<PAGE>
Filed Pursuant to Rule 424B3
Registration Number 333-24007
$25,000,000
ENStar Inc.
8.00% Two Year
9.75% Five Year
11.00% Ten Year
Subordinated Debentures
PROSPECTUS SUPPLEMENT NO. 3
TO PROSPECTUS DATED APRIL 4, 1997
The following information amends and updates the Prospectus of ENStar
Inc., dated April 4, 1997 (the "Prospectus"), and should be read in conjunction
therewith. Please keep this Prospectus Supplement with your Prospectus for
future reference.
___________________________
The date of this Prospectus Supplement is November 14, 1997
<PAGE>
Enstar Inc.
INDEX TO PROSPECTUS SUPPLEMENT NO. 3
Page
Summary Financial Data 3
Management's Discussion and Analysis of Financial
Condition and Results of Operations 4
General 5
Results of Operations 7
Capital Resources and Liquidity 12
Index to Condensed Consolidated Financial Statements 14
-2-
<PAGE>
Enstar Inc.
SUMMARY FINANCIAL DATA
(In thousands, except per share and ration amounts)
The following table sets forth certain summary financial data for ENStar
Inc. ("ENStar" or the "Company") and should be read in conjunction with the
Condensed Consolidated Financial Statements of the Company included in this
Prospectus Supplement.
<TABLE> Nine Months Ended
<CAPTION> September 30,
Unaudited
1997 1996
---------------------
<S> <C> <C>
OPERATIONS
Revenues $ 41,314 $ 49,151
Operating income (loss) (3,332) 410
Net income (loss) (1,540) 1,053
Income (loss) per share (.47) .32
Ratio of earnings to fixed charge (3.60)X 1.55X
September 30,
1997 December 31,
(Unaudited) 1996
----------------------
FINANCIAL POSITION
Total current assets $ 27,636 $ 15,796
Long-term debt, net of current maturities 15,663 1,150
Shareholders' equity 15,408 20,947
</TABLE>
-3-
<PAGE>
Enstar Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of Operations
of the Company should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in this report.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements include
statements regarding intent, belief, or current expectations of the Company
and its management and are made in reliance upon the safe harbor provisions of
the Securities Litigation Reform Act of 1995. Shareholders and prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve a number of risks and uncertainties
that may cause the Company's actual results to differ materially from the
results discussed in the forward-looking statements. Among the factors that
could cause actual results to differ materially from those indicated by such
forward-looking statements are general economic conditions, computer and
computer networking industry conditions, risks associated with the cost required
for the development and offering of new products and services that may not be
commercially successful, the rapid technological changes occurring in the
markets in which the Company operates, failure to successfully execute
Americable's expansion strategy, dependence on and the need to recruit and
retain key personnel, the concentration of the Company's revenues with certain
customers, dependence on key suppliers and product supply, the substantial
competition in the markets in which the Company operates and certain
indemnification obligations relating to the Reorganization Transactions. Each
of these factors is more fully discussed in Exhibit 99 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
The market for Transition Network's products is characterized by rapid
technological change. The introduction of products embodying new technology can
render existing products obsolete. Transition has recently refined its product
strategy to focus more of its research and development efforts on developing
products facilitating the conversion from existing to new technologies. This
shift in product focus is expected to reduce future sales of the Company's
existing advanced LAN products as it focuses more of its engineering, marketing,
and sales resources on its conversion based products.
-4-
<PAGE>
Enstar Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
GENERAL
ENStar Inc. is a holding company. Its principal subsidiaries are
Americable, Inc. ("Americable") and Transition Networks, Inc. ("Transition").
Americable's operations are organized into two primary business units, Enstar
Networking Corporation ("Enstar Networking") and Americable Distribution. As
a network integrator, Enstar Networking provides services designed to build,
maintain, and secure local area network ("LAN") and wide area network ("WAN")
infrastructures for large and medium sized end-users. As a value-added
distributor, Americable is a provider of networking and connectivity products,
cable assemblies, and custom OEM manufacturing solutions. Transition is a
manufacturer of connectivity devices used in LAN applications. At September 30,
1997, ENStar owned 1,025,000 shares of common stock of CorVel Corporation
("CorVel"), or an approximate 24.5% interest in CorVel, a provider of cost
containment and managed care services designed to address the medical costs of
workers' compensation. In January 1997, ENStar, at the direction of North Star,
sold 200,000 shares of CorVel for approximately $5.1 million cash. The proceeds
from the sale were distributed to and retained by North Star. ENStar's
investment in CorVel is accounted for as an unconsolidated subsidiary using
the equity method of accounting. The common stock of CorVel is included on the
Nasdaq National Market under the Symbol CRVL.
ENStar was formerly a wholly owned subsidiary of North Star. In
connection with the reorganization involving North Star and Michael Foods (the
"Reorganization Transactions"), North Star transferred to ENStar certain of
its assets, including its shares of common stock of Americable and Transition
and its shares of CorVel, and certain other assets. Pursuant to the
Reorganization Transactions, (i) North Star merged with Michael Foods and (ii)
the outstanding common stock of ENStar (the "ENStar Common Stock") was
distributed to the shareholders of North Star (the "Distribution"). As a
result of the Distribution, ENStar ceased to be a subsidiary of North Star and
became a publicly owned company. ENStar's Common Stock is included on the
Nasdaq National Market under the symbol "ENSR".
As described in Note 2 to the Consolidated Financial Statements of
ENStar, the Consolidated Statements of Operations of ENStar for 1996 include
an allocation of general and administrative costs incurred by North Star prior
to the consummation of the Reorganization Transactions in the management of
the operating companies, investment holding, and other assets of ENStar.
Management believes these allocations are reasonable and present the
operations of ENStar as though it has been operated on a stand-alone basis
prior to the consummation of the Reorganization Transactions.
-5-
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following are unaudited summarized operating results for each of the
Company's continuing operations for the three and nine months ended September 30
(in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------
1997 1996 1997 1996
-------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Americable $ 11,906 $ 13,301 $ 29,843 $ 38,221
Transition 4,518 4,523 12,556 12,166
Eliminations (434) (466) (1,085) (1,236)
---------------------------------------------
$ 15,990 $ 17,358 $ 41,314 $ 49,151
=============================================
Gross Profit
Americable $ 2,481 $ 3,010 $ 6,665 $ 8,494
Transition 1,745 1,704 4,932 4,510
---------------------------------------------
$ 4,226 $ 4,714 $ 11,597 $ 13,004
=============================================
Selling, General and Administrative Expenses
Americable $ 3,132 $ 2,537 $ 9,106 $ 7,510
Transition 1,701 1,605 4,884 4,261
Corporate 226 329 939 823
----------------------------------------------
$ 5,059 $ 4,471 $ 14,929 $ 12,594
==============================================
Operating Income (Loss)
Americable $ (651) $ 473 $ (2,441) $ 984
Transition 44 99 48 249
Corporate (226) (329) (939) (823)
----------------------------------------------
$ (833) $ 243 $ (3,332) $ 410
==============================================
</TABLE>
-6-
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 vs. THREE MONTHS ENDED
SEPTEMBER 30, 1996
Consolidated revenues decreased $1.4 million, or 7.9%, to $16 million
from $17.4 million in 1996.
Revenues at Americable decreased approximately $1.4 million, or 10.5%, to
$11.9 million. Sales of networking products decreased approximately $1.9
million due primarily to lower customer demand at Enstar Networking. This
includes approximately $1.1 million in decreased sales of networking
products to three customers due to reduced demand which is expected to continue
for the remainder of the year. These customers accounted for approximately $2.5
million of revenues in 1996. In addition, sales of cable assemblies, bulk
cable, and other connectivity products decreased approximately $660,000,
primarily due to lower demand from contractors and resellers. Offsetting these
decreases was approximately $500,000 of increased service revenues from network
integration and structured wiring services and approximately $700,000 of higher
network security revenues at Enstar Networking as a result of its expanded focus
on new service offerings.
Revenues at Transition were $4.5 million; relatively unchanged from the
same period in 1996. Sales to domestic customers increased approximately
$60,000, or 2%, to $3.1 million, which primarily is a result of the addition
of new customers and higher demand from existing customers. Sales to
international customers were approximately $1.4 million, a decrease of 6.7%
from the previous year. Sales to international customers accounted for
approximately 31% and 33% of net sales for the period ended September 30,
1997 and 1996, respectively.
Consolidated gross profit, as a percent of revenues, decreased to 26.4%
in 1997 as compared to 27.2% in 1996. Margins at Americable decreased to 20.8%
from 22.6% due primarily to higher level of personnel, training, and other
related costs associated with the expansion of its cable assembly operation.
Margins at Transition increased to 38.6% from 37.7% due primarily to higher
sales of new product enhancements of its basic LAN products.
The Company's selling, general and administrative expenses increased
approximately $600,000, or 13%, to approximately $5.1 million from $4.5
million in 1996.
-7-
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
Operating expenses at Americable increased approximately $595,000 or
23.5% for the period which reflects approximately $240,000 of higher
engineering expense due to the addition of technical and engineering
personnel and higher training costs at Enstar Networking. In addition, this
increase reflects approximately $170,000 of increased selling expenses primarily
attributable to the addition of new sales personnel and related expenses.
General and administrative expenses increased approximately $185,000 due
primarily to higher facility related expenses and the addition of support
personnel associated with the increased level of sales and engineering
personnel.
Operating expenses at Transition increased approximately 6%, which reflects
increased sales and marketing expenses of approximately $90,000 associated with
advertising and promotional activities along with the addition of new product
marketing personnel and related expenses This was offset by approximately
$60,000 of decreased engineering expenses which reflects a reduction in
development costs and personnel associated with Transition's advanced LAN
products.
Corporate expenses decreased approximately $103,000, or 31%, to $226,000
which reflects lower legal and professional costs.
Net interest expense increased $197,000 or 386% to $248,000 from $51,000
in 1996 due primarily to the higher levels of long-term debt related to the
subordinated debenture program which commenced in November 1996.
The income tax provision (benefit) reflects the Company's estimated
effective annual tax rate. The income tax benefit of $375,000 in 1997 relates
to the elimination of deferred tax liabilities that will reverse as net
operating losses available for carryforward are utilized in future periods.
To the extent loss carryforwards are realized in the future, deferred taxes
will be reinstated.
Equity in earnings of the Company's unconsolidated subsidiary increased
$21,000 to $350,000 from $329,000 in the previous year which reflects higher
earnings at CorVel, offset by ENStar's reduced ownership interest in CorVel
following the January 1997 sale of stock. Further information with respect
to the results of operations of CorVel is contained in the Management's
Discussion and Analysis of Financial Condition and Results of Operations
section on its Form 10-Q and Form 10-K as filed with the Securities and
Exchange Commission.
-8-
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1997 vs. NINE MONTHS ENDED
SEPTEMBER 30, 1996
Consolidated revenues decreased $7.8 million, or 15.9%, to $41.3 million
from $49.1 million in 1996.
Revenues at Americable decreased approximately $8.4 million, or 21.9%, to
$29.8 million. Sales of networking products decreased approximately $7.7
million due primarily to lower demand at Enstar Networking. This includes
approximately $6.7 million in decreased sales of networking products to three
customers due to reduced demand which is expected to continue for the remainder
of the year. These customers accounted for approximately $9.6 million of
revenues in 1996. In addition, sales of bulk cable and other connectivity
products decreased approximately $2.6 million primarily due to lower demand from
contractors and resellers. Offsetting these decreases was increased service
revenues of approximately $680,000 from network integration and structured
wiring services and approximately $1.2 million due to higher network security
revenues at Enstar Networking as a result of its expanded focus on new service
offerings.
Revenues at Transition increased approximately $390,000, or 3.2%, to $12.6
million. Sales to domestic customers increased approximately $650,000, or 8.3%
to $8.5 million, which primarily is a result of the addition of new customers.
Sales to international customers were approximately $4.2 million, a decrease of
2.8% from the previous year. Sales to international customers accounted for
approximately 33% and 35% of net sales for the period ended September 30, 1997
and 1996, respectively.
Consolidated gross profit, as a percent of revenues, increased to 28% in
1997 as compared to 26.5% in 1996. Increased margins at Transition are
primarily due to higher sales of basic LAN products sold during the period.
Margins at Americable were relatively unchanged between years. ENStar expects
its gross profit margins to decline due to expected competitive pricing
pressures on products sold by both Americable and Transition.
The Company's selling, general and administrative expenses increased
approximately $2.3 million, or 18.5%, to $14.9 million from $12.6 million
in 1996.
-9-
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
Operating expenses at Americable increased approximately $1.6 million,
or 21.1%, for the period which reflects approximately $705,000 of increased
selling expenses primarily attributable to higher promotional expenses
related to the introduction of Enstar Networking along with the addition of
new sales personnel and related expenses. In addition, this increase reflects
approximately $610,000 of higher engineering expense due to the addition of
technical and engineering personnel along with increased recruiting and training
costs. General and administrative expenses increased approximately $270,000
due primarily to higher facility related expenses associated with the increased
level of personnel.
Americable expects that its selling expenses, as a percentage of
revenues, will increase during the remainder of 1997 through the addition of
sales and technical personnel and their related expenses. These anticipated
increases in operating expenses may result in continued operating losses at
Americable, if the company is unable to increase its sales volume and/or
gross profit margins.
Transition had increased operating expenses of approximately $620,000, or
14.6%, which reflects increased sales and marketing expenses of approximately
$560,000 associated with advertising and promotional activities along with the
addition of new product marketing personnel and related expenses. In an effort
to successfully develop and launch new product enhancements, Transition
anticipates the increased levels of spending on engineering, marketing and
promotional costs to continue throughout 1997. If such increased level of
spending does not result in the timely introduction of commercially successful
products, Transition may experience significantly reduced levels of sales growth
and operating results during the remainder of 1997.
Corporate expenses increased approximately $116,000, or 14.1%, to $939,000,
which primarily reflects severance related costs associated with a former
executive of Americable, in addition to higher costs related to the subordinated
debenture program.
Net interest expense increased $331,000, or 173%, to $522,000 from $191,000
in 1996, due primarily to higher levels of long-term debt related to the
subordinated debenture program which commenced in November 1996.
-10-
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
The income tax provision (benefit) reflects the Company's estimated
effective annual tax rate. The income tax benefit of approximately $1.3
million in 1997 relates to the elimination of deferred tax liabilities that
will reverse as net operating losses available for carryforward are utilized
in future periods. To the extent loss carryforwards are realized in the future,
deferred taxes will be reinstated.
Equity in earnings of the Company's unconsolidated subsidiary increased
$33,000 to $989,000 from $956,000 in the previous year which reflects higher
earnings at CorVel, offset by ENStar's reduced ownership interest in CorVel
following the January 1997 sale of stock. Further information with respect to
the results of operations of CorVel is contained in the Management's Discussion
and Analysis of Financial Condition and Results of Operations section on its
Form 10-Q and Form 10-K as filed with the Securities and Exchange Commission.
-11-
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
CAPITAL RESOURCES AND LIQUIDITY
ENStar has experienced cash flow deficits from operations and has
experienced fluctuations in its working capital, which are primarily
attributable to the change in receivables and inventories associated with
the fluctuation in sales and timing of payments on accounts payable. Cash
used in operations was approximately $1.3 million for the nine months ended
September 30, 1997, versus cash provided in operations of $640,000 in 1996.
ENStar does not have the use of cash generated by CorVel. Also, since
its initial public offering in 1991, CorVel has not declared any dividends and
has indicated that it does not anticipate doing so for the foreseeable future.
ENStar may from time to time, depending on market conditions and other factors,
sell a portion of its CorVel holdings. The ability of ENStar to sell its CorVel
holdings is limited, however, to sales pursuant to Rule 144 of the Securities
Act and the volume limitations thereof, and to private negotiated sales, which
may adversely affect the ability of ENStar to sell a large portion of the CorVel
holdings at a given time.
In November 1996, ENStar commenced a program (the "Debenture Program")
whereby it sells subordinated debentures of various maturities primarily to
individual investors. The debentures are offered on a continuous basis at
interest rates that change from time to time depending on market conditions.
Proceeds from long-term debt of approximately $14.5 million represent sales of
debentures under this program. At September 30, 1997, the Company had $15.5
million principal amount of subordinated debentures outstanding with a
weighted average interest rate of 9.7%.
Americable and Transition maintain revolving line of credit facilities
with their principal bank to provide borrowings up to $4 million and $4 million,
respectively, due in June 1998. Borrowings under these facilities are based on
eligible accounts receivable and inventory with interest at prime (8.5%) with
optional fixed rate advances at the London Interbank Offered Rate ("LIBOR") plus
2.5%. At September 30, 1997, there was approximately $2.3 million of
outstanding borrowings and approximately $3.1 million of available borrowings
under these credit facilities. In September 1997, Americable obtained the
necessary waivers from its bank to waive its compliance with certain financial
covenants and amend the terms of its credit agreement. Under the terms of the
amended credit agreement, ENStar is required to make capital contributions to
Americable to the extent Americable incurs pretax losses in excess of specified
levels.
-12-
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
CAPITAL RESOURCES AND LIQUIDITY (Continued)
In June 1997, the Company commenced a modified "Dutch Auction" self-
tender offer for the repurchase of up to 600,000 shares of its common stock.
This tender offer expired in July 1997, resulting in the Company's purchase
and retirement of 37,290 shares of its common stock at $6.25 per share or an
aggregate cost of approximately $233,000.
At November 10, 1997, ENStar had approximately $12.4 million of cash and
cash equivalents, excluding cash of its operating subsidiaries. The Company
believes that its available cash and cash equivalents along with the amounts
available under the credit facilities of its operating companies, will be
adequate to meet expected cash requirements, including capital expenditures and
potential acquisitions, for the remainder of the year.
-13-
<PAGE>
Enstar Inc.
INDEX TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Page
Condensed Consolidated Balance Sheets
as of September 30, 1997 and December 31, 1996 15
Condensed Consolidated Financial Statements of Operations
for the Three and Nine Months Ended September 30, 1997 and 1996 16
Condensed Consolidated Financial Statements of Cash Flows for
the Nine Months Ended September 30, 1997 and 1996 17
Notes to Condensed Consolidated Financial Statements 18
-14-
<PAGE>
Enstar Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-----------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 12,507 $ 824
Accounts receivable, net 9,408 8,785
Inventories 5,459 5,706
Prepaid expenses and other current assets 262 481
--------------------------------
Total current assets 27,636 15,796
Property and equipment, net 2,016 1,742
Investment in unconsolidated subsidiary 11,116 13,519
Goodwill, net 4,682 4,801
Other assets 207 157
--------------------------------
$ 45,657 $ 36,015
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 2,280 $ 1,310
Current portion of long-term debt 30 28
Accounts payable 4,866 4,101
Accrued expenses 5,992 4,830
--------------------------------
Total current liabilities 13,168 10,269
Long-term debt, net of current maturities 15,663 1,150
Deferred income taxes 1,418 3,649
Shareholders' Equity
Common stock, $.01 par value
100,000,000 shares authorized,
issued and outstanding 3,266,989
shares in 1997 and 3,304,279 in 1996 33 33
Additional paid-in-capital 16,711 20,710
Retained earnings (deficit) (1,336) 204
---------------------------------
Total shareholders' equity 15,408 20,947
----------------------------------
$ 45,657 $ 36,015
==================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-15-
<PAGE>
ENStar Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------
1997 1996 1997 1996
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 15,990 $ 17,358 $ 41,314 $ 49,151
Operating and product costs 11,764 12,644 29,717 36,147
-----------------------------------------------
Gross profit 4,226 4,714 11,597 13,004
Selling, general,
and administrative expenses 5,059 4,471 14,929 12,594
-----------------------------------------------
Operating income (loss) (833) 243 (3,332) 410
Interest expense, net (248) (51) (522) (191)
-----------------------------------------------
Income (loss) before income taxes
and equity in earnings of
unconsolidated subsidiary (1,081) 192 (3,854) 219
Income tax provision (benefit) (375) 70 (1,325) 122
-----------------------------------------------
Income (loss) before equity in
earnings of unconsolidated
subsidiaries (706) 122 (2,529) 97
Equity in earnings of
unconsolidated subsidiary 350 329 989 956
-----------------------------------------------
Net income (loss) (356) 451 (1,540) 1,053
===============================================
Net income (loss) per share $ (0.11) $ 0.14 $ (0.47) $ 0.32
===============================================
Weighted average shares
outstanding 3,279,419 3,313,266 3,295,999 3,307,300
===============================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-16-
<PAGE>
ENStar Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
Net cash provided (used)
in operating activities $ (1,262) $ 640
Cash flows for investing activities
Capital expenditures (977) (693)
Collection of notes receivable --- 258
Other (50) (95)
--------------------------------
Net cash used in investing activities (1,027) (530)
--------------------------------
Cash flow from financing activities
Proceeds from long-term debt 14,536 ---
Payments on long-term debt (21) ---
Proceeds from notes payable 45,792 50,238
Payments on notes payable (44,822) (51,143)
Additional capital investment
(constructive dividends) (1,280) 723
Purchase of common stock (233) ---
--------------------------------
Net cash provided (used) by financing
activities 13,972 (182)
--------------------------------
Net increase (decrease) in cash and
cash equivalents 11,683 (72)
Cash and cash equivalents
at beginning of period 824 246
--------------------------------
Cash and cash equivalents
at end of period $ 12,507 $ 174
==================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-17-
<PAGE>
ENStar Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business --
ENStar Inc. ("ENStar" or "the Company") is a holding company principally
comprised of two operating companies, Americable, Inc. ("Americable") and
Transition Networks, Inc. ("Transition"), and an equity investment in CorVel
Corporation ("CorVel"). ENStar was formerly an operating unit of North Star
Universal, Inc. ("North Star" or "NSU"). In November 1996, North Star
contributed the Operating Unit's assets to ENStar. On February 28, 1997,
North Star, in connection with its merger with Michael Foods, Inc. ("Michael
Foods"), distributed its ownership interest in ENStar to North Star's
Shareholders through a tax free dividend, thus causing ENStar to become a
publicly held company.
2. Basis of Presentation --
The accompanying consolidated financial statements prior to November 1996
were financial statements of the operating unit comprised of the entities and
assets described in Note 1. Operating unit equity was converted to
contributed capital at the time North Star contributed the capital stock of
Americable, Transition, and CorVel to ENStar. There was no change in the
historical cost basis of the assets and liabilities of any of the entities or
investment contributed to ENStar. The consolidated financial statements for
1996 include an allocation of general and administrative costs incurred by
North Star in the management of the operating companies. Management believes
these allocations are reasonable and present the operations of the Company
as though it had operated on a stand-alone basis. Previously, operating unit
equity included the historical equity of each entity, the net investment in
CorVel and intercompany payables owed to North Star. The net annual advances
between the former operating unit and North Star were considered additional
capital invested from, or constructive dividend to, North Star. Accordingly,
the accompanying consolidated financial statements may not necessarily be
indicative of the results that would have been obtained if the Company had
been operated as a stand-alone entity throughout all periods presented.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with regulation S-X, by ENStar without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The information furnished in the condensed consolidated financial statements
includes normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of such financial statements. Certain
information and footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although the
Company believes that the disclosures are adequate to make the information
-18-
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
presented not misleading, it is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
Results for the nine months ended September 30 may not necessarily be
indicative of the results to be expected for the full year.
3. Investment in Unconsolidated Subsidiary --
The Company's unconsolidated subsidiary consists of its investment in
CorVel Corporation ("CorVel"). At September 30, 1997, ENStar owned 1,025,000
shares, or an approximate 24.5% ownership, in CorVel. The Company's investment
in CorVel is accounted for as an unconsolidated subsidiary using the equity
method of accounting. CorVel has a fiscal year ended March 31. The following
is summarized balance sheet and income statement information of the Company's
unconsolidated subsidiary as of, and for the nine month period ended September
30, 1997 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 37,166
Noncurrent assets 20,890
Current liabilities 11,086
Noncurrent liabilities 1,644
Revenues 100,400
Gross profit 18,764
Net income 6,861
</TABLE>
In January 1997, ENStar, at the direction of North Star, sold 200,000
shares of CorVel for approximately $5.1 million cash. The proceeds from the
sale were distributed to and retained by North Star. The book value of the
shares sold was approximately $1.4 million, net of deferred taxes, and has
been reflected as a dividend to North Star for the period ended September 30,
1997. In addition, as a result of other equity transactions of CorVel, ENStar
decreased its investment in unconsolidated subsidiary by approximately
$1.8 million, additional paid-in capital by $1.1 million, and deferred income
taxes by $740,000 for the nine months ended September 30, 1997. At September
30, 1997, the value of the Company's investment in CorVel, based on the closing
market price, was approximately $39.2 million.
-19-
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. Inventories --
Inventories are stated at the lower of average cost (first-in, first-out)
or market. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------------------------
<S> <C> <C>
Finished goods $ 3,823 $ 3,285
Purchased parts 1,636 2,421
--------------------------------
$ 5,459 $ 5,706
--------------------------------
--------------------------------
</TABLE>
5. Accrued Expenses -
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------------------------
<S> <C> <C>
Payroll and related benefits $ 963 $ 701
Insurance reserves 1,077 968
Discontinued operations 2,000 2,000
Other 1,952 1,161
--------------------------------
$ 5,992 $ 4,830
--------------------------------
--------------------------------
</TABLE>
-20-
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Net Income (Loss) Per Share --
Net income (loss) per share for 1997 was based on the average number of
shares outstanding during the period after giving effect to the assumed
exercise of outstanding stock options, except where the effects are
antidilutive.
Net income per share for the three and nine months ended September 30, 1996
was computed based on the 9,939,800 and 9,921,900 weighted average number of
shares of North Star common stock outstanding after giving effect to the assumed
exercise of North Star's outstanding stock options. This weighted average
number of shares was adjusted to reflect the distribution of ENStar common
stock to North Star shareholders whereby one share of ENStar common stock was
issued to each holder of three shares of North Star common stock.
7. New Accounting Pronouncement --
The FASB has issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which is effective for financial statements issued after
December 15, 1997. Early adoption of the new standard is not permitted. The
new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The effect on the
Company's financial statements of adopting this new standard has not been
determined.
8. Income Taxes --
Deferred income taxes arise from temporary differences between financial
and tax reporting. To the extent the Company's financial reporting basis in
its investment in unconsolidated subsidiary exceeds its tax basis, and is not
expected to be realized in a tax-free manner, the Company records a deferred
tax liability. At September 30, 1997, the deferred tax liability includes a
cumulative tax effect of approximately $4.2 million for the differences in the
financial reporting and tax basis of the Company's investment in CorVel.
9. Contingencies -
In connection with the merger of North Star and Michael Foods, ENStar,
through the operation of an indemnification agreement, is contingently liable
for any, and all, liabilities arising from the activities of North Star,
through, and including, the reorganization of North Star and Michael Foods.
Under the terms of the indemnification agreement, the Company is required to
maintain certain minimum levels of market capitalization or net worth for a
period of five years.
-21-
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. Reclassifications --
Certain 1996 amounts have been reclassified to conform with the financial
statement presentation used in 1997. Such reclassifications had no impact on
previously reported retained earnings or net income.
-22-
