, $2,363, $2,745, $2,038 (unaudited) and $2,120
(unaudited), respectively.
F-38
<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 nine months ended June
30, 1998 and 1999 totaled $179, $254, $317, $212 (unaudited) and $395
(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-39
<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 1999, 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 and the fiscal year ended July 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
September 17, 1999
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Robert F. Driver Co., Inc.:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Robert F. Driver Co., Inc. and
subsidiaries (the Company) for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Robert F. Driver Co., Inc. and subsidiaries for the year ended July 31, 1997,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
San Diego, California
September 10, 1997
F-41
<PAGE>
ROBERT F. DRIVER CO., INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
July 31,
----------------
1998 1999
------- -------
(Successor
Company)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 2,356 $ 2,315
Premium trust cash......................................... 22,855 30,380
Insurance premiums receivable.............................. 11,665 24,076
Other current assets....................................... 1,935 243
------- -------
Total current assets..................................... 38,811 57,014
Property and equipment, net.................................. 1,151 1,216
Goodwill, net................................................ 17,895 28,107
Customer lists acquired, net................................. 826 714
Deferred income taxes........................................ 889 237
Other assets................................................. 800 396
------- -------
Total assets............................................. $60,372 $87,684
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................................ $ 253 $ 4,265
Current portion of long-term debt.......................... 1,267 2,605
Accounts payable and accrued expenses...................... 6,005 5,604
Insurance premiums payable................................. 26,250 46,219
Income taxes payable....................................... 616 462
------- -------
Total current liabilities................................ 34,391 59,155
Long-term debt, net of current portion....................... 14,263 15,229
Deferred compensation........................................ 1,331 26
------- -------
Total liabilities........................................ 49,985 74,410
------- -------
Class A redeemable preferred stock, $.01 par value: 5,000,000
shares authorized; 4,000 shares issued and outstanding at
July 31, 1998 and 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
1,096,180 shares at July 31, 1999, respectively........... 7 11
Additional paid-in capital................................. 6,711 10,184
Retained earnings.......................................... 509 1,010
Unearned compensation...................................... -- (1,151)
------- -------
7,227 10,054
Stockholder notes receivable............................... (840) (780)
------- -------
Total stockholders' equity............................... 6,387 9,274
------- -------
Total liabilities and stockholders' equity............... $60,372 $87,684
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-42
<PAGE>
ROBERT F. DRIVER CO., INC.
CONSOLIDATED STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Period From
----------------------------
Fiscal Year August 1, 1997 June 1, 1998 Fiscal Year
Ended July Through Through Ended July
31, 1997 May 31, 1998 July 31, 1998 31, 1999
----------- -------------- ------------- -----------
(Predecessor Company) (Successor Company)
<S> <C> <C> <C> <C>
Revenues:
Commissions and fees.... $28,170 $24,446 $8,440 $41,607
------- ------- ------ -------
Expenses:
Producer compensation... 12,965 11,630 3,792 16,250
Employee compensation
and related costs...... 7,433 6,760 1,715 13,438
Occupancy costs......... 1,378 1,144 230 1,891
Office operating
expenses............... 759 650 230 1,063
Depreciation and
amortization........... 463 656 337 1,941
Other selling, general
and administrative
expenses............... 3,948 2,162 1,222 3,924
------- ------- ------ -------
26,946 23,002 7,526 38,507
------- ------- ------ -------
Operating income...... 1,224 1,444 914 3,100
------- ------- ------ -------
Other (income) expense:
Interest expense........ 42 36 220 1,995
Interest income......... (654) (599) (193) (824)
Other................... (213) (161) (6) (239)
------- ------- ------ -------
(825) (724) 21 932
------- ------- ------ -------
Income before provision
for income taxes......... 2,049 2,168 893 2,168
Provision for income
taxes.................... 933 970 384 1,327
------- ------- ------ -------
Net income................ $ 1,116 $ 1,198 $ 509 $ 841
======= ======= ====== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-43
<PAGE>
ROBERT F. DRIVER CO., INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Class A
Common Stock Common Stock Additional Stockholder Unearned Total
---------------- ------------------- Paid-In Retained Unearned Notes ESOP Stockholders'
Shares Amount Shares Amount Capital Earnings Compensation Receivable Contributions Equity
--------- ------ ---------- ------- ---------- -------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Net income...... -- -- -- -- -- 841 -- -- -- 841
Issuance of
Class A
Common Stock... 357,640 4 -- -- 3,198 -- (1,151) -- -- 2,051
Issuance of
warrants....... -- -- -- -- 275 -- -- -- -- 275
Dividends....... -- -- -- -- -- (340) -- -- -- (340)
Forgiveness of
stockholder
notes
receivable..... -- -- -- -- -- -- -- 60 -- 60
--------- ----- ---------- ------- ------- ------- ------- ------- ------ -------
Balance at July
31, 1999........ 1,096,180 $ 11 -- $ -- $10,184 $ 1,010 $(1,151) $ (780) $ -- $ 9,274
========= ===== ========== ======= ======= ======= ======= ======= ====== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-44
<PAGE>
ROBERT F. DRIVER CO., INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Period From
----------------------------
Fiscal Year August 1, 1997 June 1, 1998 Fiscal Year
Ended Through Through Ended
July 31, 1997 May 31, 1998 July 31, 1998 July 31, 1999
------------- -------------- ------------- -------------
(Predecessor Company) (Successor Company)
<S> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income............. $1,116 $ 1,198 $ 509 $ 841
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Stock based
compensation........ -- -- -- 1,167
Depreciation and
amortization........ 463 656 337 1,941
Change in deferred
income taxes........ (342) (217) (239) 652
Accretion of discount
on debt............. -- -- -- 195
Changes in operating
assets and
liabilities:
Premium trust
cash.............. (4,788) 7,348 (8,150) (6,799)
Insurance premiums
receivable........ 801 (3,636) 659 (11,347)
Other assets....... 301 (579) (157) 88
Accounts payable
and accrued
expenses.......... 17 (870) 1,972 (1,126)
Insurance premiums
payable........... 2,129 (2,797) 5,377 18,579
Income taxes
payable........... 139 249 111 (181)
Deferred
compensation...... 590 500 241 (1,305)
------ -------- ------- -------
Net cash provided
by operating
activities....... 426 1,852 660 2,705
------ -------- ------- -------
Cash flows from
investing activities:
Purchase of predecessor
company............... -- (17,064) -- --
Purchase business
combinations.......... -- -- -- (4,674)
Purchases of equipment
and leasehold
improvements.......... (351) (479) (51) (692)
Collections on notes
receivable............ 49 -- -- --
Purchase of customer
lists................. (193) -- -- --
Other.................. 4 -- -- (145)
------ -------- ------- -------
Net cash used in
investing
activities....... (491) (17,543) (51) (5,511)
------ -------- ------- -------
Cash flows from
financing activities:
Proceeds from debt
issuance.............. -- 16,178 -- --
Proceeds from revolving
line of credit........ -- 253 -- 1,725
Principal payments on
debt.................. (294) (1,027) (202) (1,326)
Repurchase of common
stock................. (170) -- -- --
Proceeds from issuance
of common stock
warrants.............. -- 730 -- --
Proceeds from issuance
of common stock....... -- -- -- 942
Payments received on
stockholder notes..... -- -- 343 1,764
Dividends paid......... -- -- -- (340)
Contributions
(advances) to ESOP.... 400 (542) -- --
Repayment received from
ESOP.................. -- 907 -- --
------ -------- ------- -------
Net cash (used in)
provided by
financing
activities....... (64) 16,499 141 2,765
------ -------- ------- -------
Net (decrease) increase
in cash and cash
equivalents............ (129) 808 750 (41)
Cash and cash
equivalents at
beginning of period.... 927 798 1,606 2,356
------ -------- ------- -------
Cash and cash
equivalents at end of
period................. $ 798 $ 1,606 $ 2,356 $ 2,315
====== ======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-45
<PAGE>
ROBERT F. DRIVER CO., INC.
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
(In Thousands)
<TABLE>
<CAPTION>
Period From
Fiscal Year ---------------------------- Fiscal Year
Ended August 1, 1997 June 1, 1998 Ended
July 31, 1997 Through Through July 31, 1999
------------- May 31, 1998 July 31, 1998 --------------
-------------- -------------
(Predecessor Company) (Successor Company)
<S> <C> <C> <C> <C>
Supplementary
disclosures of cash
flow information:
Cash payments for:
Interest........... $ 42 $ 36 $ 220 $ 1,557
Income taxes....... $ 1,135 $ 512 $ 938 $ 954
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 $ -- $12,814
Liabilities
assumed........... (1,184) (26,957) -- (7,865)
Issuance of common
stock warrants for
advisory fees
relating to
acquisitions...... -- -- -- (275)
------- -------- ----- -------
Net assets
(liabilities)
assumed, other
than cash and
cash
equivalents..... $ (18) $ 3,273 $ -- $ 4,674
======= ======== ===== =======
Supplementary
disclosure of noncash
financing activities:
Issuance of common
stock for
acquisitions........ $ 439 $ 3,776 $ -- $ 1
Debt issued to
selling shareholders
in acquisitions..... $ 219 $ 455 $ -- $ 5,510
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-46
<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 five wholly-owned subsidiaries, FHI Benefit Plans,
Inc., Robert F. Driver of Nevada, Inc. and Cal-Central Insurance and Management
Services, Inc. (Cal-Central), Averbeck Company Insurance Brokers, and Sher
Company Insurance Services. The Company purchased four entities during fiscal
1999 (see Note 4).
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-47
<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 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
retirements and disposals using the specific identification method, with the
resulting gain or loss included in operations.
Intangible Assets:
Goodwill 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 were 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 for recoverability.
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 July 31, 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 1999, 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-48
<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 depreciation.
Reclassifications:
Certain reclassifications have been made to fiscal 1997 and 1998
financial statements to conform to current year presentation. The
reclassifications have no impact on previously reported net income or
stockholders' equity.
NOTE 4--BUSINESS COMBINATIONS
The Company completed one business combination during the year ended July
31, 1997 and four business combinations during the year ended July 31, 1999,
which have been accounted for under the purchase method of accounting. The
consolidated financial statements and related notes to the consolidated
financial statements include the results of these acquired entities from their
respective dates of acquisition.
F-49
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
The Company issued common stock, warrants and cash in connection with
these business combinations. The purchase consideration has been allocated to
tangible and intangible assets acquired and liabilities assumed based on the
fair market values on the date of the respective acquisitions. The fair values
of the assets acquired and liabilities assumed at the dates of acquisition were
as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
July 31,
------------------
1997 1999
-------- --------
<S> <C> <C>
Cash........................................................ $ 4 $ --
Premium trust cash.......................................... 903 726
Insurance premiums receivable............................... 215 1,064
Other current assets........................................ -- 34
Equipment................................................... 48 177
Goodwill.................................................... -- 10,665
Customer list............................................... 453 --
Deferred income taxes....................................... -- 52
Other assets................................................ -- 97
Short-term debt............................................. -- (2,305)
Current portion of long-term debt........................... -- (884)
Accounts payable and accrued expenses....................... (52) (725)
Insurance premiums payable.................................. (1,084) (1,390)
Long-term debt.............................................. (48) (2,535)
Income taxes payable........................................ -- (27)
-------- --------
Net assets acquired....................................... $ 439 $ 4,949
======== ========
These acquisitions were funded as follows:
Common stock, 21,081 shares (fiscal 1997)................. $ 439 $ --
Cash, net of cash acquired................................ -- 4,674
Common stock warrants..................................... -- 275
-------- --------
$ 439 $ 4,949
======== ========
</TABLE>
F-50
<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,
----------------
1998 1999
------- -------
(Successor
Company)
<S> <C> <C>
Other current assets:
Current portion of employee receivable................. $ 18 $ --
Stockholder notes receivable........................... 1,759 10
Prepaid expenses and other............................. 158 233
------- -------
$ 1,935 $ 243
======= =======
Property and equipment, net:
Furniture and fixtures................................. $ 184 $ 442
Computer equipment..................................... 1,062 1,657
Leasehold improvements................................. 50 82
------- -------
1,296 2,181
Less accumulated depreciation and amortization......... (145) (965)
------- -------
$ 1,151 $ 1,216
======= =======
Intangible assets, net:
Goodwill............................................... $17,969 $28,778
Customer lists......................................... 1,121 1,121
------- -------
19,090 29,899
Less accumulated amortization.......................... (369) (1,078)
------- -------
$18,721 $28,821
======= =======
Other assets:
Cash surrender value of life insurance................. $ 13 $ 13
Employee receivable, net of current portion............ 6 53
Deferred financing costs............................... 329 270
Other.................................................. 452 60
------- -------
$ 800 $ 396
======= =======
Accounts payable and accrued expenses:
Producers' commissions................................. $ 4,080 $ 3,021
Accrued personnel costs, vacation and bonuses.......... 953 1,091
Other.................................................. 972 1,492
------- -------
$ 6,005 $ 5,604
======= =======
</TABLE>
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 (8.25
percent at July 31, 1999). Under this agreement, $253 and $1,978 was
outstanding at July 31, 1998 and 1999, respectively.
The Company issued several notes in relation to the Averbeck acquisition
(see Note 4) with an outstanding balance of $2,257 at July 31, 1999 at a 7%
interest rate. These notes are payable in monthly installments with all
remaining principal and interest due and payable between December 1999 and
February 2000.
The Company issued a short term note payable in relation to the Ochinero
acquisition (see Note 4) with an outstanding balance of $30 at July 31, 1999 at
an 8% interest rate. The final payment of this note is due and payable on
December 31, 1999.
F-51
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 31,
----------------
1998 1999
------- -------
(Successor
Company)
<S> <C> <C>
$12,000 note payable, secured by the Company's assets.
Payable in varying monthly amounts at prime plus .25%
(effective rate of 8.25% at July 31, 1999), with a balloon
payment of $4,470 due on May 15, 2003...................... $11,840 $10,820
$4,000 unsecured senior subordinated debt. Interest payable
quarterly at rate of 12%. Principal due May 28, 2005....... 3,295 3,396
$510 note payable, secured by various assets. Principal and
interest of $11 payable monthly at prime plus .25%
(effective rate of 8.25% at July 31, 1999), maturing
July 26, 1999.............................................. 120 3
$219 unsecured note payable, principal and interest of $16
payable quarterly at a rate of 8% through April 30, 2001... 158 118
$191 unsecured note payable, principal and interest payable
monthly at a rate of 9% through August 15, 1999............ 41 --
$260 unsecured note payable, principal of $10 and interest
payable quarterly at an imputed rate of 6% through July 1,
1999....................................................... 39 --
$59 unsecured note payable to related party, principal and
interest of $1 payable monthly at a rate of 12% through
April 13, 2001............................................. 37 25
$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
$2,046 unsecured, non-interest bearing note payable, payable
annually with an imputed interest rate of 8% or $317
through December 31, 2001.................................. -- 1,851
$128 unsecured, non-interest bearing note payable, payable
annually through December 24, 2000......................... -- 85
------- -------
15,530 17,834
Less current portion of long-term debt...................... (1,267) (2,605)
------- -------
Long-term debt, net of current portion...................... $14,263 $15,229
======= =======
</TABLE>
Maturities of long-term debt as of July 31, 1999, are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
------------
<S> <C>
2000.............................................................. $ 2,605
2001.............................................................. 3,380
2002.............................................................. 2,079
2003.............................................................. 6,099
2004.............................................................. 279
Thereafter........................................................ 3,392
-------
Total maturities of long-term debt.............................. $17,834
=======
</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 not in compliance with these
requirements at July 31, 1999, however, the Company did obtain waivers on the
debt covenant violations through September 25, 2000.
F-52
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
NOTE 7--INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
Period From
----------------------------
Fiscal Year August 1, 1997 June 1, 1998 Fiscal Year
Ended Through Through Ended
July 31, 1997 May 31, 1998 July 31, 1998 July 31, 1999
------------- -------------- ------------- -------------
(Predecessor Company) (Successor Company)
<S> <C> <C> <C> <C>
Current:
Federal............. $ 991 $ 923 $ 495 $ 499
State............... 283 264 128 176
------ ------ ----- ------
1,274 1,187 623 675
------ ------ ----- ------
Deferred:
Federal............. (282) (172) (199) 559
State............... (59) (45) (40) 93
------ ------ ----- ------
(341) (217) (239) 652
------ ------ ----- ------
$ 933 $ 970 $ 384 $1,327
====== ====== ===== ======
</TABLE>
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,
--------------------
1998 1999
--------- ---------
(Successor Company)
<S> <C> <C>
Deferred tax assets:
Deferred compensation.................................. $ 530 $ --
State taxes............................................ 134 91
Errors and omissions liability......................... 120 139
Compensated absences and bonuses, principally due to
accrual for financial reporting purposes.............. 130 118
Amortization of agency acquisitions.................... 41 5
Allowance for bad debt................................. 10 7
Deferred financing and organization costs.............. -- 166
--------- ---------
Total deferred tax assets............................ 965 526
--------- ---------
Deferred tax liabilities:
Equipment and leasehold improvements, principally due
to differences in depreciation........................ (76) (1)
Stock grants........................................... -- (288)
--------- ---------
Total deferred tax liabilities....................... (76) (289)
--------- ---------
Net deferred tax assets.................................. $ 889 $ 237
========= =========
</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.
F-53
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
Period From
----------------------------
Fiscal Year August 1, 1997 June 1, 1998 Fiscal Year
Ended July 31, Through Through Ended July 31,
1997 May 31, 1998 July 31, 1998 1999
-------------- -------------- ------------- --------------
(Predecessor Company) (Successor Company)
<S> <C> <C> <C> <C>
Computed expected income
taxes.................. 34% 34% 34% 34%
State income taxes, net
of federal income tax
benefit................ 7 7 6 8
Other, net.............. 4 3 5 5
Nondeductible
amortization of
goodwill............... -- -- -- 11
Meals and
entertainment.......... -- -- -- 2
Officers Life........... -- -- -- 1
--- --- --- ---
45% 44% 45% 61%
=== === === ===
</TABLE>
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 $781 in fiscal 1997, $968 for the period from August 1, 1997 to May
31, 1998, $199 for the period from June 1, 1998 to July 31, 1998, and $1,466
for fiscal 1999.
Future minimum rental payments at July 31, 1999, under agreements
classified as operating leases with noncancelable terms in excess of one year
are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
------------
<S> <C>
2000............................................................... $ 1,960
2001............................................................... 1,868
2002............................................................... 1,692
2003............................................................... 1,629
2004............................................................... 1,154
Thereafter......................................................... 2,890
-------
$11,193
=======
</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 matching employer contributions as defined in
the plan agreement.
F-54
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
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 original terms of 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, $500 for the period August 1, 1998 through May 31, 1998, and $241 for the
period from June 1, 1998 through July 31, 1998. Effective December 31, 1998,
the Board of Directors amended the Plan to terminate the mandatory Company
contributions and resolved that funds currently remaining be distributed as
soon as administratively possible. At July 31, 1999, the Company had liquidated
all but $26 of the deferred compensation obligation. There was no deferred
compensation expense for the year ended July 31, 1999.
Employee Stock Option Plan (ESOP):
In 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 31,1997.
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 year ended July 31, 1997, the Company contributed $800 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:
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 30,000 shares of its Class A
Common Stock during February 1999. These rights were all exercised during
February 1999.
F-55
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
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
1999, and at 10 percent annually thereafter. Payment of dividends on 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. At July
31, 1999, stockholder notes receivable includes an amount related to a key
employee for which the Company has agreed to forgive a portion of the note over
a five year period based on continued employment.
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) is included in
additional paid-in capital.
The Company 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 additional paid-in capital. The
warrants were exercised during fiscal 1999.
The Company issued 36,667 common stock warrants to an outside advisor as
part of the acquisitions during the current fiscal year (see Note 4). The
warrants have been exercised and the transaction has been recorded in
additional paid in capital and common stock.
Class B Common:
On November 12, 1997, the Company authorized 10,000,000 shares of Class B
Common Stock, par value of $.01 per share. No shares of Class B Common Stock
were outstanding as of July 31, 1998 or 1999.
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
F-56
<PAGE>
ROBERT F. DRIVER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Share and Per Share)
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
and outside advisors 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 installments 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 July 31, 1999, these amounts totalling $10
and $48 are included in other current assets and other assets, respectively.
In February 1999, the Company issued 107,335 shares of its Class A Common
Stock in connection with its Producer Stock Equity Program (PSEP). These shares
are unrestricted, but are subject to the stock repurchase option as described
above and vest over five years. 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 five year vesting
period.
Subsequent to its acquisition of the business of the Public Entity Group
of Sedgwick California, the Company issued 12,000 shares of Class A Common
Stock to certain key executives. The shares are unrestricted, but are subject
to the stock repurchase option described above.
During the year ended July 31, 1999, the Company issued 11,300 shares of
its Class A Common Stock as a bonus to certain key employees. These shares are
unrestricted, but are subject to the stock repurchase option as described
above.
Stock Sales:
In February 1998, the Company issued 11,601 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 purchase option as described in Note
10.
In February 1999, the Company issued 30,195 shares of its Class A Common
Stock in connection with its Producer Stock Equity Program (PSEP) for cash
consideration. These shares are unrestricted, but are subject to the stock
repurchase option as described in Note 10.
F-57
<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--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 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-58
<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-59
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 288 $ 606 $ 1,881
Fees receivable, less allowance for doubtful
accounts of $1,124, $1,356 and $1,878 (unaudited),
respectively...................................... 3,475 4,077 6,982
Unbilled fees, at net realizable value............. 628 431 1,205
Due from principals................................ 119 14 8
Prepaid expenses and other current assets.......... 75 81 81
------ ------ -------
Total current assets............................. 4,585 5,209 10,157
Property and equipment, net.......................... 874 1,142 1,196
Other assets......................................... 6 6 6
------ ------ -------
Total assets..................................... $5,465 $6,357 $11,359
====== ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................. $ 160 $ 879 $ 101
Accounts payable................................... 68 23 218
Accrued compensation and related costs............. 133 126 2,179
Income taxes payable............................... 2 27 (4)
Deferred income taxes.............................. 1,420 1,569 2,760
------ ------ -------
Total current liabilities........................ 1,783 2,624 5,254
Long-term debt....................................... 794 473 799
Deferred income taxes................................ 71 85 78
------ ------ -------
Total liabilities................................ 2,648 3,182 6,131
------ ------ -------
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 5,165
------ ------ -------
Total shareholders' equity....................... 2,817 3,175 5,228
------ ------ -------
Total liabilities and shareholders' equity....... $5,465 $6,357 $11,359
====== ====== =======
</TABLE>
See accompanying Notes to Financial Statements.
F-60
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
------------------------- ---------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Professional services..... $13,292 $17,475 $21,631 $11,828 $16,630
------- ------- ------- ------- -------
Expenses:
Shareholder compensation
and related costs........ 4,423 6,636 8,921 3,942 4,916
Employee compensation and
related costs............ 4,896 6,405 8,829 4,532 5,888
Occupancy costs........... 410 527 659 320 418
Office operating
expenses................. 961 1,398 1,670 857 1,240
Other selling, general and
administrative expenses.. 936 1,071 1,018 746 914
------- ------- ------- ------- -------
11,626 16,037 21,097 10,397 13,376
------- ------- ------- ------- -------
Operating income........ 1,666 1,438 534 1,431 3,254
------- ------- ------- ------- -------
Other (income) expense:
Interest expense.......... 35 32 58 33 44
Interest income........... (48) (31) (69) (15) (28)
Other..................... (26) (2) (26) 13 4
------- ------- ------- ------- -------
(39) (1) (37) 31 20
------- ------- ------- ------- -------
Income before provision for
income taxes............... 1,705 1,439 571 1,400 3,234
Provision for income taxes.. 58 557 213 498 1,184
------- ------- ------- ------- -------
Net income.................. $ 1,647 $ 882 $ 358 $ 902 $ 2,050
======= ======= ======= ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
F-61
<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............ -- -- -- -- -- 2,050 2,050
----- --- ---- ------ ---- ------ ------
Balance at June 30, 1999
(unaudited)............ 1,574 $ 2 $ 61 $ -- $-- $5,165 $5,228
===== === ==== ====== ==== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-62
<PAGE>
MANN FRANKFORT STEIN & LIPP, P.C.
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
----------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ----- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income........................ $ 1,647 $ 882 $ 358 $ 902 $ 2,050
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization... 202 132 266 112 176
Change in deferred income
taxes.......................... (4) 466 163 498 1,184
Changes in operating assets and
liabilities:
Fees receivable............... (121) (1,197) (602) (1,095) (2,905)
Unbilled fees................. (104) (139) 197 (699) (774)
Prepaid expenses and other
current assets............... (30) 64 99 (204) (6)
Accounts payable.............. 27 (76) (45) 167 195
Accrued compensation and
related costs................ (254) 70 (7) 2,005 2,053
Other......................... (29) 90 25 (11) (19)
------- ------- ----- ------- -------
Net cash provided by
operating activities....... 1,334 292 454 1,675 1,954
------- ------- ----- ------- -------
Cash flows from investing
activities:
Purchase of property and
equipment........................ (123) (625) (534) (164) (230)
------- ------- ----- ------- -------
Net cash used in investing
activities................. (123) (625) (534) (164) (230)
------- ------- ----- ------- -------
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) (292) (771)
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 (292) (449)
------- ------- ----- ------- -------
Net increase (decrease) in cash and
cash equivalents................... (884) 187 318 1,219 1,275
Cash and cash equivalents at
beginning of period................ 985 101 288 721 606
------- ------- ----- ------- -------
Cash and cash equivalents at end of
period............................. $ 101 $ 288 $ 606 $ 1,940 $ 1,881
======= ======= ===== ======= =======
Supplemental disclosures of cash
flow information:
Interest paid..................... $ 35 $ 32 $ 58 $ 33 $ 44
Income taxes paid................. $ 33 $ 13 $ 19 $ 12 $ 30
</TABLE>
See accompanying Notes to Financial Statements.
F-63
<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.
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.
F-64
<PAGE>
MANN FRANKFORT STEIN & LIPP, 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 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 June 30, 1999, and the
results of its operations and its cash flows for the six months ended June 30,
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........................................... $9,921 $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-65
<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,
---------------- June 30,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Property and equipment, net:
Furniture and fixtures................... $ 877 $ 1,036 $ 1,049
Computer equipment....................... 1,132 1,459 1,579
Leasehold improvements................... 27 75 171
------- ------- -------
2,036 2,570 2,799
Less accumulated depreciation and
amortization............................ (1,162) (1,428) (1,603)
------- ------- -------
$ 874 $ 1,142 $ 1,196
======= ======= =======
</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 Six Months
31, Ended
--------------------- June 30,
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......... 489 755 687 712
Write-offs.............................. (518) (183) (455) (190)
----- ------ ------ ------
Balance at end of period................ $ 552 $1,124 $1,356 $1,878
===== ====== ====== ======
</TABLE>
NOTE 6--CREDIT FACILITIES
Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------- June 30,
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 $ 900
Less current maturities of long-term debt.... (160) (879) (101)
----- ------ -----
Total long-term debt....................... $ 794 $ 473 $ 799
===== ====== =====
</TABLE>
Maturities on long-term debt 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-66
<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>
Six Months
Year Ended Ended
December 31, June 30,
-------------- -----------
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...................................... 37 532 163 498 1,184
--- ---- ---- ---- ------
Total provision for income taxes........... $58 $557 $213 $498 $1,184
=== ==== ==== ==== ======
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts............... $ 467 $ 512 $ 762
Accrued liabilities........................... 40 34 225
------ ------ ------
Total current deferred tax assets........... 507 546 987
Current deferred tax liabilities:
Accounts receivable and unbilled fees......... 1,903 2,090 3,628
Other......................................... 24 25 119
------ ------ ------
Total current deferred tax liabilities...... 1,927 2,115 3,747
------ ------ ------
Net current deferred tax liabilities........ 1,420 1,569 2,760
Non-current deferred tax liabilities:
Property and equipment........................ 71 85 78
------ ------ ------
Net deferred tax liability...................... $1,491 $1,654 $2,838
====== ====== ======
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
---------------- -------------
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 1 2
--- --- --- ----- -----
Effective income tax rate................ 3% 37% 37% 36% 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-67
<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 six months ended June 30, 1998 and 1999 was
$344, $429, $530, $235 (unaudited) and $347 (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 six months ended June 30, 1998
and 1999 were $52, $61, $67, $30 (unaudited) and $91 (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-68
<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-69
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
May 31,
---------------- August 31,
1998 1999 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 771 $ 823 $ 566
Funds held in trust for clients................ 10 13 14
Fees receivable, less allowance for doubtful
accounts of $693, $754 and $870 (unaudited),
respectively.................................. 5,553 5,749 5,583
Unbilled fees, at net realizable value......... 2,334 2,657 2,506
Prepaid expenses and other current assets...... 314 668 109
------- ------- -------
Total current assets......................... 8,982 9,910 8,778
Property and equipment, net...................... 1,234 1,411 1,295
Cash surrender value, life insurance............. 2,832 3,518 3,610
Deferred income taxes............................ 1,066 1,478 1,556
Other assets..................................... 106 72 40
------- ------- -------
Total assets................................. $14,220 $16,389 $15,279
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................................ $ 345 $ 1,103 $ 96
Notes payable to shareholders.................. 1,693 3,798 3,216
Accounts payable and other accrued expenses.... 55 83 145
Accrued compensation and related costs to
shareholders.................................. 4,080 3,987 5,456
Accrued compensation and related costs to
employees..................................... 1,259 1,457 635
Income taxes payable........................... -- -- 406
Deferred income taxes.......................... 1,245 1,299 733
------- ------- -------
Total current liabilities.................... 8,677 11,727 10,687
Long-term debt................................... 371 -- --
Retirement plan.................................. 2,978 4,280 4,584
------- ------- -------
Total liabilities............................ 12,026 16,007 15,271
------- ------- -------
Commitments and contingencies
Shareholders' equity:
Common stock, $1 par value; 50,000 shares
authorized, 10,400, 7,500, and 7,500
(unaudited) shares issued and outstanding at
May 31, 1998 and 1999 and August 31, 1999,
respectively.................................. 10 8 8
Additional paid-in-capital..................... 1,210 1,234 1,234
Treasury stock, at cost, 250 shares at May 31,
1998 and 1999 and August 31, 1999,
respectively.................................. (140) (140) (140)
Retained earnings (deficit).................... 1,114 (720) (1,094)
------- ------- -------
Total shareholders' equity................... 2,194 382 8
------- ------- -------
Total liabilities and shareholders' equity... $14,220 $16,389 $15,279
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-70
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Fiscal Year Ended Ended
May 31, August 31,
------------------------- --------------
1997 1998 1999 1998 1999
------- ------- ------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Professional services............. $17,954 $19,417 $22,525 $4,263 $5,367
------- ------- ------- ------ ------
Expenses:
Shareholder compensation and
related costs.................... 6,646 7,339 8,797 1,553 2,406
Employee compensation and related
costs............................ 7,567 8,225 9,949 1,979 2,275
Occupancy costs................... 1,045 990 1,134 279 285
Office operating expenses......... 861 870 977 259 191
Depreciation and amortization..... 394 475 485 118 144
Other selling, general and
administrative expenses.......... 1,742 1,556 2,092 510 459
------- ------- ------- ------ ------
18,255 19,455 23,434 4,698 5,760
------- ------- ------- ------ ------
Operating loss.................. (301) (38) (909) (435) (393)
------- ------- ------- ------ ------
Other (income) expense:
Interest expense.................. 79 101 103 45 78
Interest income................... (51) (22) (30) (7) (8)
Other............................. (156) (192) (80) (17) (2)
------- ------- ------- ------ ------
(128) (113) (7) 21 68
------- ------- ------- ------ ------
Income (loss) before provision for
income taxes....................... (173) 75 (902) (456) (461)
Provision (benefit) for income
taxes.............................. 191 286 (156) (75) (87)
------- ------- ------- ------ ------
Net loss............................ $ (364) $ (211) $ (746) $ (381) $ (374)
======= ======= ======= ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-71
<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
Net loss (unaudited).. -- -- -- -- -- (374) (374)
--- --- ------ ------ ------- ------- -------
Balance at August 31,
1999 (unaudited)....... 8 $ 8 $1,234 250 $ (140) $(1,094) $ 8
=== === ====== ====== ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-72
<PAGE>
FOLLMER, RUDZEWICZ & COMPANY, P.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Fiscal Year Ended
Ended May 31, August 31,
----------------------- -------------
1997 1998 1999 1998 1999
------- ------ ------ ----- ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $ (364) $ (211) $ (746) $(381) $ (374)
Adjustments to reconcile income to net
cash provided by operating
activities:
Depreciation and amortization...... 394 466 485 118 144
Change in deferred taxes........... (85) (429) (358) (354) (644)
Loss on disposal of property and
equipment......................... 5 1 8 -- --
Changes in operating assets and
liabilities:
Funds held in trust.............. 9 (2) (3) (2) (1)
Fees receivable.................. (154) (565) (196) 842 166
Unbilled fees.................... (1,059) 728 (323) (600) 151
Prepaid expenses and other
current assets.................. (654) 552 (354) (85) 559
Accounts payable and other
accrued expenses................ 25 (87) 28 200 62
Accrued compensation and related
costs........................... 1,118 (276) (105) 81 647
Income taxes payable............. (256) -- -- 240 406
Retirement plans................. 1,015 1,208 1,302 325 304
Other............................ 232 23 34 3 32
------- ------ ------ ----- ------
Net cash provided by (used in)
operating activities.......... 226 1,408 (228) 387 1,452
------- ------ ------ ----- ------
Cash flows from investing activities:
Purchase of property and equipment... (646) (307) (437) (178) (28)
Proceeds from sale of property and
equipment........................... 36 24 1 -- --
Increase in cash surrender value..... (612) (644) (686) (100) (92)
------- ------ ------ ----- ------
Net cash used in investing
activities.................... (1,222) (927) (1,122) (278) (120)
------- ------ ------ ----- ------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt................................ -- 500 -- -- --
Payments of long-term debt........... (139) (481) (613) (85) --
Proceeds from borrowings on line of
credit.............................. -- -- 1,000 -- --
Payments on line of credit........... -- -- -- -- (1,000)
Proceeds from (payments of) short-
term debt, net...................... 500 (500) -- -- (7)
Advances (repayments) to
shareholders........................ 857 377 2,105 (564) (582)
Acquisition and retirement of stock.. -- -- (1,090) -- --
Proceeds from issuance of stock...... -- 141 -- -- --
------- ------ ------ ----- ------
Net cash provided by (used in)
financing activities.......... 1,218 37 1,402 (649) (1,589)
------- ------ ------ ----- ------
Net increase (decrease) in cash and
cash equivalents...................... 222 518 52 (540) (257)
Cash and cash equivalents at beginning
of period............................. 31 253 771 771 823
------- ------ ------ ----- ------
Cash and cash equivalents at end of
period................................ $ 253 $ 771 $ 823 $ 231 $ 566
======= ====== ====== ===== ======
Supplemental disclosures of cash flow
information:
Interest paid........................ $ 75 $ 101 $ 103 $ 46 $ 79
Income taxes paid.................... $ 347 $ 841 $ 536 $ 75 $ 85
</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-73
<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-74
<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.
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 August 31, 1999 and
the results of its operations and its cash flow for the three months ended
August 31, 1999 and 1998, as presented in the accompanying unaudited interim
financial statements.
F-75
<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,
---------------- August 31,
1998 1999 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Property and equipment, net
Furniture and fixtures.................. $ 729 $ 977 $ 978
Computer equipment....................... 1,729 2,104 2,131
Automobiles.............................. -- 41 41
Leasehold improvements................... 261 270 270
------- ------- -------
2,719 3,392 3,420
Less accumulated depreciation and
amortization............................ (1,485) (1,981) (2,125)
------- ------- -------
$ 1,234 $ 1,411 $ 1,295
======= ======= =======
</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,
------------------- Three Months Ended
1997 1998 1999 August 31, 1999
----- ----- ----- ------------------
(Unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of period.... $ 598 $ 885 $ 693 $754
Additions to costs and expenses... 579 375 693 144
Less write-offs................... (292) (567) (632) (28)
----- ----- ----- ----
Balance at end of period.......... $ 885 $ 693 $ 754 $870
===== ===== ===== ====
</TABLE>
NOTE 5--CREDIT FACILITIES
Short-Term Debt:
Short-term debt consists of the following:
<TABLE>
<CAPTION>
May 31,
----------- August 31,
1998 1999 1999
---- ------ -----------
(Unaudited)
<S> <C> <C> <C>
Line of credit..................................... $-- $1,000 $--
Current maturities of long-term debt............... 345 -- --
Other short term debt.............................. -- 103 96
---- ------ ----
Total short-term debt.......................... $345 $1,103 $ 96
==== ====== ====
</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-76
<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>
Three
Fiscal Year Months
Ended Ended
May 31, August 31,
------------------ ------------
1997 1998 1999 1998 1999
---- ----- ----- ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income taxes currently payable
Federal............................. $ 90 $ 493 $ (56) $ 196 $ 500
State................................ 186 222 258 40 56
---- ----- ----- ----- -----
276 715 202 236 556
Deferred income tax benefit:
Federal.............................. (80) (406) (339) (294) (608)
State................................ (5) (23) (19) (17) (35)
---- ----- ----- ----- -----
Total provision (benefit) for
taxes............................. $191 $ 286 $(156) $ (75) $ (87)
==== ===== ===== ===== =====
</TABLE>
F-77
<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,
---------------- August 31,
1998 1999 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Current deferred tax
liabilities:
Accrual to cash
adjustment............... $(1,245) $(1,299) $ (733)
------- ------- ------
Long-term deferred tax
assets (liabilities):
Property and equipment.... (36) (105) (140)
Supplemental Executive
Retirement Plan.......... 1,102 1,583 1,696
------- ------- ------
Total long-term deferred
tax asset.............. 1,066 1,478 1,556
------- ------- ------
Net deferred tax (liability)
asset...................... $ (179) $ 179 $ 823
======= ======= ======
</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>
Three Months
Fiscal Year Ended
Ended May 31, August 31,
----------------- -----------------
1997 1998 1999 1998 1999
---- ---- ----- ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Tax provision (benefit) at U.S.
federal statutory rate............ $(61) $ 26 $(317) $(146) $(142)
Net increase in life insurance cash
surrender value................... (15) (14) (95) (24) (23)
Nondeductible expenses............. 90 83 89 25 22
State tax rate..................... (3) 2 (18) (9) (11)
State permanent differences, net of
federal benefit................... 180 189 185 79 67
---- ---- ----- ----- -----
Total provision (benefit) for
taxes............................. $191 $286 $(156) $ (75) $ (87)
==== ==== ===== ===== =====
</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-78
<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, 1999 and the three months ended August 31, 1998 and 1999 was
$1,077, $1,129, $1,216, $396 (unaudited) and $375 (unaudited), 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, $179, $44 (unaudited) and $44 (unaudited), for the fiscal years
ended May 31, 1997, 1998, 1999 and the three months ended August 31, 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-79
<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-80
<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, $20, and $26 (unaudited) at May 31, 1998 and 1999 and
August 31, 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-81
<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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 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
August 26, 1999
F-82
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
June 30,
---------------
1998 1999
------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 2,013 $ 69
Fees receivable, less allowance for doubtful accounts of
$924 and $749, respectively................................ 4,349 3,873
Unbilled fees, at net realizable value...................... 1,341 1,556
Prepaid expenses and other current assets................... 183 117
------- ------
Total current assets...................................... 7,886 5,615
Property and equipment, net................................... 1,763 1,548
Intangible assets, net........................................ 1,058 1,247
Deferred income taxes......................................... 423 423
Other assets.................................................. 15 --
------- ------
Total assets.............................................. $11,145 $8,833
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt............................................. $ 2,612 $1,631
Due to principals........................................... 4,906 3,973
Accounts payable............................................ 99 106
Accrued employee compensation and related costs............. 785 860
Deferred compensation....................................... 619 529
Deferred income taxes....................................... 653 653
Other accrued liabilities................................... 208 239
------- ------
Total current liabilities................................. 9,882 7,991
Deferred compensation......................................... 542 495
Other long-term liabilities................................... 4 --
------- ------
Total liabilities......................................... 10,428 8,486
------- ------
Commitments and contingencies
Shareholders' equity:
Redeemable common stock and contributed capital, no par
value; 10,000 shares authorized, 32 and 9,745 common shares
issued and outstanding at June 30, 1998 and 1999,
respectively............................................... 1,222 924
Accumulated deficit......................................... (216) (216)
Related party advances...................................... (289) (361)
------- ------
Total shareholders' equity................................ 717 347
------- ------
Total liabilities and shareholders' equity................ $11,145 $8,833
======= ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-83
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
CONSOLIDATED STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year
Ended June 30,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues:
Professional services............................. $16,812 $17,916 $18,604
------- ------- -------
Expenses:
Shareholder compensation and related costs........ 6,214 7,113 6,574
Employee compensation and related costs........... 6,441 6,318 7,513
Occupancy costs................................... 1,248 1,256 1,438
Office operating expenses......................... 1,690 1,811 1,675
Other selling, general and administrative
expenses......................................... 1,175 1,338 1,348
------- ------- -------
16,768 17,836 18,548
------- ------- -------
Operating income................................ 44 80 56
------- ------- -------
Other (income) expense:
Interest expense.................................. 291 326 347
Interest income................................... (254) (261) (286)
Other............................................. 7 15 (5)
------- ------- -------
44 80 56
------- ------- -------
Net income.......................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-84
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Common Stock Related Total
-------------- Accumulated Party Shareholders'
Shares Amount Deficit Advances Equity
------ ------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
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
Capital contributed by
principals................ -- 211 -- -- 211
Issuance of shares......... 9,716 -- -- -- --
Redemption of capital
contributed by
principals................ (3) (509) -- -- (509)
Net increase in related
party advances............ -- -- -- (72) (72)
----- ------ ----- ----- -----
Balance at June 30, 1999..... 9,745 $ 924 $(216) $(361) $ 347
===== ====== ===== ===== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-85
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year
Ended June 30,
-------------------------
1997 1998 1999
------- ------- -------
<S> <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................... 810 908 1,067
Provision for (recovery of) uncollectible fees
receivable..................................... 210 278 (2)
Loss on disposal of property and equipment...... -- -- 8
Changes in operating assets and liabilities:
Fees receivable............................... (735) (798) 478
Unbilled fees................................. (233) (101) (215)
Prepaid expenses and other current assets..... (238) (87) 66
Due to principals............................. 1,232 1,185 (477)
Accounts payable.............................. (26) (105) 7
Other accrued liabilities..................... 154 (15) 31
Accrued employee compensation and related
costs........................................ 121 150 75
Other......................................... (239) 157 (141)
------- ------- -------
Net cash provided by operating activities... 1,056 1,572 897
------- ------- -------
Cash flows from investing activities:
Business acquisitions............................. (453) (390) (342)
Purchase of property and equipment................ (665) (702) (1,163)
Other............................................. (15) 29 15
------- ------- -------
Net cash used in investing activities....... (1,133) (1,063) (1,490)
------- ------- -------
Cash flows from financing activities:
Repayments (advances) to related parties.......... 198 (62) (72)
Proceeds from (payments of) short-term debt, net.. 776 344 (981)
Redemption of capital contributed by principals... -- (37) (509)
Capital contributed by principals................. 144 92 211
------- ------- -------
Net cash provided by (used in) financing
activities................................. 1,118 337 (1,351)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ 1,041 846 (1,944)
Cash and cash equivalents at beginning of period.... 126 1,167 2,013
------- ------- -------
Cash and cash equivalents at end of period.......... $ 1,167 $ 2,013 $ 69
======= ======= =======
Supplemental disclosures of cash flow information:
Interest paid..................................... $ 291 $ 326 $ 347
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-86
<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 wholly-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-87
<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-88
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
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, 1997, 1998 and 1999 were approximately $30, $34 and $35,
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, 1997, 1998 and 1999, were
approximately $245, $270 and $196, 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, 1997, 1998 and 1999 were approximately
$178, $86 and $111, respectively. These amounts are being amortized over the
remaining portion of a forty-year period from the date of acquisition.
F-89
<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,
----------------
1998 1999
------- -------
<S> <C> <C>
Property and equipment, net:
Furniture and fixtures................................. $ 2,942 $ 1,580
Computer equipment..................................... 828 1,449
Automobiles............................................ 839 --
Leasehold improvements................................. 652 785
------- -------
5,261 3,814
Less accumulated depreciation and amortization......... (3,498) (2,266)
------- -------
$ 1,763 $ 1,548
======= =======
</TABLE>
In June 1999, the Company's shareholders purchased the automobiles from
the Company. Amounts due from the shareholders have been included as a
reduction to the due to principals balance.
<TABLE>
<S> <C> <C>
Intangible assets, net:
Goodwill................................................. $1,134 $1,363
Less accumulated amortization............................ (76) (116)
------ ------
$1,058 $1,247
====== ======
</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
June 30,
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period..................... $ 789 $ 814 $ 924
Additions to (reductions of)
costs and expenses......... 210 278 (2)
Less (write-offs)
recoveries................. (185) (168) (173)
----- ----- -----
Balance at end of period.... $ 814 $ 924 $ 749
===== ===== =====
</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 8.5 percent at June 30, 1997, 1998
and 1999, respectively.
F-90
<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, 1998 and 1999, there were no borrowings
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,
---------
1998 1999
---- ----
<S> <C> <C>
Long-term deferred tax assets:
Deferred compensation......................................... $225 $213
Net operating loss carryforward............................... 141 162
Property and equipment........................................ 57 48
---- ----
Total long-term deferred tax assets......................... 423 423
Current deferred tax liabilities:
Intangible assets............................................. 119 126
Accrual to cash adjustment.................................... 534 527
---- ----
Total current deferred tax liabilities...................... 653 653
---- ----
Net deferred tax liability...................................... $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>
2000............................................................... $ 723
2001............................................................... 779
2002............................................................... 773
2003............................................................... 703
2004............................................................... 703
Thereafter......................................................... 2,359
------
Total minimum lease payments....................................... $6,040
======
</TABLE>
Rent expense for all operating leases for the fiscal years ended June 30,
1998 and 1999 was $806 and $874, respectively.
F-91
<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, 1997, 1998 and 1999 was $493, $503 and $768,
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) was 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. During 1999, 9,716 shares of common stock were issued to existing
shareholders for no additional consideration.
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.
During fiscal 1999, the Company received notice from legal counsel for a
former owner of Ade of a potential claim arising out of the Company's
acquisition of Ade. This claim includes allegations of breach of contract,
fraudulent inducement, breach of fiduciary duty, and violation of state and
federal antitrust laws. The Company believes this lawsuit is without merit and
intends to vigorously contest it.
NOTE 12--RELATED PARTY TRANSACTIONS
The Company has a loan receivable of $230 from BDMP Realty LLC (BDMP), a
related party owned by the Company's principals. 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.
F-92
<PAGE>
BERRY, DUNN, MCNEIL & PARKER, CHARTERED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
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 6, the Company periodically receives loans from the
Company's shareholders and shareholders' families.
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-93
<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, 1998 and July 31, 1999, and the results of its operations and its cash
flows for each of the two years in the period ended October 31, 1998 and the
nine months ended July 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
September 24, 1999
F-94
<PAGE>
URBACH KAHN & WERLIN PC
BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
October 31, July 31,
1998 1999
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 189 $ 2,174
Marketable securities................................... 1,152 --
Fees receivable, less allowance for doubtful accounts of
$1,177
and $1,116, respectively............................... 7,741 8,520
Unbilled fees, at net realizable value.................. 299 684
Due from shareholders................................... 570 550
Prepaid expenses and other current assets............... 829 400
------- -------
Total current assets.................................. 10,780 12,328
Property and equipment, net............................... 699 980
Investments............................................... 927 900
Deferred income taxes..................................... 2,188 2,252
Other assets.............................................. 319 331
------- -------
Total assets.......................................... $14,913 $16,791
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt......................................... $ 946 $ 446
Accounts payable........................................ 340 393
Accrued compensation and related costs to employees..... 249 262
Accrued compensation and related costs to shareholders.. 1,337 3,668
Deferred compensation................................... 262 247
Deferred income taxes................................... 2,603 2,022
Other accrued liabilities............................... 564 1,060
------- -------
Total current liabilities............................. 6,301 8,098
Long-term debt............................................ 1,622 1,269
Deferred compensation..................................... 4,805 5,077
Other..................................................... 149 149
------- -------
Total liabilities..................................... 12,877 14,593
------- -------
Commitments and contingencies
Shareholders' equity:
Redeemable common stock, $.01 par value; 100,000 shares
authorized, and 18,425 shares issued and outstanding .. -- --
Additional paid-in-capital.............................. 3,186 3,364
Accumulated other comprehensive income.................. 151 --
Accumulated deficit..................................... (1,301) (1,166)
------- -------
Total shareholders' equity............................ 2,036 2,198
------- -------
Total liabilities and shareholders' equity............ $14,913 $16,791
======= =======
</TABLE>
See accompanying Notes to Financial Statements.
F-95
<PAGE>
URBACH KAHN & WERLIN PC
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended October 31, Ended July 31,
------------------ -------------------
1997 1998 1998 1999
-------- -------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Professional services........... $ 16,012 $ 17,085 $13,192 $15,997
-------- -------- ------- -------
Expenses:
Shareholder compensation and
related costs.................. 4,798 4,853 3,774 6,434
Employee compensation and
related costs.................. 6,590 7,147 5,363 5,997
Occupancy costs................. 1,036 1,136 847 824
Office operating expenses....... 674 736 571 581
Depreciation and amortization... 222 261 181 255
Other selling, general and
administrative expenses........ 2,385 2,727 2,074 1,917
-------- -------- ------- -------
15,705 16,860 12,810 16,008
-------- -------- ------- -------
Operating income (loss)....... 307 225 382 (11)
-------- -------- ------- -------
Other (income) expense:
Interest expense................ 594 643 482 456
Realized gains on investment.... -- -- -- (366)
Interest income................. (78) (108) (38) (34)
Other........................... (489) (435) (268) (368)
-------- -------- ------- -------
27 100 176 (312)
-------- -------- ------- -------
Income before provision for income
taxes............................ 280 125 206 301
Provision for income taxes........ 172 105 120 162
-------- -------- ------- -------
Net income........................ $ 108 $ 20 $ 86 $ 139
======== ======== ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
F-96
<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 (Loss)
------ ------ ---------- ----------- ------------- ------------- -------------
<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
Cash dividends, $.17
per share............ -- -- -- (4) -- (4)
Issuances of common
stock/ payments of
subscriptions........ -- -- 178 -- -- 178
Reclassification
adjustment for gains
included in net
income............... -- -- -- -- (151) (151) $(151)
Net income............ -- -- -- 139 -- 139 139
------ ---- ------ ------- ---- ------ -----
Total comprehensive
loss................ -- -- -- -- -- -- $ (12)
=====
Balance at July 31, 1999
....................... 18,425 $-- $3,364 $(1,166) $-- $2,198
====== ==== ====== ======= ==== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-97
<PAGE>
URBACH KAHN & WERLIN PC
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year
Ended Nine Months Ended
October 31, July 31,
-------------- ------------------
1997 1998 1998 1999
------- ----- ----------- ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 108 $ 20 $ 86 $ 139
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 222 261 181 255
Change in deferred income taxes.... 148 105 120 (564)
Gain on sale of investments........ -- -- -- (366)
Increase in related entities' and
investment equity................. (367) (346) (210) (218)
Changes in current assets and
liabilities:
Fees receivable.................. 126 (836) (934) (779)
Unbilled fees.................... 92 (161) (398) (385)
Prepaid expenses and other
current assets.................. (253) (8) 326 429
Accounts payable................. (607) (67) 134 53
Accrued liabilities.............. (74) 405 229 496
Accrued compensation and related
costs to employees.............. (173) (16) (149) 13
Accrued compensation and related
costs to shareholders........... 45 455 367 2,331
Deferred compensation............ 602 298 263 257
Other............................ 140 47 94 (61)
------- ----- ----- ------
Net cash provided by operating
activities.................... 9 157 109 1,600
------- ----- ----- ------
Cash flows from investing activities:
Due from shareholders................ 41 (176) (102) 20
Purchase of property and equipment... (283) (187) (169) (530)
Dividends from corporate joint
venture equity investment........... 176 85 -- 123
Purchase of investments.............. (37) (31) (8) --
Proceeds from sale of investments.... -- -- -- 1,408
Other................................ (75) (40) -- 43
------- ----- ----- ------
Net cash (used in) provided by
investing activities.......... (178) (349) (279) 1,064
------- ----- ----- ------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt................................ 1,700 -- -- --
Payments of long-term debt........... (296) (429) (326) (353)
Proceeds from (payments of) short-
term debt, net...................... (1,100) 500 400 (500)
Payments of dividends................ (3) (3) (3) (4)
Proceeds from issuance of common
stock/payments of subscriptions..... 333 228 216 178
Payments to retire common stock...... (443) -- -- --
Other................................ (10) 67 -- --
------- ----- ----- ------
Net cash provided by (used in)
financing activities.......... 181 363 287 (679)
------- ----- ----- ------
Net increase in cash and cash
equivalents........................... 12 171 117 1,985
Cash and cash equivalents at beginning
of period............................. 6 18 18 189
------- ----- ----- ------
Cash and cash equivalents at end of
period................................ $ 18 $ 189 $ 135 $2,174
======= ===== ===== ======
Supplemental disclosures of cash flow
information:
Interest paid........................ $ 238 $ 254 $ 482 $ 456
Income taxes paid.................... $ 11 $ 34 $ 28 $ 25
</TABLE>
See accompanying Notes to Financial Statements.
F-98
<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-99
<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, 1998, the fair
market value of the marketable securities exceeded the adjusted cost. The
unrealized gains, net of deferred income taxes, are reported as an increase to
shareholders' equity. During April 1999, the Company divested all of its
marketable securities ($1,248), which resulted in realized gains of $328.
Marketable securities consisted of:
<TABLE>
<CAPTION>
October 31,
1998
-----------
<S> <C> <C>
Adjusted cost................................................ $ 920
Unrealized holding gains..................................... 232
-------
Fair market value............................................ $ 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 July 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
F-100
<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 Company's results of operations and cash flows for the nine
months ended July 31, 1998, as presented in the accompanying unaudited interim
financial statements.
F-101
<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>
July
October 31, 31,
1998 1999
----------- -------
<S> <C> <C>
Property and equipment, net:
Furniture and fixtures............................. $ 3,795 $ 4,297
Leasehold improvements............................. 696 723
------- -------
4,491 5,020
Less accumulated depreciation and amortization..... (3,792) (4,040)
------- -------
$ 699 $ 980
======= =======
Prepaid expenses and other current assets:
Prepaid insurance.................................. $ 306 $ 50
Prepaid taxes...................................... 65 78
Prepaid rent....................................... 166 --
Other receivables.................................. 138 214
Notes receivables.................................. 83 22
Other.............................................. 71 36
------- -------
$ 829 $ 400
======= =======
Other accrued liabilities:
Accrued income taxes............................... $ -- $ 726
401K employer matching contribution................ 245 51
Other.............................................. 319 283
------- -------
$ 564 $ 1,060
======= =======
</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
October 31, Ended
------------------ July 31,
1997 1998 1999
-------- -------- -----------
<S> <C> <C> <C>
Balance at beginning of period............. $ 1,385 $ 1,070 $1,177
Additions to costs and expenses............ 174 420 351
Less write-offs............................ (489) (313) (412)
-------- -------- ------
Balance at end of period................... $ 1,070 $ 1,177 $1,116
======== ======== ======
</TABLE>
F-102
<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, July 31,
1998 1999
----------- --------
<S> <C> <C>
Lines of credit....................................... $500 $--
Current maturities of long-term debt.................. 446 446
---- ----
Total short-term debt............................... $946 $446
==== ====
</TABLE>
The Company has several bank lines of credit with borrowing capacity of
$5,000. 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>
July
October 31, 31,
1998 1999
----------- ------
<S> <C> <C>
Note payable, unsecured, interest rates ranging from
8% to 8.5%. Maturities from April 2001 through July
2004................................................. $2,068 $1,715
Less current maturities of long-term debt............. (446) (446)
------ ------
Total long-term debt................................ $1,622 $1,269
====== ======
</TABLE>
Maturities on long-term debt as of July 31, 1999, including capital lease
obligations, are as follows:
<TABLE>
<CAPTION>
Twelve Months Ending:
---------------------
<S> <C>
2000............................................................... $ 446
2001............................................................... 399
2002............................................................... 258
2003............................................................... 281
2004............................................................... 306
Thereafter......................................................... 25
------
Total maturities of long-term debt............................... $1,715
======
</TABLE>
F-103
<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
Ended Nine Months
October 31, Ended July 31,
----------- ----------------
1997 1998 1998 1999
----- ----- ----------- ----
(Unaudited)
<S> <C> <C> <C> <C>
Income taxes currently payable:
Federal.................................... $ -- $ -- $-- $584
State...................................... 24 -- -- 142
----- ----- ---- ----
24 -- -- 726
Deferred income tax expense (benefit):
Federal.................................... 128 81 92 (416)
State...................................... 20 24 28 (148)
----- ----- ---- ----
Total provision for income taxes......... $ 172 $ 105 $120 $162
===== ===== ==== ====
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
October 31, July 31,
1998 1999
----------- --------
<S> <C> <C>
Long-term deferred tax assets:
Deferred compensation.............................. $2,018 $2,132
Fixed assets....................................... 120 120
Net operating loss and tax credit carryforwards.... 50 --
------ ------
Total long-term deferred tax assets.............. 2,188 2,252
------ ------
Current deferred tax liabilities:
Accrual to cash adjustments........................ 2,522 2,022
Unrealized gains on investments.................... 81 --
------ ------
Total current deferred tax liabilities........... 2,603 2,022
------ ------
Net deferred tax (liability) asset................... $ (415) $ 230
====== ======
</TABLE>
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
October 31, Ended July 31,
----------- ----------------
1997 1998 1998 1999
----- ----- ----------- ----
(Unaudited)
<S> <C> <C> <C> <C>
Income taxes currently payable:
U.S. federal statutory rate............... $ 98 $ 44 $ 72 $105
State income taxes, net of federal income
tax benefit.............................. 44 24 20 28
Non-deductible expenses................... 30 37 28 29
----- ----- ---- ----
Actual income tax provision................. $ 172 $ 105 $120 $162
===== ===== ==== ====
</TABLE>
F-104
<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 July 31, 1999:
<TABLE>
<CAPTION>
Twelve Months Ending:
---------------------
<S> <C>
2000............................................................... $ 849
2001............................................................... 868
2002............................................................... 851
2003............................................................... 725
2004............................................................... 725
Thereafter......................................................... 481
------
Total minimum lease payments..................................... $4,499
======
</TABLE>
Rent expense for all operating leases for the fiscal years ended October
31, 1997 and 1998 and the nine months ended July 31, 1998 and 1999 was $915,
$1,043, $774 (unaudited) and $741, 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 Nine Months
October 31, Ended
----------- July 31,
1997 1998 1999
----- ----- -----------
<S> <C> <C> <C>
Service cost....................................... $ 141 $ 144 $116
Interest cost...................................... 355 389 300
Amortization of prior service cost................. 58 58 44
----- ----- ----
Net deferred compensation cost..................... $ 554 $ 591 $460
===== ===== ====
</TABLE>
F-105
<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 Nine Months
October 31, Ended
----------- July 31,
1997 1998 1999
----- ----- -----------
<S> <C> <C> <C>
Discount rate...................................... 7.5% 7.5% 7.5%
Rates of increase in compensation levels........... 4.0% 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>
July
October 31, 31,
1998 1999
----------- -------
<S> <C> <C>
Projected benefit obligation:
Retirees........................................... $ 1,223 $ 1,098
Active participants................................ 3,796 4,134
------- -------
Funded status........................................ (5,019) (5,232)
Unrecognized prior service cost...................... 175 131
Unrecognized gain.................................... (223) (223)
------- -------
Accrued deferred compensation cost................... $(5,067) $(5,324)
======= =======
</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.
Payments of $178 were made by shareholders on subscriptions during the
nine months ended July 31, 1999.
Dividends of $3, $3 and $4 were declared and paid during fiscal year 1997
and 1998 and the nine months ended July 31, 1999, respectively.
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-106
<PAGE>
URBACH KAHN & WERLIN PC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
NOTE 12--CENTERPRISE TRANSACTION
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-107
<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-108
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 194 $ 857 $ 636
Restricted cash.................................... 190 -- --
Administration fees and commissions receivable..... 708 675 631
Funds held for customers........................... 612 660 568
Prepaid expenses and other current assets.......... 28 160 80
Due from principal................................. -- 164 --
------ ------ ------
Total current assets............................. 1,732 2,516 1,915
Property and equipment, net.......................... 966 747 702
Due from principal................................... 155 -- --
Other assets-security deposits....................... 43 38 38
------ ------ ------
Total assets..................................... $2,896 $3,301 $2,655
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................. $ 200 $ 153 $ 140
Accounts payable................................... 53 123 127
Accrued liabilities................................ 266 185 150
Accrued compensation and related costs............. 62 91 35
Deferred income.................................... 69 -- 29
Current portion of customer deposits............... 526 660 568
Refunds due to customers........................... 119 257 350
------ ------ ------
Total current liabilities........................ 1,295 1,469 1,399
Long-term debt, less current portion................. 309 154 95
Customer deposits, less current portion.............. 86 -- --
------ ------ ------
Total liabilities................................ 1,690 1,623 1,494
------ ------ ------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value; 150 shares authorized,
100 common shares issued and outstanding at
December 31, 1997 and 1998. No shares authorized,
issued or outstanding at June 30, 1999
(unaudited)....................................... -- -- --
Common stock--Class A (voting common stock), no par
value; 150 shares authorized, 150 shares issued
and 149 outstanding at June 30, 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 June 30, 1999
(unaudited). No shares authorized, issued or
outstanding at December 31, 1997 and 1998......... -- -- --
Additional paid-in-capital......................... 208 208 208
Treasury stock..................................... -- -- (164)
Retained earnings.................................. 998 1,470 1,117
------ ------ ------
Total shareholders' equity....................... 1,206 1,678 1,161
------ ------ ------
Total liabilities and shareholders' equity....... $2,896 $3,301 $2,655
====== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-109
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Six Months
Year Ended Ended June
December 31, 30,
--------------- --------------
1997 1998 1998 1999
------ ------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Administration fees......................... $6,583 $ 6,703 $3,591 $3,910
Reinsurance commissions..................... 1,960 1,343 773 625
Other....................................... 1,118 2,450 628 967
------ ------- ------ ------
9,661 10,496 4,992 5,502
------ ------- ------ ------
Expenses:
Employee compensation and related costs..... 6,047 6,461 2,930 3,156
Occupancy costs............................. 296 299 131 140
Other operating expenses.................... 1,121 1,132 799 909
Depreciation and amortization............... 206 242 120 104
Other selling, general and administrative
expenses................................... 1,045 1,078 538 555
------ ------- ------ ------
8,715 9,212 4,518 4,864
------ ------- ------ ------
Operating income.......................... 946 1,284 474 638
------ ------- ------ ------
Other (income) expense:
Interest expense............................ 28 32 18 10
Interest income............................. (80) (77) (33) (29)
Other....................................... 132 82 -- --
------ ------- ------ ------
80 37 (15) (19)
------ ------- ------ ------
Income before provision for income taxes...... 866 1,247 489 657
Provision for income taxes.................... 31 25 21 10
------ ------- ------ ------
Net income.................................... $ 835 $ 1,222 $ 468 $ 647
====== ======= ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-110
<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
------------- ------------- -------------- Paid-in- Treasury Retained Shareholders'
Shares Amount Shares Amount Shares Amount Capital Stock Earnings Equity
------ ------ ------ ------ ------ ------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 150 $-- -- $-- -- $-- $208 $ -- $1,143 $1,351
Cash dividends, $6,533
per share............. -- -- -- -- -- -- -- -- (980) (980)
Net income............. -- -- -- 835 835
---- ---- --- ---- ------ ---- ---- ----- ------ ------
Balance at December 31,
1997................... 150 -- -- -- -- -- 208 -- 998 1,206
Cash dividends, $5,666
per share............. -- -- -- -- -- -- -- -- (850) (850)
Net income............. -- -- -- -- -- -- -- -- 1,322 1,322
---- ---- --- ---- ------ ---- ---- ----- ------ ------
Balance at December 31,
1998................... 150 -- -- -- -- -- 208 -- 1,470 1,678
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, $6,000
per share............. -- -- -- -- -- -- -- -- (900) (900)
Net income............. -- -- -- -- -- -- -- -- 547 547
---- ---- --- ---- ------ ---- ---- ----- ------ ------
Balance at June 30, 1999
(unaudited)............ -- $-- 149 $-- 14,660 $-- $208 $(164) $1,117 $1,161
==== ==== === ==== ====== ==== ==== ===== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-111
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
-------------- ----------------
1997 1998 1998 1999
----- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 835 $ 1,322 $ 468 $ 647
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 206 242 120 104
Loss on disposal of property and
equipment............................... 49 82 -- --
Changes in current assets and
liabilities:
Administration fees and commissions
receivable............................ (215) 33 401 44
Funds held for customers............... 190 (48) 472 92
Restricted cash........................ (6) 190 190 --
Prepaid expenses and other current
assets................................ (11) (132) (16) 80
Accounts payable....................... 19 70 82 4
Accrued liabilities.................... 216 (81) (227) (135)
Accrued compensation and related
costs................................. 26 29 95 (56)
Deferred income........................ (47) (69) (69) 29
Customer deposits...................... (275) 48 (490) (92)
Refunds due to customers............... 95 138 69 93
Other.................................. (86) (4) -- --
----- ------- ------- -------
Net cash provided by operating
activities.......................... 996 1,820 1,095 810
----- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment......... (451) (105) (10) (59)
----- ------- ------- -------
Net cash used in investing
activities.......................... (451) (105) (10) (59)
----- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt... 400 -- -- --
Payments of long-term debt................. (150) (202) (111) (72)
Payments of dividends...................... (980) (850) (650) (900)
----- ------- ------- -------
Net cash used in financing
activities.......................... (730) (1,052) (761) (972)
----- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................. (185) 663 324 (221)
Cash and cash equivalents at beginning of
year........................................ 379 194 194 857
----- ------- ------- -------
Cash and cash equivalents at end of year..... $ 194 $ 857 $ 518 $ 636
===== ======= ======= =======
Supplemental disclosures of cash flow
information:
Interest paid.............................. $ 28 $ 32 $ 8 $ 10
Income taxes paid.......................... $ 29 $ 27 $ 21 $ 9
Non-cash transaction:
Retirement of an amount due from principal
for treasury stock........................ $ -- $ -- $ -- $ 164
</TABLE>
See accompanying Notes to Financial Statements.
F-112
<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 June 30,
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-113
<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-114
<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 June 30, 1999, and
the results of its operations and its cash flows for the six months ended June
30, 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,
--------------- June 30,
1997 1998 1999
------ ------- -----------
(Unaudited)
<S> <C> <C> <C>
Property and equipment, net:
Furniture and fixtures.................... $ 349 $ 284 $ 339
Computer equipment and software........... 1,444 1,626 1,128
Automobiles............................... 14 14 14
Leasehold improvements.................... 74 70 70
------ ------- ------
1,881 1,994 1,551
Less accumulated depreciation and
amortization............................. (915) (1,247) (849)
------ ------- ------
$ 966 $ 747 $ 702
====== ======= ======
</TABLE>
NOTE 4--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December
31,
--------- June 30,
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 $235
Other.......................................... 3 -- --
---- ---- ----
509 307 235
Less current maturities of long-term debt...... 200 153 140
---- ---- ----
Total long-term debt......................... $309 $154 $ 95
==== ==== ====
Maturities on long-term debt are as follows:
1999..................................................... $153
2000..................................................... 106
2001..................................................... 34
2002..................................................... 14
----
Total maturities of long-term debt....................... $307
====
</TABLE>
F-115
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
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 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 six months ended June 30, 1998 and 1999 was $253,
$269, $118 (unaudited) and $131 (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 six months ended June 30, 1998
and 1999 was $39, $37, $22 (unaudited) and $22 (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-116
<PAGE>
SELF FUNDED BENEFITS, INC. D/B/A INSURANCE DESIGN ADMINISTRATORS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
1998 and the six months ended June 30, 1998 and 1999, these expenditures
totaled $74, $14, $3 (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-117
<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-118
<PAGE>
GRACE & COMPANY, P.C.
BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 6 $ 19
Fees receivable, less allowance for doubtful
accounts of $761 and $790 (unaudited),
respectively....................................... 1,531 2,404
Unbilled fees, at net realizable value.............. 815 1,151
Prepaid expenses and other current assets........... 204 258
------ ------
Total current assets.............................. 2,556 3,832
Property and equipment, net........................... 515 488
Cash surrender value of life insurance................ 993 998
Deferred income taxes................................. 11 11
Other assets.......................................... 30 41
------ ------
Total assets...................................... $4,105 $5,370
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt..................................... $ 742 $1,296
Due to shareholders................................. 601 229
Accounts payable.................................... 160 92
Accrued compensation and related costs.............. 530 776
Deferred income taxes............................... 766 1,153
Other accrued liabilities........................... 93 90
------ ------
Total current liabilities......................... 2,892 3,636
Long-term debt........................................ 419 389
------ ------
Total liabilities................................. 3,311 4,025
------ ------
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 June 30, 1999
(unaudited), respectively.......................... 17 17
Additional paid-in-capital.......................... 350 350
Treasury stock, 1,500 shares at December 31, 1998
and June 30, 1999 (unaudited), respectively........ (89) (89)
Retained earnings................................... 516 1,067
------ ------
Total shareholders' equity........................ 794 1,345
------ ------
Total liabilities and shareholders' equity........ $4,105 $5,370
====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-119
<PAGE>
GRACE & COMPANY, P.C.
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended June 30,
December 31, --------------
1998 1998 1999
------------ ------ ------
(Unaudited)
<S> <C> <C> <C>
Revenues:
Professional services........................... $9,691 $5,684 $6,269
Expenses:
Shareholder compensation and related costs...... 2,709 1,395 1,464
Employee compensation and related costs......... 5,075 2,713 2,955
Occupancy costs................................. 406 192 238
Office operating expenses....................... 95 59 73
Depreciation and amortization................... 190 104 102
Other selling, general and administrative
expenses....................................... 689 406 425
------ ------ ------
9,164 4,869 5,257
------ ------ ------
Operating income.............................. 527 815 1,012
------ ------ ------
Other (income) expense:
Interest expense................................ 122 62 95
Interest income................................. (23) (6) (4)
Other........................................... (135) (62) (17)
Loss on equity investment....................... 40 -- --
------ ------ ------
4 (6) 74
------ ------ ------
Income before provision for income taxes.......... 523 821 938
Provision for income taxes........................ 232 334 387
------ ------ ------
Net income........................................ $ 291 $ 487 $ 551
====== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-120
<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).......... -- -- -- -- -- 551 551
------ --- ---- ----- ---- ------ ------
Balance at June 30, 1999
(unaudited)............ 16,500 $17 $350 1,500 $(89) $1,067 $1,345
====== === ==== ===== ==== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-121
<PAGE>
GRACE & COMPANY, P.C.
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended June 30,
December 31, ------------
1998 1998 1999
------------ ----- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 291 $ 487 $ 551
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 190 104 102
Change in deferred income taxes................. 127 117 387
Changes in operating assets and liabilities:
Fees receivable............................... (581) (358) (873)
Unbilled fees................................. 113 (197) (337)
Prepaid expenses and other current assets..... 44 8 (53)
Other assets.................................. (15) (7) (11)
Accounts payable.............................. (3) 66 (68)
Accrued compensation and related costs........ (13) 177 245
Other accrued liabilities..................... 84 216 (2)
----- ----- -----
Net cash provided by (used in) operating
activities................................. 237 613 (59)
----- ----- -----
Cash flows from investing activities:
Purchase of property and equipment................ (328) (75) (77)
Proceeds from sale of property and equipment...... 6 -- 2
Increase in cash surrender value.................. (171) (101) (5)
----- ----- -----
Net cash used in investing activities....... (493) (176) (80)
----- ----- -----
Cash flows from financing activities:
Proceeds from issuance of long-term debt.......... 450 250 50
Payments of long-term debt........................ (77) (30) (80)
Proceeds from (payments of) short-term debt, net.. (292) (765) 182
Issuance of common stock.......................... 171 99 --
----- ----- -----
Net cash provided by (used in) financing
activities................................. 252 (446) 152
----- ----- -----
Net (decrease) increase in cash..................... (4) (9) 13
Cash at beginning of period......................... 10 10 6
----- ----- -----
Cash at end of period............................... $ 6 $ 1 $ 19
===== ===== =====
Supplemental disclosures of cash flow information:
Interest paid..................................... $ 134 $ 62 $ 95
Income taxes paid................................. $ 20 $ 1 $ 46
</TABLE>
See accompanying Notes to Financial Statements.
F-122
<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.
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.
F-123
<PAGE>
GRACE & COMPANY, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
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 June 30, 1999 and the
results of its operations and its cash flows for the six months ended June 30,
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, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Property and equipment, net:
Furniture and fixtures............................... $ 663 $ 622
Computer equipment................................... 1,079 1,111
Automobiles.......................................... 47 47
Leasehold improvements............................... 56 59
------- -------
1,845 1,839
Less accumulated depreciation and amortization....... (1,330) (1,351)
------- -------
$ 515 $ 488
======= =======
</TABLE>
F-124
<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>
Six Months
Year Ended Ended
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Balance at beginning of period.................... $903 $761
Additions to costs and expenses................... 96 87
Recoveries of previously reserved amounts......... (105) --
Less write-offs................................... (133) (58)
---- ----
Balance at end of period.......................... $761 $790
==== ====
</TABLE>
NOTE 5--CREDIT FACILITIES
Short-Term Debt:
Short-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Line of credit.................................... $595 $1,160
Current maturities of long-term debt.............. 147 136
---- ------
Total short-term debt........................... $742 $1,296
==== ======
</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, 2000. The line of credit is collateralized by accounts receivable,
unbilled fees and all fixed assets. The line of credit is also partially
guaranteed by ten 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-125
<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, June 30,
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 $ 525
Less current maturities of long-term debt........ (147) (136)
----- -----
Total long-term debt........................... $ 419 $ 389
===== =====
The notes payable include $118 at December 31, 1998 and $95 (unaudited)
at June 30, 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>
Six Months
Ended
Year Ended June 30,
December 31, -----------
1998 1998 1999
------------ ----- -----
(Unaudited)
<S> <C> <C> <C>
Income taxes currently payable:
Federal........................................ $ 94 $ 212 $ --
State.......................................... 11 24 --
Deferred income tax expense:
Federal........................................ 114 87 348
State.......................................... 13 11 39
---- ----- -----
Total provision for income taxes............. $232 $334 $ 387
==== ===== =====
</TABLE>
F-126
<PAGE>
GRACE & COMPANY, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
December 31, June 30,
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) (1,153)
----- -------
Total current deferred tax liabilities........ (766) (1,153)
----- -------
Net deferred tax liability........................ $(755) $(1,142)
===== =======
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended June 30,
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 2 2
--- ----- -----
Effective income tax rate................... 44% 41% 41%
=== ===== =====
</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 six months ended June 30, 1998 and 1999 was $192
(unaudited) and $238 (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-127
<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 six months
ended June 30, 1998 and 1999 was $63 (unaudited) and $64 (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 $27 at June
30, 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 June
30, 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 $3 (unaudited) at June 30, 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-128
<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-129
<PAGE>
THE REPPOND COMPANIES
COMBINED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 148 $ 208
Accounts receivable................................. 842 956
Prepaid expenses and other current assets........... 77 150
------ ------
Total current assets.............................. 1,067 1,314
Property and equipment, net........................... 792 833
Deferred income taxes................................. 7 7
Other assets.......................................... 27 23
------ ------
Total assets...................................... $1,893 $2,177
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt..................................... $ 368 $ 587
Accounts payable.................................... 248 161
Accrued compensation and related costs.............. 243 218
Income taxes payable................................ 103 --
Deferred income taxes............................... 120 153
Other accrued liabilities........................... 5 --
------ ------
Total current liabilities......................... 1,087 1,119
Long-term debt........................................ 130 264
------ ------
Total liabilities................................. 1,217 1,383
------ ------
Commitments
Shareholders' equity:
Members' equity of the Reppond Administrators
L.L.C.............................................. (26) 54
Common stock of The Reppond Company, $1 par value;
50,000 shares authorized; 500 shares issued and
outstanding at December 31, 1998 and 501 shares
issued and outstanding at June 30, 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 June 30,
1999 (unaudited)................................... -- --
Additional paid-in capital.......................... 56 56
Note receivable from shareholder.................... (28) (28)
Retained earnings................................... 673 711
------ ------
Total shareholders' equity........................ 676 794
------ ------
Total liabilities and shareholders' equity........ $1,893 $2,177
====== ======
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-130
<PAGE>
THE REPPOND COMPANIES
COMBINED STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended June 30,
December 31, --------------
1998 1998 1999
------------ ------ ------
(Unaudited)
<S> <C> <C> <C>
Revenue:
Commission...................................... $6,423 $3,350 $3,563
Fee for service................................. 1,469 743 790
------ ------ ------
7,892 4,093 4,353
------ ------ ------
Expenses:
Producer compensation and related costs......... 2,359 1,267 1,364
Employee compensation and related costs......... 2,708 1,217 1,310
Occupancy costs................................. 391 194 239
Office operating expenses....................... 501 274 344
Depreciation and amortization................... 332 156 153
Other selling, general and administrative
expenses....................................... 1,090 369 679
------ ------ ------
7,381 3,477 4,089
------ ------ ------
Operating income.............................. 511 616 264
------ ------ ------
Other (income) expense:
Interest expense................................ 72 42 25
Interest income................................. (43) (2) (1)
Other........................................... 22 9 2
------ ------ ------
51 49 26
------ ------ ------
Income before provision for income taxes.......... 460 567 238
Provision for income taxes........................ 113 156 120
------ ------ ------
Net income........................................ $ 347 $ 411 $ 118
====== ====== ======
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-131
<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:
Issuance of
shares 1 -- -- -- -- -- -- -- -- --
Net income...... -- -- 80 -- -- -- 38 -- -- 118
--- --- ----- --- ---- --- ---- ---- ---- ----
Total
comprehensive
income.........
Balance at June
30, 1999
(unaudited)..... 501 $ 1 $ 54 250 $-- $56 $711 $(28) $-- $794
=== === ===== === ==== === ==== ==== ==== ====
<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:
Issuance of
shares
Net income...... $118
-------------
Total
comprehensive
income......... $118
=============
Balance at June
30, 1999
(unaudited).....
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-132
<PAGE>
THE REPPOND COMPANIES
COMBINED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended June 30,
December 31, ------------
1998 1998 1999
------------ ----- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 347 $ 411 $ 118
Adjustments to reconcile net income to net
cash provided by (used in ) operating
activities:
Depreciation and amortization................ 332 152 153
Changes in current operating assets and
liabilities:
Accounts receivable....................... 41 (48) (114)
Prepaid expenses.......................... (38) (26) (73)
Accounts payable.......................... 102 (35) (87)
Accrued compensation and related costs.... 78 (8) (25)
Income taxes payable...................... 184 39 (103)
Deferred income taxes..................... (67) 43 33
Other assets and liabilities.............. (20) -- (1)
----- ----- -----
Net cash provided by (used in) operating
activities............................. 959 528 (99)
----- ----- -----
Cash flows from investing activities:
Purchase of property and equipment............ (301) (122) (194)
----- ----- -----
Net cash used in investing activities... (301) (122) (194)
----- ----- -----
Cash flows from financing activities:
Proceeds from long-term debt.................. -- -- 350
Payments of long-term debt.................... (346) (93) (229)
Repurchase of common stock.................... (17) (17) --
Proceeds from (payments of) short-term debt,
net.......................................... (185) (274) 232
----- ----- -----
Net cash (used in) provided by financing
activities............................. (548) (384) 353
----- ----- -----
Net increase in cash and cash equivalents....... 110 22 60
Cash and cash equivalents at beginning of
period......................................... 38 38 148
----- ----- -----
Cash and cash equivalents at end of year........ $ 148 $ 60 $ 208
===== ===== =====
Supplemental disclosures of cash flow
information:
Interest paid................................. $ 72 $ 29 $ 25
Income taxes paid............................. $ 111 $ 105 $ 232
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-133
<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-134
<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 June 30, 1999 and the
results of its operations and its cash flow for the six months ended June 30,
1999 and 1998, as presented in the accompanying unaudited interim financial
statements.
F-135
<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, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Property and equipment:
Furniture and fixtures......................... $ 438 $ 457
Computer equipment............................. 823 883
Leasehold improvements......................... 103 114
Office equipment............................... 302 311
Vehicles....................................... 19 19
Computer software.............................. 286 381
------- -------
1,971 2,165
Less accumulated depreciation and amortization... (1,179) (1,332)
------- -------
$ 792 $ 833
======= =======
</TABLE>
NOTE 5--CREDIT FACILITIES
Short-Term Debt:
Short-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Line of credit.................................... $183 $415
Current maturities of long-term debt.............. 185 172
---- ----
Total short-term debt........................... $368 $587
==== ====
</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-136
<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, June 30,
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 $436
Less current maturities of long-term debt....... 185 172
---- ----
Total long-term debt........................ $130 $264
==== ====
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>
Six Months
Year Ended Ended
December 31, June 30,
1998 1998 1999
------------ ----- -----
(Unaudited)
<S> <C> <C> <C>
Income taxes currently payable:
Federal....................................... $180 $ 218 $ 87
---- ----- -----
Deferred income tax expense (benefit):
Federal....................................... (67) (62) 33
---- ----- -----
Total provision for income taxes............ $113 $ 156 $ 120
==== ===== =====
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
Six Months
Ended
December 31, June 30,
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 $149
Unrealized losses............................... 4 4
---- ----
$120 $153
==== ====
</TABLE>
F-137
<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>
Six Months
Ended June
Year Ended 30,
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) (11)
Meals and entertainment...................... 4 4 3
Merger costs................................. -- -- 25
Other........................................ 1 4 --
--- ----- -----
25% 28% 50%
=== ===== =====
</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 June 30, 1998 and 1999 was $386, $193
(unaudited), and $237 (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-138
<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 promissory notes 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 August 15, 1999.
In August 1999, the Company extended its line of credit agreement with
the Commerce Bank of Washington, N.A. to December 31, 1999.
F-139
<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-140
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 169 $ 189
Fees receivable, less allowance for doubtful
accounts of $177 and $177 (unaudited).............. 1,562 2,142
Notes receivable.................................... 12 12
Unbilled fees, at net realizable value.............. 254 443
Prepaid expenses and other current assets........... 23 112
------ ------
Total current assets.............................. 2,020 2,898
------ ------
Property and equipment, net........................... 133 122
Fees receivable....................................... 43 43
Notes receivable...................................... 46 60
------ ------
Total assets...................................... $2,242 $3,123
====== ======
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Short-term debt..................................... $1,101 $1,258
Loans from managers................................. 26 --
Due to managers..................................... 152 175
Accounts payable.................................... 115 135
Accrued expenses.................................... 142 164
------ ------
Total current liabilities......................... 1,536 1,732
------ ------
Long-term debt........................................ 153 --
Deferred rent......................................... 113 117
------ ------
Total liabilities................................. 1,802 1,849
------ ------
Commitments and contingencies
Members' equity:
Managers............................................ 440 1,274
------ ------
Total members' equity............................. 440 1,274
------ ------
Total liabilities and members' equity............. $2,242 $3,123
====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-141
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, -----------------
1998 1998 1999
------------ -------- --------
(Unaudited)
<S> <C> <C> <C>
Revenues:
Professional services......................... $6,217 $ 3,283 $ 4,180
------ -------- --------
Expenses:
Managers' compensation and related costs...... 2,104 1,037 1,145
Employee compensation and related costs....... 2,292 1,173 1,291
Occupancy costs............................... 372 175 172
Office operating expenses..................... 494 231 286
Depreciation and amortization................. 31 16 16
Other selling, general and administrative
expenses..................................... 467 231 264
------ -------- --------
5,760 2,863 3,174
------ -------- --------
Operating income............................ 457 420 1,006
------ -------- --------
Other expense:
Interest expense.............................. 130 67 64
Other......................................... 50 -- 108
------ -------- --------
180 67 172
------ -------- --------
Net income...................................... $ 277 $ 353 $ 834
====== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-142
<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).............................. -- 834 834
---- ------ ------
Balance at June 30, 1999 (unaudited)................ $-- $1,274 $1,274
==== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-143
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, ----------------
1998 1998 1999
------------ -------- --------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 277 $ 353 $ 834
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 31 16 16
Provision for losses on accounts
receivable................................ 56 6 37
Changes in deferred rent expense........... 17 -- 4
Changes in current assets and liabilities:
Fees receivable.......................... (266) (92) (635)
Unbilled fees............................ (159) (178) (189)
Prepaid expenses and other current
assets.................................. (2) (6) (89)
Due to managers.......................... 152 (55) 23
Accounts payable......................... (10) (18) 20
Accrued expenses......................... 33 29 26
----- ------- --------
Net cash provided by operating
activities............................ 129 55 47
----- ------- --------
Cash flows from investing activities:
Purchase of property and equipment........... (11) (7) (5)
----- ------- --------
Net cash used in investing activities.. (11) (7) (5)
----- ------- --------
Cash flows from financing activities:
Payments of long-term debt................... (133) (66) (153)
Proceeds from short-term debt................ 197 57 157
Payments of loans from managers.............. (16) (7) (26)
----- ------- --------
Net cash provided by (used in)
financing activities.................. 48 (16) (22)
----- ------- --------
Net increase in cash........................... 166 32 20
Cash and cash equivalents at beginning of
year.......................................... 3 3 169
----- ------- --------
Cash and cash equivalents at end of year....... $ 169 $ 35 $ 189
===== ======= ========
Supplemental disclosure of cash flow
information:
Interest paid................................ $ 130 $ 67 $ 64
</TABLE>
See accompanying Notes to Financial Statements.
F-144
<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.
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
F-145
<PAGE>
SIMIONE, SCILLIA, LARROW & DOWLING LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands)
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 June 30, 1999, and the
results of its operations and its cash flows for the six months ended June 30,
1998 and 1999, as presented in the accompanying unaudited interim financial
statements.
F-146
<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, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Property and equipment, net:
Furniture and fixtures........................ $197 $199
Computer equipment............................ 19 22
---- ----
216 221
Less accumulated depreciation and
amortization................................. (83) (99)
---- ----
$133 $122
==== ====
</TABLE>
NOTE 4--DETAIL OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a rollforward of activity within the allowance for
doubtful accounts:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Balance at beginning of period.................... $255 $177
Additions to costs and expenses................... 56 37
Less write-offs................................... (134) (37)
---- ----
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, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Line of credit borrowings......................... $ 969 $1,258
Current maturities of long-term debt.............. 132 --
------ ------
Total short-term debt........................... $1,101 $1,258
====== ======
</TABLE>
Line of credit borrowings consist of amounts outstanding under the
Company's $1,500 revolving credit note with a bank. That note 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. The line of credit
borrowings cannot exceed 80 percent of the Company's eligible accounts
receivable (as defined). The revolving line of credit matures five months
after the proposed initial public offering of Centerprise. See Note 10.
F-147
<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,
1998
------------
<S> <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
Less current maturities of long-term debt.................. (132)
----
Total long-term debt................................... $153
====
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, $256 and $252 (unaudited) for the fiscal year ended
December 31, 1998 and for the six months ended June 30, 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-148
<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, $13
(unaudited) and $8 (unaudited) for the fiscal year ended December 31, 1998 and
the six months ended June 30, 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. This note was paid
in full during June 1999.
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.
In June 1999, the Company amended its line of credit with a bank. The
line was extended to five months after the initial public offering of
Centerprise Advisors, Inc. All rights to request advances under the line of
credit terminate on the date of the proposed initial public offering of
Centerprise.
F-149
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
10,500,000 Shares
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
Lehman Brothers
CIBC World Markets
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting commissions and discounts) payable by
Centerprise in connection with the issuance and distribution of the common
stock pursuant to the prospectus contained in this Registration Statement.
Centerprise will pay or reimburse BGL Capital for all of these expenses.
<TABLE>
<CAPTION>
Approximate
Amount
-----------
<S> <C>
Securities and Exchange Commission registration fee........... $ 50,353
NASD filing fee............................................... 18,613
NYSE listing fee.............................................. 201,000
Accountants' fees and expenses................................ 3,800,000
Blue Sky fees and expenses.................................... 5,000
Legal fees and expenses....................................... 3,275,000
Transfer Agent and Registrar fees and expenses................ 5,500
Printing and engraving........................................ 1,000,000
Miscellaneous expenses........................................ 2,644,534
-----------
Total..................................................... $11,000,000
===========
</TABLE>
- --------
*To be filed by amendment.
Item 14. 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.
II-1
<PAGE>
Section 6(b) of the underwriting agreement filed as Exhibit 1.1 provides
that the Underwriters named therein will indemnify and hold harmless
Centerprise and each director, officer or controlling person of Centerprise
from and against certain liabilities, including liabilities under the
Securities Act. Centerprise expects to have director and officer insurance
coverage concurrently with the consummation of this offering.
Item 15. Recent Sales of Unregistered Securities.
The following information relates to securities of Centerprise issued or
sold by Centerprise since inception that were not registered under the
Securities Act:
1. Centerprise was incorporated on November 9, 1998 and issued 2,992
shares of its common stock to its founders at a price of $10.00 per
share. Of such shares, 100 were issued to BGL Capital Partners,
L.L.C. ("BGL Capital") and 2,892 were issued to Robert C. Basten.
2. On December 30, 1998, Centerprise issued 333 shares to Rondol E.
Eagle at $10.00 per share.
3. On February 1, 1999, Centerprise issued 12,400 shares to CPA Holdings
LLC for total consideration of $108,000 in cash and 40 shares of
common stock of Professional Service Group, Inc.
4. On February 15, 1999, Centerprise issued 150 shares to Dennis W.
Bikun at a price of $40.00 per share.
5. On March 8, 1999, Centerprise issued an aggregate of 625 shares to
Jonathan R. Rutenberg and Reznick, Fedder & Silverman, C.P.A.s,
L.L.C. at a price of $10.00 per share.
6. On March 9, 1999, Centerprise issued 1,000 shares to DeAnn L. Brunts
at a price of $40.00 per share.
The offer and sale of these shares were exempt from registration under
the Securities Act in reliance on the exemption provided by Section 4(2)
thereof. Prior to the completion of the offering, the number of these shares
will be increased to 3,711,019 by the approximately 212.05817-for-one stock
split.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<C> <S>
1.1** Form of Underwriting Agreement.
2.1**+ Merger Agreement between Centerprise, Reznick Fedder & Silverman,
Inc., 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 & Co., 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.
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
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.
2.9**+ 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 and 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.
2.20**+ 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.
2.25* Extension Agreement and Acknowledgement between Centerprise and
Reznick, dated August 31, 1999.
2.26* Extension Agreement and Acknowledgement between Centerprise and
Driver, dated August 31, 1999.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
2.27* Extension Agreement and Acknowledgement between Centerprise and
Follmer, dated August 31, 1999.
2.28* Extension Agreement and Acknowledgement between Centerprise and
Mann Frankfort, dated August 31, 1999.
2.29* Extension Agreement and Acknowledgement between Centerprise and
Berry Dunn, dated August 31, 1999.
2.30* Extension Agreement and Acknowledgement between Centerprise and
Urbach, dated August 31, 1999.
2.31* Extension Agreement and Acknowledgement between Centerprise and
IDA, dated August 31, 1999.
2.32* Extension Agreement and Acknowledgement between Centerprise and
Grace, dated August 31, 1999.
2.33* Extension Agreement and Acknowledgement between Centerprise, The
Reppond Company Inc., Reppond Administrators L.L.C. and
VeraSource Excess Risk Ltd., dated August 31, 1999.
2.34* Extension Agreement and Acknowledgement between Centerprise and
Simione, dated August 31, 1999.
2.35* Amended and Restated Merger Agreement between Centerprise,
Reznick, Reznick Mergersub Inc. and Reznick Fedder & Silverman,
C.P.A.s, L.L.C. dated as of September 24, 1999.
2.36* Amended and Restated Merger Agreement between Centerprise, Driver
and RFD Mergersub Inc. dated as of September 24, 1999.
2.37* Amended and Restated Merger Agreement between Centerprise,
Follmer, FRF Holding LLC and FRC Mergersub Inc. dated as of
September 24, 1999.
2.38* Amended and Restated Merger Agreement between Centerprise, Mann
Frankfort and MFSL Mergersub Inc. dated as of September 24, 1999.
2.39* Amended and Restated Merger Agreement between Centerprise, Berry
Dunn and Berry Dunn Mergersub Inc. dated as of September 24,
1999.
2.40* Amended and Restated Merger Agreement between Centerprise, Urbach
and UKW Mergersub Inc. dated as of September 24, 1999.
2.41* Amended and Restated Merger Agreement between Centerprise, IDA
and IDA Mergersub Inc. dated as of September 24, 1999.
2.42* Amended and Restated Merger Agreement between Centerprise, Grace,
Grace Capital, LLP and Grace Mergersub Inc. dated as of September
24, 1999.
2.43* Amended and Restated Merger Agreement between Centerprise, The
Reppond Company Inc., Reppond Administrators, LLC, VeraSource
Excess Risk Ltd., Reppond Mergersub Inc., RA Mergersub LLC and
Verasource Mergersub Inc. dated as of September 24, 1999.
2.44* Amended and Restated Merger Agreement between Centerprise, SSLD
Mergersub LLC, and Simione dated as of September 24, 1999.
2.45* Form of Company Stockholder Agreement.
3.1** Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Form of Amended and Restated Bylaws of the Registrant.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
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).
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 Purchase 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 to be named as prospective director (David Reznick)
23.5** Consent to be named as prospective director (Thomas W. Corbett)
23.6** Consent to be named as prospective director (Richard H. Stein)
23.7** Consent to be named as prospective director (Anthony P. Frabotta)
23.8** Consent to be named as prospective director (Charles H. Roscoe)
23.9** Consent to be named as prospective director (Steven N. Fischer)
23.10** Consent to be named as prospective director (Robert F. Gallo)
23.11** Consent to be named as prospective director (Wayne J. Grace)
23.13** Consent to be named as prospective director (Anthony P. Scillia)
23.14** Consent to be named as prospective director (Louis C. Fornetti)
23.15** Consent to be named as prospective director (William J. Lynch)
23.16* Consent to be named as prospective director (John M. Cook)
23.17 Consent to be named as prospective director (Peter I. Mason)
24** Power of Attorney (see signature page).
</TABLE>
- --------
*Incorporated by reference to the corresponding exhibit to the Registrant's
registration statement on Form S-4 (file no. 333-75861).
**Previously filed.
+Prior agreement-no longer in effect.
II-5
<PAGE>
(b) Financial Statement Schedules.
Not applicable.
Item 17. Undertakings.
The Registrant hereby undertakes:
(1) To provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
(2) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by Centerprise pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus 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.
Insofar as indemnification for liabilities arising under the
Securities Act 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
Commission, such indemnification is against public policy as expressed
in the Securities 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, suite 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 had 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
Securities Act and will be governed by the final adjudication of such
issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 5 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Chicago, and State of Illinois on the 2nd day of November, 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. 5 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, November 2, 1999
____________________________________ President and Chief
Robert C. Basten Executive Officer
* Executive Vice President, November 2, 1999
____________________________________ Chief Financial Officer and
DeAnn L. Brunts a Director
* Vice President and November 2, 1999
____________________________________ Chief Accounting Officer
Dennis W. Bikun
* Director November 2, 1999
____________________________________
Scott H. Lang
</TABLE>
<TABLE>
<S> <C> <C>
/s/ Robert C. Basten November 2, 1999
</TABLE>
*By: __________________________
Robert C. Basten
Attorney-in-fact
<TABLE>
<S> <C>
</TABLE>
II-7
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 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................................... June 17, 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........................... February 4, 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
November 2, 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.
/s/ KPMG LLP
KPMG LLP
San Diego, California
November 2, 1999
<PAGE>
Exhibit 23.17
Consent
I, Peter I. Mason, 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") 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/ Peter I. Mason
------------------
Peter I. Mason
Dated: October 18, 1999
