<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. 2
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 August 14, 1997
<PAGE>
Enstar Inc. and Subsidiaries
INDEX TO PROSPECTUS SUPPLEMENT NO. 2
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. and Subsidiaries
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> Six Months Ended
<CAPTION> June 30,
Unaudited
1997 1996
---------------------
<S> <C> <C>
OPERATIONS
Revenues $ 25,324 $ 31,793
Operating income (loss) (2,499) 167
Net income (loss) (1,184) 602
Income (loss) per share (.36) .18
Ratio of earnings to fixed charge (4.43)X 1.09X
June 30,
1997 December 31,
(Unaudited) 1996
----------------------
FINANCIAL POSITION
Total current assets $ 26,735 $ 15,796
Long-term debt, net of current maturities 14,628 1,150
Shareholders' equity 16,233 20,947
</TABLE>
-3-
<PAGE>
Enstar Inc. and Subsidiaries
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. 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. and Subsidiaries
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 June 30,
1997, ENStar owned 1,025,000 shares of common stock of CorVel Corporation
("CorVel"), or an approximate 24% 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
Universal, Inc. ("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. and Subsidiaries
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 six months ended June 30 (in
thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------
1997 1996 1997 1996
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Americable $ 9,555 $ 12,819 $ 17,937 $ 24,920
Transition 4,163 3,992 8,038 7,643
Eliminations (326) (380) (651) (770)
--------------------------------------------
$ 13,392 $ 16,431 $ 25,324 $ 31,793
============================================
Gross Profit
Americable $ 2,138 $ 2,752 $ 4,184 $ 5,484
Transition 1,664 1,376 3,187 2,806
--------------------------------------------
$ 3,802 $ 4,128 $ 7,371 $ 8,290
============================================
Selling, General and Administrative Expenses
Americable $ 3,220 $ 2,553 $ 5,974 $ 4,973
Transition 1,467 1,404 3,183 2,656
Corporate 357 287 713 494
--------------------------------------------
$ 5,044 $ 4,244 $ 9,870 $ 8,123
============================================
Operating Income (Loss)
Americable $ (1,082) $ 199 $ (1,790) $ 511
Transition 197 (28) 4 150
Corporate (357) (287) (713) (494)
--------------------------------------------
$ (1,242) $ (116) $ (2,499) $ 167
============================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-6-
<PAGE>
Enstar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 vs. THREE MONTHS ENDED JUNE 30, 1996
Consolidated revenues decreased $3.0 million, or 18.5%, to $13.4 million
from $16.4 million in 1996.
Revenues at Americable decreased approximately $3.2 million, or 25.5%, to
$9.6 million. This includes approximately $2.1 million in decreased sales of
networking products to two customers due to reduced demand which is expected to
continue for the remainder of the year. These customers accounted for
approximately $2.7 million of revenues in 1996. In addition, sales of bulk
cable and other connectivity products decreased approximately $660,000,
primarily due to lower demand from contractors and resellers. Offsetting these
decreases was approximately $280,000 of increased internal service revenues due
to expanded focus on service offerings at Enstar Networking Corporation.
Revenues at Transition increased approximately $171,000, or 4.3%, to $4.2
million. Sales to domestic customers increased approximately $250,000, or 10%,
to $2.8 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 3% from the previous year. Sales
to international customers accounted for approximately 33% and 35% of net sales
for the period ended June 30, 1997 and 1996, respectively.
Consolidated gross profit, as a percent of revenues, increased to 28.4% in
1997 as compared to 25.1% in 1996. Margins at Transition increased to 40% from
34.5% due primarily to higher sales of new product enhancements of its basic LAN
products. In addition, increased margins at Americable are primarily
attributable to the higher level of internal service revenues.
The Company's selling, general and administrative expenses increased
$800,000, or 18.9%, to $5 million from $4.2 million in 1996.
-7-
<PAGE>
Enstar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
Operating expenses at Americable increased approximately $667,000, or
26.1%, for the period which reflects approximately $295,000 of higher
engineering expense due to the addition of technical and engineering personnel
and higher training costs. In addition, this increase reflects approximately
$250,000 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. General and
administrative expenses increased approximately $122,000 due primarily to higher
facility related expenses associated with the increased level of personnel.
Operating expenses at Transition increased approximately 4.5%, which
reflects increased sales and marketing expenses of approximately $160,000
associated with advertising and promotional activities along with the addition
of new product marketing personnel and related expenses. This was offset by
approximately $100,000 of decreased engineering expenses which reflects a
reduction in development costs and personnel associated with Transition's
advanced LAN products.
Corporate expenses increased approximately $70,000, or 24.4%, to $357,000
which reflect higher costs related to the subordinated debenture program.
Net interest expense increased $116,000, or 157%, to $190,000 from $74,000
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 $500,000 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
$7,000 to $330,000 from $323,000 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 their
Form 10-Q and Form 10-K as filed with the Securities and Exchange Commission.
-8-
<PAGE>
Enstar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
SIX MONTHS ENDED JUNE 30, 1997 vs. SIX MONTHS ENDED JUNE 30, 1996
Consolidated revenues decreased $6.5 million, or 20.3%, to $25.3 million
from $31.8 million in 1996.
Revenues at Americable decreased approximately $7 million, or 28%, to $17.9
million. This includes approximately $5.1 million in decreased sales of
networking products to two customers due to reduced demand which is expected to
continue for the remainder of the year. These customers accounted for
approximately $6.6 million of revenues in 1996. In addition, sales of bulk
cable and other connectivity products decreased approximately $1.6 million
primarily due to lower demand from contractors and resellers. Offsetting these
decreases was approximately $465,000 of increased internal service revenues due
to expanded focus on service offerings at Enstar Networking Corporation.
Revenues at Transition increased approximately $395,000, or 5.2%, to $8
million. Sales to domestic customers increased approximately $250,000, or 11.5%
to $5.3 million, which primarily is a result of the addition of new customers.
Sales to international customers were approximately $2.7 million, a decrease of
1% from the previous year. Sales to international customers accounted for
approximately 34% and 36% of net sales for the period ended June 30, 1997 and
1996, respectively.
Consolidated gross profit, as a percent of revenues, increased to 29.1% in
1997 as compared to 26.1% in 1996. Increased margins at Americable are
primarily attributable to the higher level of internal service revenues.
Increased margins at Transition are primarily due to higher sales of basic LAN
products sold during the period. 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 $1.8 million, or 21.5%, to $9.9 million from $8.1 million in 1996.
-9-
<PAGE>
Enstar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
Operating expenses at Americable increased approximately $1 million, or
20.1%, for the period which reflects approximately $540,000 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
$375,000 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 $85,000 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 lower operating profits at Americable, if the
company is unable to increase its sales volume and/or gross profit margins.
Transition had increased operating expenses of approximately $527,000, or
19.8%, which reflects increased sales and marketing expenses of approximately
$455,000 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 $219,000, or 44%, to $713,000,
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 $134,000, or 97%, to $274,000 from $140,000
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. and Subsidiaries
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 $950,000 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
$12,000 to $639,000 from $627,000 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 their
Form 10-Q and Form 10-K as filed with the Securities and Exchange Commission.
-11-
<PAGE>
Enstar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND 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 $656,000 for the six months ended June 30, 1997, versus cash used
in operations of $966,000 in 1996.
ENStar does not have the use of cash generated by CorVel and its
subsidiaries. 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 $13.5 million represent sales of
debentures under this program. At June 30, 1997, the Company had $14.4 million
principal amount of subordinated debentures outstanding with a weighted average
interest rate of 9.4%.
Americable and Transition maintain revolving line of credit facilities with
their principal bank to provide borrowings up to $9 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 June 30, 1997, there was approximately $2.2 million of outstanding
borrowings and approximately $2.5 million of available borrowings under these
credit facilities. At June 30, 1997, Americable was not in compliance with
certain financial covenants of this credit agreement. Management is currently
in the process of negotiating an amendment to this agreement and obtaining the
necessary waivers from its bank.
-12-
<PAGE>
Enstar Inc. and Subsidiaries
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 of 35,903
shares of its common stock at $6.25 per share or an aggregate cost of
approximately $224,000.
At August 8, 1997, ENStar had approximately $12.5 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. and Subsidiaries
INDEX TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Page
Condensed Consolidated Balance Sheets
as of June 30, 1997 and December 31, 1996 15
Condensed Consolidated Financial Statements of Operations
for the Six Months Ended June 30, 1997 and 1996 16
Condensed Consolidated Financial Statements of Cash Flows for
the Six Months Ended June 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>
June 30, December 31,
1997 1996
------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 12,584 $ 824
Accounts receivable, net 8,249 8,785
Inventories 5,618 5,706
Prepaid expenses and other current assets 284 481
------------------------------
Total current assets 26,735 15,796
Property and equipment, net 1,924 1,742
Investment in unconsolidated subsidiary 10,924 13,519
Goodwill, net 4,722 4,801
Other assets 220 157
------------------------------
$ 44,525 $ 36,015
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 2,232 $ 1,310
Current portion of long-term debt 29 28
Accounts payable 4,002 4,101
Accrued expenses 5,685 4,830
------------------------------
Total current liabilities 11,948 10,269
Long-term debt, net of current maturities 14,628 1,150
Deferred income taxes 1,716 3,649
Shareholders' Equity
Common stock, $.01 par value 100,000,000
shares authorized, issued and outstanding
3,304,279 shares in 1997 and 1996 33 33
Additional paid-in-capital 17,180 20,710
Retained earnings (deficit) (980) 204
------------------------------
Total shareholders' equity 16,233 20,947
------------------------------
$ 44,525 $ 36,015
==============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-15-
<PAGE>
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 13,392 $ 16,431 $ 25,324 $ 31,793
Operating and product costs 9,590 12,303 17,953 23,503
-----------------------------------------
Gross profit 3,802 4,128 7,371 8,290
Selling, general, and
administrative expenses 5,044 4,244 9,870 8,123
-----------------------------------------
Operating income (loss) (1,242) (116) (2,499) 167
Interest expense, net (190) (74) (274) (140)
Income (loss) before income taxes
and equity in earnings of
unconsolidated subsidiary (1,432) (190) (2,773) 27
Income tax provision (benefit) (500) (52) (950) 52
-----------------------------------------
Income (loss) before equity in earnings
of unconsolidated subsidiaries (932) (138) (1,823) (25)
Equity in earnings of
unconsolidated subsidiary 330 323 639 627
-----------------------------------------
Net income (loss) (602) 185 (1,184) 602
=========================================
Net income (loss) per share $ (0.18) $ 0.06 $ (0.36) $ 0.18
=========================================
Weighted average shares outstanding 3,304,279 3,313,133 3,304,279 3,304,333
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-16-
<PAGE>
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Net cash used in operating activities $ (656) $ (966)
Cash flows for investing activities
Capital expenditures (641) (542)
Other (63) 79
----------------------------
Net cash used in investing activities (704) (463)
Cash flow from financing activities
Proceeds from long-term debt 13,492 384
Payments on long-term debt (14) ---
Proceeds from notes payable 29,556 33,596
Payments on notes payable (28,634) (32,675)
Constructive dividends (1,280) ---
Net cash provided by financing activities 13,120 1,305
Net increase (decrease) in cash and
cash equivalents 11,760 (124)
Cash and cash equivalents
at beginning of period 824 246
Cash and cash equivalents
at end of period $ 12,584 $ 122
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-17-
<PAGE>
ENStar Inc. and Subsidiaries
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 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
-18-
<PAGE>
ENStar Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
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 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 six months ended June 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 June 30, 1997, ENStar owned 1,025,000 shares, or an
approximate 24% 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 six month period ended June 30,
1997 (in thousands):
<TABLE>
<S> <C>
Current assets $ 37,070
Noncurrent assets 20,464
Current liabilities 10,839
Noncurrent liabilities 1,553
Revenues 65,717
Gross profit 12,289
Net income 4,480
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 during the period ended March 31, 1997.
-19-
<PAGE>
ENStar Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
In addition, as a result of other equity transactions of CorVel, ENStar
decreased its investment in unconsolidated subsidiary by approximately $900,000,
additional paid-in capital by $540,000, and deferred income taxes by $360,000.
At June 30, 1997, the value of the Company's investment in CorVel, based on the
closing market price, was approximately $29.5 million.
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>
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------------------------------
<S> <C> <C>
Finished goods $ 4,328 $ 3,285
Purchased parts 1,290 2,421
--------------------------------
$ 5,618 $ 5,706
</TABLE>
5. Accrued Expenses -
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------------------------------
<S> <C> <C>
Payroll and related benefits $ 692 $ 701
Insurance reserves 1,010 968
Discontinued operations 2,000 2,000
Other 1,983 1,161
--------------------------------
$ 5,685 $ 4,830
</TABLE>
-20-
<PAGE>
ENStar Inc. and Subsidiaries
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 six months ended June 30, 1996 was
computed based on the 9,939,000 and 9,913,000 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 June 30, 1997, the deferred tax liability includes a cumulative
tax effect of approximately $4.1 million for the differences in the financial
reporting and tax basis of the Company's investment in CorVel.
-21-
<PAGE>
ENStar Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
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.
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-
