============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-29026
ENSTAR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MINNESOTA 41-1831611
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6479 CITY WEST PARKWAY
EDEN PRAIRIE, MN 55344
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 941-3200
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.25
PAR VALUE
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X . NO __ .
THE AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AT MARCH 20, 1998 WAS APPROXIMATELY $9.4 MILLION BASED ON THE
LAST SALE PRICE FOR THE COMMON STOCK AS REPORTED BY THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS AUTOMATED QUOTATION SYSTEM ON THAT DATE.
AT MARCH 20, 1998, 3,266,989 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
CERTAIN PORTIONS OF THE DOCUMENTS LISTED BELOW HAVE BEEN INCORPORATED BY
REFERENCE INTO THE INDICATED PART OF THIS FORM 10-K.
<TABLE>
<CAPTION>
DOCUMENT INCORPORATED PART OF FORM 10-K
--------------------- -----------------
<S> <C>
PROXY STATEMENT FOR 1998 ANNUAL MEETING OF SHAREHOLDERS ITEMS 10, 11, 12 AND 13
</TABLE>
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
================================================================================
<PAGE>
PART I
ITEM 1. BUSINESS.
INTRODUCTION
THE COMPANY
ENStar Inc., a Minnesota corporation formed in 1995 ("ENStar" or the
"Company"), is a holding company. Its principal subsidiaries are Americable,
Inc. ("Americable"), Enstar Networking Corporation ("Enstar Networking") and
Transition Networks, Inc. ("Transition"). Americable is a distributor of
premise wiring, connectivity products and low-end networking electronics.
Enstar Networking is a network integrator that provides services to design,
build, maintain, and protect corporate network infrastructures. Transition is
a manufacturer of connectivity devices used in local area network ("LAN")
applications. ENStar also owns 1,025,000 shares of common stock of CorVel
Corporation ("CorVel"), or an approximate 25% interest in CorVel, a provider
of cost containment and managed care services designed to address the medical
costs of workers' compensation.
ENStar was formerly a wholly owned subsidiary of North Star Universal, Inc.
("NSU"). In connection with transactions (the "Reorganization Transactions")
consummated pursuant to a reorganization agreement entered into between NSU and
Michael Foods, Inc. ("Michael"), NSU transferred, on or prior to February 28,
1997, 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) NSU merged with Michael and
(ii) the outstanding common stock of ENStar was distributed to the shareholders
of NSU (the "Distribution"). As a result of the Distribution, ENStar ceased to
be a subsidiary of NSU and became a publicly owned company whose stock is quoted
on the Nasdaq National Market under the symbol "ENSR." In connection with the
Reorganization Transactions, ENStar agreed to indemnify Michael against certain
losses arising from the Reorganization Transactions and to assume certain
liabilities of Michael. See "-Reorganization Transactions."
The Company directly employed five management and administrative employees
as of March 20, 1998.
UNCONSOLIDATED SUBSIDIARY
CorVel. Since its initial public offering in June 1991, CorVel has been
operated as an independent company. As a less-than-majority-owned subsidiary of
ENStar, CorVel's operations have not been consolidated with ENStar, and ENStar's
investment in CorVel is accounted for under the equity method of accounting.
The following summary of CorVel's business has been prepared from information
reported by CorVel. Additional information regarding CorVel is available from
the reports and other documents prepared and filed by CorVel with the
Commission.
-1-
<PAGE>
CorVel is an independent nationwide provider of medical cost containment
and managed care services designed to address escalating medical costs.
CorVel's services include preferred provider organizations, automated medical
fee auditing, medical case management, independent medical examinations,
utilization review and vocational rehabilitation services. Such services are
provided to insurance companies, third party administrators and employers to
assist them in managing the medical costs and monitoring the quality of care
associated with medical claims.
Since its initial public offering in June 1991, Jeffrey J. Michael and
Peter E. Flynn, officers of ENStar, have been members of the Board of Directors
of CorVel. Based on the past service of Messrs. Michael and Flynn on CorVel's
Board of Directors and the Company's position as a significant shareholder of
CorVel, the Company believes that Messrs. Michael and Flynn will continue to
serve as members of the CorVel Board of Directors and be nominated for
re-election to the CorVel Board at the next annual meeting of stockholders of
CorVel. There are no agreements, however, between ENStar and CorVel or any of
CorVel's stockholders requiring the nomination of Messrs. Michael and Flynn or
any designees of ENStar for election as directors of CorVel.
In connection with the Distribution, ENStar transferred all of its CorVel
Common Stock to Americable to satisfy certain federal income tax requirements
relating to the Reorganization Transactions. Neither ENStar nor Americable has
any agreement with CorVel requiring CorVel to register the shares of CorVel
Common Stock. In the absence of registration of its CorVel Common Stock, the
ability of ENStar to sell the holdings of CorVel Common Stock will be limited 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 holdings of CorVel Common Stock at a given
time.
OPERATING SUBSIDIARIES
GENERAL
Americable. Americable was organized as a Minnesota corporation in 1981
and was acquired by NSU in December 1986. Americable is a distributor of
premise wiring, connectivity products, and low-end networking electronics. As a
value-added distributor, Americable supplies a wide array of voice and data
communication related products such as cable (both copper and fiber optic),
cable assemblies, components (blocks, jacks, connectors, patch cords, patch
panels) and networking hardware. The principal focus of Americable's
distribution business, is to provide quality products, prompt reliable
-2-
<PAGE>
delivery of such products and strong customer service both before and after the
products are sold. Americable sells to a wide range of customers throughout the
United States in the voice and data communications aftermarket, including
contractors, resellers, systems integrators, and installers.
Americable also manufactures a wide variety of cable assemblies,
subassemblies and specialty products for its customers. Some of these products
are manufactured to standard specifications for sale by Americable through its
distribution business, others are custom designed and manufactured by Americable
to customer specifications. These customer-designed products are manufactured
for both end-users and OEMs.
Enstar Networking. Enstar Networking is a network integrator that provides
services to design, build, maintain and protect corporate network
infrastructures. The company's mission is "to provide our clients with
technical services and solutions that improve the performance and integrity of
their networks." The company offers customized, integrated solutions through
three strategic business units:
Security Integration Group (SIG) is a team of consultants that provide
information security consulting services for customers using Internet
and intranetwork applications. These services include policy
development, architecture design, business impact analysis, access,
auditing, continuity and custom training services.
Network Integration Services (NIS) include a variety of customized,
integrated solutions to build, manage and maintain high performance
local area networks ("LAN") and wide area networks ("WAN"). These
service offerings include design services such as requirements
definition and project planning along with the implementation and
support of a select platform of networking hardware and software.
Enstar Networking also provides a variety of solutions to remotely
manage and maintain LAN's and WAN's for its customers.
Structured Wiring Services (SWS) involve the design and installation
of network cabling infrastructures for voice and data communications.
Through a quality-trained team of project managers and technicians,
Enstar Networking provides a comprehensive offering of cabling design,
installation, certification and documentation services for category 5
copper and fiber optic systems.
Enstar Networking previously operated as the network integration business
of Americable. As part of its business strategy since the early 1990's,
Americable had expanded the level of network integration services provided to
end-user customers such as network design, implementation, management and
maintenance. Enstar Networking was organized in April 1997 to distinctly focus
the networking service activities from the traditional distribution and
manufacturing operations of Americable.
-3-
<PAGE>
Transition Networks. Transition Networks develops and distributes media,
rate and transport conversion products that enable bandwidth requirements.
Transition's products are designed to protect the investment made in network
infrastructure while optimizing performance capacity. Focused on providing
conversion tools between multiple technologies such as Ethernet to Fast
Ethernet, FDDI, ATM, and Gigabit, the company takes a unique approach to
conversion technology. All of its conversion products are designed to be
transparent to the network. The principle of conversion technology is to make
the necessary adaptation while not affecting the performance, nature or the
appearance of the network to the users or devices.
Physical connectivity devices enable computing and other electronic devices
to communicate over a LAN. These devices include managed and unmanaged hubs,
transceivers, media converters and other related fiber based networking devices.
Transition's products include media, rate, and protocol conversion and related
LAN products. Transition sells its products to a number of volume distributors
and resellers throughout the United States and 50 countries worldwide.
Historically, in excess of 90% of Transition's revenues have been derived
from the sale of its media conversion and related LAN products. These products
have life cycles of 18 to 36 months and are generally sold based on price,
availability and functionality. More recently, Transition has focused its
product development and marketing efforts on expanding its conversion technology
based products.
Media Conversion - connecting unlike media types, predominantly copper
to fiber;
Rate Conversion - connecting unlike rates within a protocol, such as
Ethernet to Fast Ethernet; and
Transport Conversion - connecting unlike transport protocols, such as
Fast Ethernet to FDDI, within the LAN environment.
In addition, the company provides related LAN products, such as hubs and
transceivers, that integrate with the conversion technologies to enable
network expansion. Transition's future operations are highly dependent on its
ability to introduce conversion technology based products on a timely basis that
meet customer demands.
-4-
<PAGE>
BUSINESS STRATEGY
Americable. Americable's objective is to be a leading provider of
value-added connectivity products throughout the United States. To meet this
goal, Americable believes it must seek to maintain its current customer
relationships and expand its customer base in the regions in which it operates,
develop strong relationships with its key suppliers, and develop and enhance its
value-added offerings.
During 1997, approximately 2,500 customers purchased products from
Americable. Management at Americable believes that preserving and enhancing
these relationships is a constant priority. Continuous quality improvement in
its operations along with expansion of its fiber optic product offerings are
some of the means that Americable utilizes to enhance its customer
relationships.
Management at Americable also believes that developing strong relationships
with the leading manufacturers allows Americable to offer its customers name
brand products that provide the best value in meeting their needs. Americable
believes that utilizing a select range of suppliers allows it to provide
superior customer service because its technical personnel are more familiar with
the products sold and because such high quality products are generally more
reliable. Further, such strong relationships result in greater continuity of
product supply.
Enstar Networking. Enstar Networking's objective is to be a leading
provider of information technology (IT) services to manage and secure corporate
networks. Its focus is on medium to large sized enterprises that deploy complex
network structures involving public networks such as the Internet for critical
business applications. Enstar Networking believes that its expertise in the
design and implementation of networks along with its specialized understanding
of security requirements uniquely positions them as a "One Company, One Call"
provider for its customers. To achieve its objectives, the company is pursuing
the following strategies:
- Implement its recently developed suite of customized security
services including assessment, policy development, access and
authentication, auditing, business continuation and training in
each of its key regional service centers. Enstar Networking plans
to continue to add new services focused on remote security
management and enhance other service offerings to meet its
customer's security needs within the context of an evolving
enterprise environment.
-5-
<PAGE>
- Build its consulting services organization. The company's Security
Integration Group was formed in April 1997 and currently provides
fee-based, on-site consulting services that can provide an
evaluation of existing network security systems, analyze potential
exposures to security breaches and suggest corrective action.
During 1998, the company plans to expand the number of SIG
consultants in order to service its customers' demand for security
services.
- Develop and market a service offering which provides network
monitoring capabilities to customers looking to outsource the
management of its LAN / WAN. Through the company's existing
Technical Assistance Center (TAC) and staff of system engineers, it
can provide remote network monitoring, remote security management
and network administration.
- Create close and long-term relationships with a focused group of
customers to develop a source for repeatable business and as a
result of high satisfaction ratios, a source of business referrals.
During 1997, approximately 2,000 customers purchased products or
services from Enstar Networking. In 1998, the company intends
to concentrate its sales and marketing efforts on a more focused
number of customers in order to provide its full array of service
offerings and develop more successful long-term customer
relationships.
- Maintain strong relationships with the leading manufacturers in the
networking industry in order to offer its customers high quality
solutions. Enstar Networking has developed relationships with Bay
Networks, Inc, Check Point Software Technologies, Ltd., Cisco
Systems, Inc., Internet Security Systems, Inc. and Security
Dynamics, Inc.
- Expand its market presence and geographic coverage through the
addition of new sales, engineering and technical personnel in new
regional locations, primarily focused in the Southwest and Midwest.
The company's strategy is to open smaller regional offices
consisting of a few sales, engineering and consulting personnel
that are supported by its larger regional service centers in Dallas,
Texas and Minneapolis, Minnesota.
-6-
<PAGE>
Transition. The market for Transition's products is characterized by rapid
technological change, constantly evolving industry standards and rigorous
competition with respect to timely product innovation. Because the introduction
of products embodying new technology and the emergence of new industry standards
can render existing products obsolete and unmarketable, Transition believes that
its future success will depend upon its ability to develop, manufacture and
market new products and enhancements to existing products on a cost-effective
and timely basis. Transition seeks to identify niche market opportunities for
new or enhanced products and quickly respond by offering a new or enhanced
product that may have greater capabilities, better functionability or
flexibility, greater ease of use or equivalent capabilities or functionability
but a lower price point than other competitive products.
As LANs have proliferated, demand for multi-vendor interoperability has led
to industry standard network protocols and access methods such as Ethernet, Fast
Ethernet, Token Ring, and Fiber Distributed Data Interface ("FDDI"). Transition
has developed the majority of its LAN products using industry standards,
primarily Ethernet. Ethernet's cabling media has evolved from coaxial cable to
its associated 10BaseTL fiber optic cabling. Management at Transition believes
that the LAN products market will continue to be driven by the migration of
end-users to new applications that demand more speed, distance, and bandwidth.
Accordingly, Transition's research and development efforts have been targeted
at high speed (100Mbs, Gigabit) LANs and the integration of installed legacy
systems to these new platforms.
PRODUCTS AND SERVICES
Americable. The following is a summary of Americable's sales by principal
product group for 1997:
<TABLE>
<CAPTION>
AS A PERCENT OF SALES
---------------------
<S> <C>
Networking Products........................... 28%
Cable Assemblies.............................. 38%
Bulk Cable.................................... 14%
Other Connectivity Products................... 20%
</TABLE>
-7-
<PAGE>
Americable maintains a wide variety of high-quality products in its
inventory. Product inventory includes connectivity products such as bulk
cable, connectors, patch panels, racks and other cable accessories. As a
distributor, Americable generally inventories products from multiple
manufacturers. Principal manufacturers of connectivity products include
Berk-Tek, Inc., Amp Incorporated, General Cable Corp., The Siemon Company and
Leviton Manufacturing, Inc.
Americable also maintains an integrated, real-time, on-line computerized
system for order entry, fulfillment and inventory control. This on-line
computer system allows sales personnel to advise customers over the phone of
product specifications, availability and order status. All orders are normally
shipped within 24 hours of receipt and, when necessary, can be shipped on a
"same-day" basis.
Americable seeks to add value for its customers by providing superior
customer service. All of Americable's sales representatives are trained to
assist customers in product selection. The sales representatives are supported
by technical personnel who have a broad range of expertise in various cabling
and networking technologies.
Americable, working to its customers' specifications, can manufacture
custom designed products such as copper, fiber-optic, small computer system
interface (SCSI) and AS/400 cable assemblies and subassemblies. All Americable
manufactured products are subject to strict quality control standards to insure
that they are of the same high quality as other, vendor manufactured,
distributed products.
-8-
<PAGE>
Enstar Networking. The following is a summary of the company's revenues by
principal business unit for 1997:
<TABLE>
<CAPTION>
PERCENT
OF REVENUES
-----------
<S> <C>
Security Integration Group
Products and Consulting............ 5%
Network Integration Services
Products........................... 49%
Services........................... 3%
Structured Wiring Services
Products........................... 29%
Installation and consulting........ 14%
</TABLE>
Revenues from services and installation in 1997 represented 17% of Enstar
Networking's total revenues, of which approximately 9% represents services
performed by Enstar Networking personnel. The remaining portion of these
services are rendered primarily through subcontractors engaged by Enstar
Networking. Enstar Networking expects to continue utilizing the services of
outside contractors in addition to its internal personnel in meeting its
customers' needs. Enstar Networking believes there are opportunities to
increase Enstar Networking's overall gross margins by increasing the volume
of services that it currently offers to its customers and intends to focus
on increasing its service revenues.
In an effort to offer its customers a "One Company, One Call" solution,
each of the above products and service groups is delivered through a single
sales organization. Each unit works in concert with the others to leverage
the company's service offerings across its customer base. Set forth below is a
description of each business unit's operations.
Security Integration Group
Enstar Networking has been involved in the network security market
since June 1996 when it became an authorized value-added reseller of Check
Point Software Technologies, Ltd.'s ("Check Point") FireWall-1-TM. In
-9-
<PAGE>
April 1997, it expanded its network security operation through the creation
of SIG which offers the following consulting services:
Assessment Services - This includes services to discover and map out
a customer's existing network and security hardware configuration and
provide suggestions for the development of network security plans.
These services can also involve a Business Impact Analysis which
involves an overall review of a customer's general information
security and basic recommendations on how a customer can improve their
overall information security practices.
Policy Development Services - These services include any consulting
activities that assist a customer in the development, approval
process, training and implementation of a corporate-wide information
security policy. Enstar Networking will develop a customized
implementation of policies and standards on areas such as data
confidentiality, password management and control, equipment use and
accountability, anti-virus, Internet or e-mail use policy, physical
security and remote access.
Access Services - These services involve the planning, installation
and maintenance of products that assist customers with policy and
security architecture enforcement including firewalls, encryption,
identification, authorization, and content security. Enstar Networking
is an authorized reseller of the Check Point Fire Wall-1, a security
product offered by Check Point Software Technologies, Ltd., in
addition to products offered by Internet Security Systems Inc.
and Security Dynamics Technologies, Inc.
Auditing Services - This includes scanning and other services that
provide customers analysis of their network security and access
control to their various operating systems.
Continuity Services - This represents consulting services to assist
customers in the development, approval, training, and
implementation of a corporate-wide Disaster Recovery or Business
Continuation Plan. A Business Continuation Plan is a document
developed in coordination with clients to help assure the successful
recovery of their critical business units in the event of a
catastrophe or disruption of business.
Customized Training Services - These services include any information
security training or awareness related services rendered to a
customer. Enstar Networking is an authorized training center in
Dallas, Texas and Minneapolis, Minnesota for Check Point Certified
System Administrator and Check Point Certified System Engineer
training programs.
-10-
<PAGE>
Network Integration Services
Enstar Networking offers the following customized networking services:
Network Discovery and Analysis - Through the combination of its
advanced engineering and project management teams, Enstar Networking
assists its customers with network discovery programs including
requirements design, detailed design, on-site hardware survey and
mapping, network baseline audits and implementation planning. These
services are designed to provide a customer with a broad overview of
their current networking capabilities and prepare a "roadmap" to help
them move to future technologies. These services are either offered
as part of an overall project or arranged separately as a billable
service.
Network Implementation - Enstar Networking supplies, implements and
supports a select range of suppliers of electronics and software
platforms from manufacturers such as Cisco Systems Inc., Bay Networks,
Inc., Microsoft Corp. and Compaq Computer Corporation. Enstar
Networking's line of network products include concentrators, hubs,
switches and routers for both existing and emerging technologies such
as Ethernet, Token Ring, FDDI, Fast Ethernet and Asynchronous Transfer
Mode ("ATM"). Enstar Networking purchases a number of networking
products through large distributors such as Tech Data Corporation,
Gates/Arrow and Ingram Micro, Inc.
In addition, Enstar Networking provides and installs network
management systems that provide its customers with the capability of
network troubleshooting, diagnostics, security, optimization and
proactive network maintenance all from a single workstation. Enstar
Networking also offers remote access products and services that allow
the end-user to operate outside of the office while still being able
to connect to their LAN.
Network Maintenance - Enstar Networking provides a broad line of
maintenance services including fixed fee network support, telephone
support, guaranteed response times, next business day on-site response
for problem resolution, "spare-in-the-air" hardware replacement and
cabling system diagnosis and repair. Through its Technical Assistance
Center (TAC), Enstar Networking can provide remote diagnostic
capabilities as part of its maintenance services. The TAC is capable
of receiving a customer call, remotely diagnosing the problem,
searching for an application solution and, if necessary, dispatching a
regional engineer to perform on-site troubleshooting.
-11-
<PAGE>
Remote Network Management and Monitoring - Beginning in 1998, Enstar
Networking plans to introduce a line of services which will provide
network monitoring capabilities to customers looking to outsource the
management of its LAN / WAN. Through the TAC and staff of system
engineers we can provide network monitoring, router configuration,
network traffic analysis, and network administration.
Remote Security Management - This program is designed to provide
customers with an outsourced firewall solution for their network.
From hardware to software configuration, Enstar Networking provides
its customers a solution to protect their corporate data via dial-up
connections and the Internet, without the capital and personnel costs
to maintain the firewall.
Structured Wiring Services ("SWS")
Enstar Networking provides solutions to build network cabling
infrastructure for voice and data communications. The speed and
performance of a network is dependent upon the adequacy and bandwidth
of its cable plant. The company has a staff of consultants, project
managers, technicians and installers that provide project management,
design and installation of standards based category 5 and fiber optic
cabling systems. Enstar Networking will oversee the design and
implementation of projects involving multiple LANs across a WAN,
consisting of multi-vendor hardware products and several thousand
nodes. These projects generally range in size from $10,000 to
$250,000.
Transition Networks. Transition's products encompass three major areas of
conversion technology, which include (i) media conversion, (ii) rate conversion,
and (iii) transport conversion. Transition plans to introduce its first
transport conversion product in 1998. In addition, the company has a number of
fiber and copper-based supporting LAN products.
The following is a summary of sales by product group for 1997:
<TABLE>
<CAPTION>
PERCENT
OF SALES
--------
<S> <C>
Media Conversion...........................54%
Rate Conversion.............................. 1% (new in 1997)
Transport Conversion............... 0% (new in 1998)
Supporting Products..................45%
</TABLE>
-12-
<PAGE>
Media Conversion allows the connection of disparate media types to
achieve extended distances and speeds within LANs. Transition has the
widest product line in the world encompassing new technologies such as
Gigabit Ethernet and ATM, as well as 10MB Ethernet, 100MB Ethernet, and
Token Ring.
Rate Conversion allows for the connection of disparate speed types
within a LAN. Transition has two versions of a 10MB Ethernet to 100MB
Ethernet device that uses copper and fiber connections.
Transport Conversation allows for the connection of disparate protocol
types with a LAN. Transition has announced a FDDI to Fast Ethernet device
for delivery expected in the second quarter of 1998.
Supporting Products include both passive and active devices such as
hubs, transceivers, and baluns that integrate with conversion technologies
to enable network expansion. It also includes Transition's "Powerstar"
line of active hubs which convert S3x or AS/400 daisy chain topology to an
unshielded twisted pair star topology, thereby improving network
reliability and flexibility.
MARKETING AND CUSTOMERS
Americable. Americable sells products to a number of installers, resellers,
other distributors and system integrators. Customer relationships are developed
both face-to-face and via the telephone.
Americable currently employs 28 telemarketing and sales support
representatives. The sales force is currently supplemented by 3 technical
service and product managers. Americable sales representatives undergo regular
training and attend company-sponsored classes in order to enhance their
technical knowledge.
Americable uses direct mailings, brochures and catalogs in marketing the
products that it distributes. Americable's catalog, which generally is
published every 18 to 24 months, is designed to provide its customers with not
only product specifications, but additional technical information to assist them
in connection with their system design. Americable's latest catalog was
released in April 1996.
-13-
<PAGE>
During 1997 and 1996, no one customer accounted for more than 10% of
Americable's sales. In addition, in 1997 and 1996, Americable derived
approximately 68% and 76%, respectively, of its sales from its largest 100
customers.
Enstar Networking. Enstar Networking provides its products and services to
customers in various industries including health care, financial services,
legal, manufacturing and education. Customer relationships are generally
developed by its outside sales representatives within a 100 mile radius
of its regional service center and satellite locations. Marketing efforts
are directed at Fortune 1000 and middle market corporations, and institutional
users such as hospitals and universities and are generally focused on customers
located in the states in which the company has offices. Through its primary
regional service centers, Enstar Networking provides its customers a full array
of services from each of its business units throughout all its locations.
Enstar Networking currently has sales personnel in the following states:
Georgia, Illinois, Texas, Minnesota, North Dakota, Colorado and California.
Enstar Networking adds and deletes locations on the basis of business
opportunities.
Enstar Networking currently employs 25 outside sales representatives in
addition to 15 sales support representatives. The sales force is currently
supplemented by 20 regional systems engineers and consultants, 35 technicians
and installers, and 2 corporate service managers. Enstar Networking sales
representatives undergo continuous training and attend company-sponsored classes
in order to enhance their technical expertise and marketing techniques. Also,
many of Enstar Networking sales and technical personnel attend vendor-sponsored
training and education programs mandated by such vendors in order for the
company to qualify as an authorized reseller of their products.
During 1997 and 1996, Enstar Networking derived approximately 43% and 52%,
respectively, of its sales from its largest 25 customers.
Transition. Transition distributes its products through a number of volume
distributors and resellers throughout the United States and in over 50 countries
worldwide. Distributors and resellers purchase Transition's products at
standard discounts based on certain volume-based incentive programs.
-14-
<PAGE>
Transition's international sales have accounted for a substantial portion of its
sales growth, coming primarily from the United Kingdom, South Africa, Australia,
and Sweden. During 1997 and 1996, revenues from outside the United States
accounted for approximately 35% of net sales.
Transition's continued growth will be dependent, in part, upon its ability
to expand its domestic and international distributor base with high quality
resellers. A significant benefit for a distributor or reseller is that
Transition does not sell directly to end-users. Transition's distributors and
resellers carry other products that are complementary to and compete with those
of Transition. These non-exclusive distributors and resellers may choose to
give higher priority to products of other suppliers or competitors.
Transition has several marketing programs to support the sale and
distribution of its products. Its marketing programs are designed to generate
sales leads for its distribution channels, as well as to enhance brand name
recognition. Transition's marketing activities include frequent participation
in industry trade shows, advertising in major trade publications, public
relations campaigns, the distribution of sales literature and product
specifications, and ongoing communications with its distributors. In addition,
Transition offers comprehensive pre- and post-sales technical support, product
training, and a strategic test partner program. Transition utilizes reseller
incentive programs such as co-op funds to increase localized print advertising
and name recognition.
RESEARCH AND DEVELOPMENT
Transition. Transition performs all of its research and development
activities at its headquarters in Eden Prairie, Minnesota. Transition believes
that is future success depends on its ability to achieve market acceptance of
new product offerings. The engineering staff has increased by 36% since the end
of 1994 to accelerate development in this area. Although there can be no
assurance that its development efforts will result in commercially successful
products, Transition intends to continue to make substantial investments in the
development of new and enhanced products. Research and development expenses
were approximately $1.0 million (7% of net sales) in 1995, $1.5 million (9%
of net sales) in 1996, and $1.4 million (8.1% of net sales) in 1997. For 1998,
Transition has budgeted research and development expenses of approximately $1.7
million.
MANUFACTURING
Americable. Americable's manufacturing operations consist of the
manufacture of custom or specialty cable assemblies including copper, fiber
optic, small computer system interface (SCSI) and AS/400 cable assemblies
and subassemblies.
-15-
<PAGE>
Transition. Transition's manufacturing operations consist primarily of the
final assembly and quality control testing of materials, components and
subassemblies. Transition uses third parties to perform printed circuit board
assembly. Transition's products include certain components that are currently
available from single or limited sources and may require long order lead times.
Any reduction in supply or substantial change in costs of components could
affect Transition's ability to deliver its products in a timely and
cost-effective manner and may adversely impact Transition's operating results.
Approximately 10% of all products are manufactured outside the United States in
Ireland and Taiwan.
COMPETITION
Americable. Americable faces substantial competition from a large number
of companies, some of which are larger, have greater financial resources,
broader name recognition and, in many cases, lower product and operating costs
than Americable. Significant competitors include Anixter International, Inc.,
Anicom, Inc., Kent Electronics Corporation, Graybar, Inc., and a number of
smaller domestic companies, as well as product manufacturers outside the United
States.
Enstar Networking. Enstar Networking faces substantial competition from a
large number of companies, some of which are larger, have greater financial
resources, broader name recognition and, in many cases, lower product and
operating costs than Enstar Networking. Enstar Networking faces competition
from large system integrators such as GE Capital Information Technology
Services, CompuCom Corporation, Vanstar Corporation and a significant number of
smaller regional network integrators.
Transition. The industry in which Transition operates is highly
competitive, and Transition believes that such competition will continue to
intensify. The industry is characterized by rapid technological change, short
product life-cycles, frequent product introductions and evolving industry
standards. Transition competes with a number of independent companies focused
on designing and manufacturing products for the LAN market, including, among
others, Allied Telesyn International, AMP Incorporated, and Digi International.
Most of Transition's competitors are established companies with significantly
greater financial resources, more extensive business experience, and greater
market and service capabilities than Transition. There can be no assurance that
Transition will be able to compete successfully.
Transition's ability to compete successfully depends upon its ability to
adapt to market changes on a timely basis. There are many networking products
currently being offered in the market segments in which Transition competes.
Transition believes that customers evaluate competing products on the basis of
required product features for a particular installation, performance, price, and
-16-
<PAGE>
ease of use. In addition, after installation, customers evaluate the suppliers'
ability to provide readily accessible technical support, if required, and its
reliability when deciding on future orders for additional equipment. Failure to
obtain significant customer satisfaction, market share, or competitively priced
products could have a material adverse effect on Transition.
REORGANIZATION TRANSACTIONS
Pursuant to the Reorganization Transactions, NSU merged with Michael and
the outstanding ENStar Common Stock was distributed to the shareholders of NSU
in the Distribution. As a result of the Distribution, ENStar ceased to be a
subsidiary of NSU and became a publicly owned company.
In connection with the Reorganization Transactions, Michael paid in full
all Michael Assumed Indebtedness within six months of consummation of the
Reorganization Transactions. Michael also agreed to pay, perform and discharge
all liabilities of NSU arising at any time prior to February 28, 1997 (the
effective date of the Reorganization Transactions (the "Effective Date"), other
than the following liabilities retained by NSU: (i) liabilities arising from the
assertion of dissenters rights by NSU shareholders in connection with the
Reorganization Transactions, and (ii) obligations under certain agreements
entered into in connection with the Reorganization Transactions.
In connection with the Reorganization Transactions, ENStar agreed to
indemnify Michael and any subsidiaries of Michael against certain liabilities
including: (i) all liabilities (other than the liabilities assumed by Michael)
of NSU or any NSU subsidiary, arising out of: (a) the liabilities transferred to
ENStar by NSU and (b) the transactions contemplated by the agreement governing
the Distribution (the "Distribution"), including the Distribution and any taxes
resulting from the Distribution; (ii) all liabilities arising from any claim
made by any shareholder of ENStar or by any shareholder or former shareholder of
NSU prior to the Effective Date relating to any act or omission of NSU on or
prior to the Effective Date in connection with the Reorganization Transactions;
(iii) all liabilities assumed by ENStar relating to the employee benefit plans
of NSU; (iv) any breach of the Distribution Agreement by ENStar; and (v)
damages, costs, and expenses including attorney's fees incurred in defending and
settling claims for such liabilities.
In connection with the Reorganization Transactions, Michael agreed to
indemnify ENStar against: (i) all liabilities of NSU, Michael or any subsidiary
of NSU or Michael arising out of transactions or events entered into or
occurring after the Effective Date, or any action or inaction, including but not
limited to, contracts, commitments and litigation, with respect to, entered into
or based upon transactions or events occurring after the Effective Date with
respect to NSU, Michael, any subsidiary of NSU after the Effective Date or any
subsidiary of Michael, other than any liability arising out of liabilities
-17-
<PAGE>
transferred to ENStar by NSU; (ii) all liabilities assumed by Michael; (iii) all
liabilities of Michael or any subsidiary of Michael; (iv) all liabilities
arising from any claim made by any current or former Michael stockholder or
shareholder of NSU after the Effective Date who was a Michael stockholder or NSU
shareholder immediately prior to the Effective Date relating to any act or
omission of Michael in connection with the Reorganization Transactions; (v) any
breach of the Distribution Agreement by NSU; and (vi) damages, costs and
expenses including attorney's fees incurred in defending and settling claims for
such obligations, expenses or liabilities.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey J. Michael...... 41 President and Chief Executive Officer
Peter E. Flynn.......... 38 Executive Vice President
Thomas S. Wargolet...... 34 Chief Financial Officer and Secretary
C. S. Mondelli.......... 47 President and Chief Executive Officer, Transition
Ronald D. Newman........ 33 President and Chief Operating Officer, Enstar
Networking
</TABLE>
Mr. Jeffrey J. Michael has served as President and Chief Executive Officer
of the Company since March 1996. Prior to such time, Mr. Michael served as
President and Chief Executive Officer of NSU since December 1990. Mr. Michael
served as Vice President-Finance from April 1989 to December 1990. Prior to
April 1989, Mr. Michael was employed by NSU in various capacities. Jeffrey J.
Michael is the son of James H. Michael (Chairman of the Board of ENStar). Mr.
Michael is also a director of Michael and CorVel.
Mr. Peter E. Flynn has served as Executive Vice President of the Company
since March 1996. In addition, Mr. Flynn has served as President of Americable
since June 1997. Prior to such time, Mr. Flynn served as Executive Vice
President, Chief Financial Officer and Secretary of NSU. Prior to joining NSU
in 1990, Mr. Flynn was an Audit Manager with Arthur Andersen & Co. Mr. Flynn
also serves as a director of CorVel.
-18-
<PAGE>
Mr. Thomas S. Wargolet has served as Chief Financial Officer and Secretary
of the Company since March 1996. Prior to such time, Mr. Wargolet served as
Controller of NSU since September 1989. Mr. Wargolet was also the Director of
Finance of Americable from September 1991 until January 1995 and Vice President
of Finance and Operations from January 1995 to September 1997. Since September
1997, Mr. Wargolet has been the Vice President of Finance and Operations of
Enstar Networking. Prior to joining NSU in 1989, Mr. Wargolet was an Audit
Senior with Arthur Andersen & Co.
Mr. C. S. (Sal) Mondelli joined Transition in February 1995 as Vice
President of Sales and Marketing, prior to becoming President and Chief
Executive Officer of Transition in July 1996. Prior to joining Transition, Mr.
Mondelli was an Executive Vice President with Prodea Software Corporation and
served in a variety of marketing and management positions with IBM Corporation.
Mr. Ronald D. Newman has served as President of Enstar Networking since
September 1997 and Chief Operating Officer since March 1997. Mr. Newman was the
Regional Manager - Southwest Operations from March 1993 to February 1997 and
prior to that served in various sales capacities for Americable.
Officers of the Company are elected annually by the Board of Directors.
The current officers of the Company are expected to be re-elected to serve in
the same positions for the coming year.
ITEM 2. PROPERTIES.
Americable. Americable's principal distribution and manufacturing
operations are located in Minneapolis, Minnesota (39,000 square feet). This
facility includes office, warehouse and manufacturing space.
Enstar Networking. Enstar Networking has its primary regional service
centers in Dallas, Texas (11,000 square feet) and Minneapolis, Minnesota
(8,000 square feet). Enstar Networking also has branch operations in Fargo,
North Dakota and Atlanta, Georgia in addition to satellite offices in Austin,
Texas, Chicago, Illinois, San Jose, California, and Denver, Colorado.
Transition. Transition's headquarters, including its executive and
corporate administration offices, manufacturing, sales and technical support are
located in Eden Prairie, Minnesota, which consists of approximately 27,000
square feet of leased space. Of this space, approximately 1,900 square feet is
occupied by ENStar corporate offices.
All of the Company's facilities are leased. ENStar believes that the
leased facilities of its operating companies are adequate for their intended
use.
-19-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is engaged in routine litigation incidental to its business,
which management believes will not have a material adverse effect upon its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-20-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
ENStar Inc.'s common stock began trading on the Nasdaq National Market
under the symbol ENSR effective March 3, 1997. The following stock prices were
obtained from Nasdaq reports:
<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
1997 (By Quarter)
First $6 $9
Second 4 3/4 6 1/2
Third 6 9 3/8
Fourth 7 3/8 9
</TABLE>
The last sale price on March 20, 1998 was $7 3/4. The number of common
shareholders of record as of March 5, 1998 was 165. In addition, the Company
estimates that an additional 800 shareholders own stock held for their accounts
at brokerage firms and financial institutions.
Management does not anticipate that cash dividends will be paid on ENStar's
common stock in the foreseeable future.
-21-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues....................$54,352 $64,123 $54,891 $47,193 $46,756
Operating income (loss)..... (4,979) (53) 1,033 (702) (1,978)
Interest expense, net....... (809) (204) (247) (348) (361)
Income (loss) before income
taxes and equity in earnings
of unconsolidated
subsidiary.. ............. (5,788) (257) 786 (1,050) (2,339)
Net income (loss)........... (2,261) 1,072 1,572 286 (1,524)
======= ======= ======= ======= =======
Basic and diluted net
income (loss) per
share(1)..................$ (0.69) $ 0.32 $ 0.49 $ 0.09 $ (0.48)
======= ======= ======= ======= =======
Weighted average common and
common equivalent shares
outstanding(1)............ 3,289 3,309 3,217 3,235 3,146
CONSOLIDATED BALANCE SHEET DATA (END OF PERIOD)
Total assets................$43,315 $36,015 $35,251 $32,243 $30,222
Long-term debt, including
current maturities........ 16,333 1,178 1,246 3,607 3,443
Shareholders' equity........ 12,405 20,947 19,694 18,176 17,035
</TABLE>
- ---------------------------
(1) Basic and diluted net income (loss) per share for 1993 to 1996 was
computed using the weighted average number of outstanding shares of NSU
Common Stock during each period presented adjusted for the Distribution of
one share of ENStar Common Stock for every three shares of NSU Common Stock
outstanding
-22-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
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 and are made in reliance under the
safe harbor provisions of the Securities Litigation Reform Act of 1995. 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 Enstar Networking'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, 1997.
GENERAL
ENStar is a holding company. Its principal subsidiaries are Americable,
Enstar Networking and Transition. ENStar also owns 1,025,000 shares of common
stock of CorVel Corporation ("CorVel"), or an approximate 25% interest in
CorVel, a provider of cost containment and managed care services designed to
address the medical costs of workers' compensation. 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.
-23-
<PAGE>
As described in Note 2 to the Consolidated Financial Statements of ENStar,
the Consolidated Statements of Operations of ENStar include an allocation of
general and administrative costs incurred by NSU 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.
Prior to 1997, Enstar Networking operated as the network integration
business of Americable. Enstar Networking was organized in April 1997 to
distinctly focus the networking service activities from the traditional
distribution and manufacturing operations of Americable. Enstar Networking
was incorporated on January 1, 1998. The separate results of operations for
Enstar Networking have been prepared from the books and records of Americable
for all periods presented. The results of operations include an allocation of
general and administrative expenses for certain items such as accounting, human
resources and information systems along with facility related expenses.
Management believes these allocations are reasonable and present the operations
of Enstar Networking and Americable as though they had operated as separate
businesses.
During 1997, Enstar Networking made significant investments in new sales,
consulting, engineering and technical personnel as part of its effort to build a
network services organization. As part of this strategy, Enstar Networking has
shifted its focus from historical commodity-based networking and connectivity
hardware sales towards more service oriented solutions. As part of this
change, the company experienced a significant decrease in revenues and
increased operating expenses resulting in an operating loss of approximately
$2.9 million. Enstar Networking expects to incur an operating loss in 1998 as
it continues to build its network service and security consulting practice.
Historically, in excess of 90% of Transition's revenues have been derived
from the sale of its media conversion and related LAN products. These products
have life cycles of 18 to 36 months and are generally sold based on price,
availability and functionality. More recently, Transition has focused its
product development and marketing efforts on expanding its conversion technology
based products. In addition, the company provides related LAN products, such as
hubs and transceivers, that integrate with the conversion technologies to enable
network expansion. Transition's future operations are highly dependent on its
ability to introduce conversion technology based products on a timely basis, at
competitive prices that meet customer demands.
-24-
<PAGE>
The following are summarized operating results for ENStar's operating
subsidiaries for the years ended December 31, 1997, 1996, and 1995 (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues
Americable............................... $11,656 $11,343 $11,458
Enstar Networking........................ 26,976 37,324 30,702
Transition............................... 17,176 17,055 14,266
Eliminations............................. (1,456) (1,599) (1,535)
------- ------- -------
$54,352 $64,123 $54,891
======= ======= =======
Gross Profit
Americable............................... $ 2,758 $ 2,761 $ 3,131
Enstar Networking........................ 5,759 8,239 6,848
Transition............................... 6,713 5,837 5,387
------- ------- -------
$15,230 $16,837 $15,366
======= ======= =======
Selling, General and Administrative Expenses
Americable............................... $ 3,357 $ 2,823 $ 2,575
Enstar Networking........................ 8,621 7,006 6,239
Transition............................... 6,926 5,934 4,465
Allocable corporate expenses............. 1,305 1,127 1,054
------- ------- -------
$20,209 $16,890 $14,333
======= ======= =======
Operating Income (Loss)
Americable............................... $ (599) $ (62) $ 556
Enstar Networking........................ (2,862) 1,233 609
Transition............................... (213) (97) 922
Allocable corporate expenses............. (1,305) (1,127) (1,054)
------- ------- -------
$(4,979) $ (53) $ 1,033
======= ======= =======
</TABLE>
-25-
<PAGE>
RESULTS OF OPERATIONS
1997 VERSUS 1996
Consolidated revenues decreased approximately $9.8 million, or 15%, to
$54.4 million from $64.1 million in 1996.
Revenues at Americable increased $313,000, or 3%, to approximately $11.6
million. This includes increased sales of cable assemblies of approximately
$500,000 due primarily to higher demand of fiber optic and custom OEM
assemblies. In addition, sales of networking products increased approximately
$200,000 due to higher demand. Sales of bulk cable and other connectivity
products decreased approximately $400,000, due primarily to lower volume to
contractors and resellers. Americable expects that its volume of sales of cable
assemblies will increase and its volume of networking products will decrease as
it focuses its sales and marketing efforts on its value-added connectivity
products which generally carry higher gross profit margins.
Revenues at Enstar Networking decreased approximately $10.3 million, or
28%, to $27 million. This includes decreased sales of networking products of
approximately $9.5 million and commodity-based structured wiring products of
approximately $3.1 million which reflects the company's shift from a
distributor/reseller of hardware towards more service oriented solutions.
Included in these amounts is approximately $6.1 million of lower sales to two
large customers. Offsetting these reductions was approximately $1 million of
increased revenues from network integration and structure wiring services along
with approximately $1.3 million of revenue from network security products due to
higher demand. Enstar Networking expects that its sales volume of networking
products will continue to decrease as it focuses its sales and marketing efforts
on developing and expanding its service offerings.
Revenues at Transition increased $121,000, or 1%, to approximately $17.2
million. Sales of Transition's media and rate conversion products increased
approximately $2.5 million or 36% to $9.3 million, reflecting additional
revenues from new products and product enhancements introduced during 1996 and
1997. Sales from new product introductions and enhancements accounted for
approximately 16% of net sales for 1997 versus 21% for 1996. Sales of
supporting LAN products decreased approximately $2.5 million or 20%, to $7.8
million due primarily to reduced sales of Ethernet hubs and switches which
reflects Transition's shift in product strategy towards conversion type
products. Sales to domestic customers of approximately $11.2 million and to
international customers of approximately $6 million, were relatively unchanged
from 1996.
-26-
<PAGE>
Sales to international customers accounted for approximately 35% of net
sales in 1997 and 1996, respectively. Transition's ability to maintain its
present level of sales and sales growth is highly dependent upon its ability
to offer new products that meet customer's demands in a rapidly changing market,
particularly in light of the relatively short life cycle of its products.
Consolidated gross profit, as a percent of revenues, increased to 28% in
1997 as compared to 26.3% in 1996. Margins at Transition increased to 39.1%
from 34.2% due primarily to increased sales of higher margin media conversion
products along with cost reductions realized on certain component parts.
Decreased margins at Americable, from 24.3% to 23.7%, are primarily due to
unfavorable labor variances resulting from the expansion of its fiber optic
manufacturing operation. Margins at Enstar Networking decreased to 21.3%
from 22.1% primarily due to increased competition for structured wiring and
network hardware products. ENStar expects its gross profit margins to continue
to decline in 1998 due to expected competitive pricing pressures on products and
services sold by each of its operating companies.
ENStar's selling, general and administrative expenses increased
approximately $3.3 million or 19.7%, to $20.2 million from $16.9 million in
1996. The increase in operating expenses at Americable reflects increased
expenses of approximately $300,000 primarily due to the addition of sales,
purchasing and product management personnel along with approximately $90,000
of higher catalog and marketing related expenses. In addition, there was
approximately $150,000 of higher rent, depreciation and other related expenses
associated with its facility remodeling.
Enstar Networking had increased operating expenses of approximately
$1.6 million, or 23%. This includes approximately $1 million of increased
salaries, benefits, training and other related expenses due to the addition
of new sales, consulting and engineering personnel. The company also had
approximately $205,000 of increased expenses due to marketing related costs
associated with the introduction of Enstar Networking and approximately $210,000
of higher costs related to the reorganization of its branch operations. In
addition, this increase includes approximately $200,000 of higher facility
related and other general and administrative expenses associated with the
increased level of personnel.
Transition had increased operating expenses of approximately $1 million,
or 17%, which reflects increased sales and marketing expenses of approximately
$810,000 due primarily to the addition of new sales and product management
personnel in addition to higher advertising, promotional and related expenses
associated with the introduction of Transition's new product strategy. This
also includes approximately $300,000 of increased general and administrative
expenses due primarily to the addition of support personnel, higher recruiting
-27-
<PAGE>
and other employee related expenses. This was offset by approximately $125,000
of decreased engineering expenses which reflects a reduction in development and
personnel costs associated with Transition's advanced LAN products. In an effort
to successfully develop and launch new advanced LAN products, Transition
anticipates the increased levels of spending on sales, marketing and promotional
costs to continue during 1998. 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.
ENStar's research and development expenses (incurred exclusively within
Transition) were approximately $1.4 million and $1.5 million for 1997 and 1996,
respectively.
Corporate expenses increased $178,000, or 16% primarily due to higher
professional fees.
Net interest expense increased $605,000 to $809,000 from $204,000 in 1996,
due primarily to the higher level of ENStar subordinated debentures in addition
to higher borrowings under the Americable credit facility.
The income tax benefit in 1997 and 1996 reflects ENStar's estimated
effective annual tax rate. See Note 6 to Consolidated Financial Statements of
ENStar.
Equity in earnings of unconsolidated subsidiary increased $45,000 to
approximately $1.3 million, which is a result of higher earnings at CorVel
offset slightly by the effect of a lower ownership interest during the first
half of 1997. CorVel's net earnings for the twelve months ended December 31,
1997 were approximately $9.3 million, an increase of approximately $1 million
or 12% from the previous year. 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 of its annual
and Quarterly reports as filed on Forms 10-K and 10-Q with the Securities and
Exchange Commission.
1996 VERSUS 1995
Consolidated revenues increased $9.2 million, or 17%, to $64.1 million from
$54.9 million in 1995.
-28-
<PAGE>
Revenues at Americable were relatively unchanged in 1996 as compared with
1995. Sales of networking products increased approximately $1.3 million to $2.2
million due to higher demand. This was offset by decreased sales of bulk cable
and other connectivity products of approximately $1.2 million, due primarily to
lower volume of sales to contractors and resellers and lower demand for certain
types of bulk cable due to increased market supply of such product in 1996.
Revenues at Enstar Networking increased approximately $6.6 million, or 22%,
to $37.3 million. This includes increased revenues of $7 million resulting from
higher demand for networking products. Of this amount, approximately $3.2
million of sales were attributable to higher volume of networking products with
two large customers. The increase in revenue at Enstar Networking also
includes approximately $800,000 of higher volume of service revenues due to
increased focus on services and the addition of technical personnel. Offsetting
these increases was approximately $1.2 million of lower sales of commodity-based
structure wiring products due to the company's focus towards networking
services.
Revenues at Transition increased approximately $2.8 million, or 20%, to
$17.1 million. Sales of Transition's advanced LAN products increased
approximately $1.2 million or 79% to $2.6 million, reflecting additional
revenues from new products and product enhancements introduced during 1995 and
1996. Sales from new product introductions and enhancements accounted for
approximately 21% of net sales for 1996 versus 9% for 1995. Sales of basic LAN
and terminal products increased approximately $1.6 million, or 14%, to $14.5
million. Sales to domestic customers increased approximately $2 million, or
24%, to $11.1 million which primarily reflects higher demand for Transition's
products. Sales to international customers increased approximately $800,000,
or 15%, to $6 million, which was primarily a result of the addition of new
customers. Sales to international customers accounted for approximately 35%
and 37% of net sales in 1996 and 1995, respectively.
Consolidated gross profit, as a percent of revenues, decreased to 26.3% in
1996 as compared to 28% in 1996. Decreased margins at Americable are primarily
attributable to a higher volume of lower margin networking products and lower
pricing on cable due to competition and overall higher market supply on certain
types of bulk cable. Decreased margins at Transition are primarily the result
of approximately $500,000 of inventory write-downs recorded in the fourth
quarter of 1996. Margins at Enstar Networking were relatively unchanged
between years.
ENStar's selling, general and administrative expenses increased
approximately $2.6 million or 17.8% to $16.9 million from $14.3 million in 1995.
Operating expenses at Americable increased $248,000, or 9.7% to $2.8 million
which is primarily a result of higher selling expenses attributable to the
addition of sales and sales support personnel along with related training and
education costs.
-29-
<PAGE>
The increase in operating expenses at Enstar Networking reflects increased
selling expenses of approximately $340,000 due to higher sales salaries,
commissions and related expenses and approximately $422,000 of higher
engineering expenses due to the addition of technical and engineering personnel.
Transition had increased operating expenses of approximately $1.5 million,
or 33%, which reflects increased engineering expenses of approximately $520,000
due to the addition of engineering personnel associated with new product
development. In addition, this increase also reflects higher sales and marketing
expenses of approximately $890,000, associated with advertising, participation
in trade shows, and other promotional expenses.
ENStar's research and development expenses (incurred exclusively within
Transition) were approximately $1.5 million in 1996, compared to approximately
$1 million in 1995. The increase was due to the addition of new engineering
personnel associated with new product development.
Corporate expenses increased approximately $73,000, or 7% primarily due to
higher professional fees.
Net interest expense decreased by approximately $43,000 to $204,000 from
$247,000 in 1995, due primarily to lower interest rates between years under the
Americable and Transition credit facilities.
The income tax provision (benefit) in 1996 and 1995 reflects ENStar's
effective annual income tax rate. See Note 6 to the Consolidated Financial
Statements of ENStar.
Equity in earnings of the Company's unconsolidated subsidiary increased
approximately $100,000 to $1.3 million from $1.2 million in 1995, which is a
result of higher earnings at CorVel. CorVel's net earnings for the twelve months
ended December 31, 1996 were approximately $8.2 million, an increase of
approximately $1.2 million or 17% from the previous year.
CAPITAL RESOURCES AND LIQUIDITY
During 1997, ENStar experienced cash flow deficits from operations due
primarily to the losses incurred at its operating companies. In certain prior
years, ENStar has experienced fluctuations in its working capital, which are
primarily attributable to the increase in receivables and inventories associated
with growth in sales and timing of payments on accounts payable. Cash used in
operations was approximately $1.8 million in 1997 versus $72,000 in 1996.
-30-
<PAGE>
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 of 1933 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"),
similar to one previously maintained by NSU, whereby it sells subordinated
debentures of various maturities to primarily individual investors. The
debentures are offered on a continuous basis at interest rates that change from
time to time depending on market conditions. At December 31, 1997, the Company
had approximately $16.3 million principal amount of subordinated debentures
outstanding with weighted average interest rate of 9.62%. Long-term debt
proceeds of approximately $15.2 million represents the amount of new debentures
sold for the year ended December 31, 1997. Approximately $135,000 of debentures
are scheduled to mature during the fourth quarter of 1998.
In June 1997, the Company commenced a modified "Dutch Auction" self tender
offer for the repurchase of shares of its common stock. This tender offer,
which expired in July 1997, resulted 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.
Americable and Transition maintain revolving line of credit facilities with
their principal bank to provide borrowings up to $4 million, respectively, due
in May and June 1998. Borrowings under these facilities are based on eligible
accounts receivable and inventory with interest at prime (8.5% at December 31,
1997). At December 31, 1997, there were aggregate outstanding borrowings of
$2,680,000 and approximately $2 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 (including Enstar Networking) incurs pretax losses in excess
of specified levels. At December 31, 1997, the companies were in compliance
with or had obtained waivers for all covenants under these agreements.
During 1997, ENStar provided an aggregate of $348,000 in cash to Americable
and Enstar Networking pursuant to the terms of the amended credit agreement.
Additional cash investments from ENStar are expected in 1998 to fund anticipated
operating losses and capital expenditures.
-31-
<PAGE>
In February 1998, the Company announced a stock repurchase plan pursuant to
which the Company plans to repurchase up to 350,000 shares of its common stock
from time-to-time in open market or privately negotiated transactions.
ENStar expects to be able to fund its working capital and capital
expenditures along with any repurchases of common stock for 1998 with cash flow
from operations along with available cash and cash equivalents and amounts
available under the credit facilities of its operating companies. At March 16,
1998, ENStar had approximately $13.2 million of cash and cash equivalents,
excluding cash of its operating subsidiaries. During 1998, ENStar's operating
plans call for approximately $1.7 million in capital expenditures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to the Registrant for 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company listed in the index
under Item 14(a)(1) and (2) hereof are filed as part of this Annual Report on
Form 10-K and are incorporated by reference in this Item 8. See also "Index to
Financial Statements" on page F-1 hereof. Certain quarterly financial data is
set forth below.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
(UNAUDITED, IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Revenues............................$11,932 $13,392 $15,990 $13,038
Gross profit........................ 3,569 3,802 4,226 3,633
Interest expense, net............... (84) (190) (248) (287)
Net loss............................ (582) (602) (356) (721)
======= ======= ======= =======
Basic and diluted loss per share....$ (.18) $ (.18) $ (.11) $ (.22)
======= ======= ======= =======
1996
Revenues............................$15,362 $16,431 $17,358 $14,972
Gross profit........................ 4,162 4,128 4,714 3,833
Interest expense, net............... (66) (74) (51) (13)
Net income........ ................. 417 185 451 19
======= ======= ======= =======
Basic and diluted income per share..$ .13 $ .05 $ .14 $ --
======= ======= ======= =======
</TABLE>
-32-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3), except for the information relating
to the executive officers of the Company set forth in Part I of this report, the
information called for by Items 10, 11, 12 and 13 is incorporated herein by
reference to the information contained in the Company's Proxy Statement for its
1998 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A
with the Securities and Exchange Commission on or prior to April 30, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<S> <S> <C>
(a)l. CONSOLIDATED FINANCIAL STATEMENTS
ENStar Inc.
Consolidated Statements of Operations....................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Shareholders' Equity............. F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements..................F-6 to F-19
Report of Independent Certified Public Accountants.......... F-20
Schedule II -- Valuation and Qualifying Accounts............ F-21
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(i) CorVel Corporation
Report of Independent Auditors.............................. S-1
Consolidated Statements of Income........................... S-2
Consolidated Balance Sheets................................. S-3
Consolidated Statements of Stockholders' Equity............. S-4
Consolidated Statements of Cash Flows....................... S-5
Notes to Consolidated Financial Statements..................S-6 to S-16
Schedule II -- Valuation and Qualifying Accounts............ S-17
</TABLE>
-33-
<PAGE>
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
3. EXHIBITS
<TABLE>
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of December
21, 1995, by and among North Star Universal, Inc., Michael
Foods, Inc. and NSU Merger Co. (filed as exhibit 2 to the
Company's Registration Statement on Form S-4, Registration
No. 333-1925 and incorporated herein by reference (schedules
omitted -- the Company agrees to furnish a copy of any
schedule to the Commission upon request)).
3.1 Articles of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Registration Statement on Form S-4,
Registration No. 333-1925 and incorporated herein by
reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-4, Registration No. 333-1925
and incorporated herein by reference).
4.1 Indenture, dated as of November 7, 1996, between the Company
and National City Bank of Minneapolis, as trustee (filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-12301 and incorporated herein by
reference).
+10.1 1996 Stock Incentive Plan, including forms of option
agreements (filed as exhibit 10.15 to the Company's
Registration Statement on Form S-4, Registration No.
333-1925, and incorporated herein by reference).
10.2 Sixth Amendment to Amended and Restated Loan and Security
Agreement, dated August 9, 1996, among Americable, Inc.,
Transition Networks, Inc., Cable Distribution Systems, Inc.,
and First Bank National Association, amending the terms of
the Amended and Restated Loan and Security Agreement (filed
as exhibit 10.1 to the Company's Registration Statement on
Form S-4, Registration No. 333-1925, and incorporated herein
by reference).
10.3 Lease Agreement dated June 13, 1995 between Transition and
West Life & Annuity Insurance Company for lease of premises
at 6475 City West Parkway, Eden Prairie, Minnesota. (Filed
as exhibit 10.11 to the Company's Registration Statement on
Form S-4, Registration No. 333-1925, and incorporated herein
by reference).
-34-
<PAGE>
10.4 Lease Agreement dated February 21, 1989 between Americable and
Ryan/Flying Cloud Associates Limited Partnership, including amendments
thereto, for the lease of premises at 7450 Flying Cloud Drive, Eden
Prairie, Minnesota. (Filed as exhibit 10.12 to the Company's
Registration Statement on Form S-4, Registration No. 333-1925, and
incorporated herein by reference).
10.5 Distribution Agreement between North Star Universal, Inc., and the
Company (Filed as an exhibit to Agreement and Plan of Reorganization,
dated as of December 21, 1995, by and among North Star Universal,
Inc., Michael Foods, Inc. and NSU Merger Co., which agreement was
filed as exhibit 2 to the Company's Registration Statement on Form
S-4, Registration No. 333-1925, and is incorporated herein by
reference).
10.6 Commercial Lease Agreement between Americable, Inc. and LaSalle
National Trust (filed as exhibit 10.4 to the Quarterly Report on
Form 10-Q of North Star Universal, Inc. for the quarter ended
September 30, 1996 and incorporated herein by reference).
10.7 Commercial Lease Agreement between Americable, Inc. and Petroleum,
Inc. (filed as exhibit 10.3 to the Quarterly Report on Form 10-Q of
North Star Universal, Inc. for the quarter ended June 30, 1996 and
incorporated herein by reference).
10.8 Separation and General Release, dated February 17, 1997, between
Americable and Gary L. Eizenga (filed as exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10.9 First Amendment to Loan and Security Agreement, dated May 29, 1997,
among Transition Networks, Inc., and First Bank National Association,
amending the terms of the Loan and Security Agreement dated August 9,
1996 (filed as exhibit 10.9 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 and incorporated herein
by reference).
10.10 Seventh Amendment to Amended and Restated Loan and Security
Agreement, dated May 29, 1997, among Americable, Inc., Cable
Distribution Systems, Inc., and First Bank National Association,
amending the terms of the Amended and Restated Loan and Security
Agreement dated August 9, 1996 (filed as exhibit 10.10 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference).
10.11 Second Amendment to Loan and Security Agreement, dated September 30,
1997, among Transition Networks, Inc., and First Bank National
Association, amending the terms of the Loan and Security Agreement
dated August 9, 1996 (filed as exhibit 10.11 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997 and incorporated herein by reference).
-35-
<PAGE>
10.12 Eighth Amendment to Amended and Restated Loan and Security Agreement,
dated September 30, 1997, among Americable, Inc., Cable Distribution
Systems, Inc., and First Bank National Association, amending the terms
of the Amended and Restated Loan and Security Agreement dated
August 9, 1996 (filed as exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997 and
incorporated herein by reference).
10.13 Assumption Agreement And Ninth Amendment To Amended And Restated Loan
and Security Agreement And Waiver dated as of March 5, 1998, among
Americable, Inc., Cable Distribution Systems, Inc., Enstar Networking
Corporation, and U.S. Bank National Association, amending the terms
of the Amended and Restated Loan and Security Agreement dated
September 30, 1997.
10.14 Third Amendment to Loan and Security Agreement and Waiver, dated
March 27, 1998, among Transition Networks, Inc., and U.S. Bank
National Association, amending the terms of the Amended and Restated
Loan and Security Agreement and Waiver dated September 30, 1997.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors - Ernst & Young LLP.
27.1 Financial Data Schedule.
99.1 Cautionary Statement Regarding Forward Looking Statements.
- --------------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K pursuant to Item
601(b)(10)(iii)(A) of Regulation S-K.
(b) Reports on Form 8-K. None.
(c) See the Exhibits set forth above.
(d) See the Financial Statement Schedules of the Company, and Subsidiaries
Consolidated Financial Statements and the CorVel Corporation Financial
Statement Schedule attached as a separate section of this report.
</TABLE>
-36-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1998
ENSTAR INC.
By /s/ JEFFREY J. MICHAEL
------------------------------------
Jeffrey J. Michael, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C> <C>
By /s/ JEFFREY J. MICHAEL Dated: March 30, 1998
------------------------------------------------
Jeffrey J. Michael
President, Chief Executive Officer and Director
(principal executive officer)
By /s/ THOMAS S. WARGOLET Dated: March 30, 1998
------------------------------------------------
Thomas S. Wargolet
Chief Financial Officer and Secretary (principal
financial and accounting officer)
By /s/ MILES E. EFRON Dated: March 30, 1998
------------------------------------------------
Miles E. Efron
Director
By /s/ JAMES H. MICHAEL Dated: March 30, 1998
------------------------------------------------
James H. Michael
Chairman of the Board of Directors
By /s/ RICHARD J. BRAUN Dated: March 30, 1998
------------------------------------------------
Richard J. Braun
Director
</TABLE>
-37-
<PAGE>
ENSTAR INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF ENSTAR PAGE
------------------------------ ----
<S> <C>
Consolidated Statements of Operations for the three years
ended December 31, 1997, 1996 and 1995.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-3
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1997, 1996, and 1995....... F-4
Consolidated Statements of Cash Flows for the year three
years ended December 31, 1997, 1996, and 1995............. F-5
Notes to Consolidated Financial Statements.................. F-6
Report of Independent Certified Public Accountants.......... F-20
Schedule II -- Valuation and Qualifying Accounts............ F-21
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF CORVEL
------------------------------
<S> <C>
Report of Independent Auditors.............................. S-1
Consolidated Statements of Income for the three years
ended March 31, 1995, 1996, and 1997...................... S-2
Consolidated Balance Sheets as of March 31, 1996 and 1997... S-3
Consolidated Statements of Stockholders' Equity for the
three years ended March 31, 1995, 1996, and 1997.......... S-4
Consolidated Statements of Cash Flows for the three years
ended March 31, 1995, 1996, and 1997...................... S-5
Notes to Consolidated Financial Statements.................. S-6
Schedule II -- Valuation and Qualifying Accounts............ S-11
</TABLE>
F-1
<PAGE>
ENSTAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues......................................$54,352 $64,123 $54,891
Operating and product costs................... 39,122 47,286 39,525
------- ------- -------
Gross profit.................................. 15,230 16,837 15,366
Selling, general and administrative expenses.. 20,209 16,890 14,333
------- ------- -------
Operating income (loss)....................... (4,979) (53) 1,033
Interest expense, net......................... (809) (204) (247)
------- ------- -------
Income (loss) before taxes and equity in
earnings of unconsolidated subsidiary....... (5,788) (257) 786
Income tax provision (benefit)................ (2,178) (25) 405
------- ------- -------
Income (loss) before equity in earnings
of unconsolidated subsidiary................ (3,610) (232) 381
Equity in earnings of
unconsolidated subsidiary................... 1,349 1,304 1,191
------- ------- -------
Net income (loss).............................$(2,261) $ 1,072 $ 1,572
======= ======= =======
Basic and diluted net
income (loss) per share.....................$ (0.69) $ 0.32 $ 0.49
======= ======= =======
Weighted average shares outstanding........... 3,289 3,309 3,217
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE>
ENSTAR INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.........................$12,609 $ 824
Accounts receivable, net of allowance
for doubtful accounts ($414 in 1997
and $440 in 1996)............................... 7,086 8,785
Inventories....................................... 5,145 5,706
Prepaid expenses and other........................ 316 481
------- -------
Total current assets........................... 25,156 15,796
Property and equipment, net......................... 2,164 1,742
Goodwill............................................ 4,642 4,801
Investment in unconsolidated subsidiary............. 11,170 13,519
Other............................................... 183 157
------- -------
$43,315 $36,015
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable to bank.............................$ 2,680 $ 1,310
Current maturities of long-term debt.............. 165 28
Accounts payable.................................. 4,200 4,101
Accrued expenses.................................. 5,165 4,830
------- -------
Total current liabilities.................... 12,210 10,269
Long-term debt, less current maturities............. 16,168 1,150
Deferred income taxes............................... -- 3,649
Commitments and contingencies....................... -- --
Shareholders' equity................................ 14,937 20,947
------- -------
$43,315 $36,015
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
ENSTAR INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL OPERATING TOTAL
SHARES PAID-IN RETAINED UNIT SHAREHOLDERS'
ISSUED AMOUNT CAPITAL EARNINGS EQUITY EQUITY
--------- ------ ---------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995. ........ -- $ -- $ -- $ -- $18,176 $18,176
Net income......................... -- -- -- -- 1,572 1,572
Effect of equity transactions of
unconsolidated subsidiary....... -- -- -- -- 42 42
Constructive dividend.............. -- -- -- -- (96) (96)
--------- ---- ------- ------- ------- -------
Balance at December 31, 1995......... -- -- -- -- 19,694 19,694
Net income......................... -- -- -- -- 868 868
Effect of equity transactions of
unconsolidated subsidiary....... -- -- -- -- (45) (45)
Constructive dividend.............. -- -- -- -- (309) (309)
--------- ---- ------- ------- ------- -------
Balance at November 6, 1996.......... -- -- -- -- 20,208 20,208
Contribution of common stock of
Americable, Transition and
CorVel to ENStar Inc. by North
Star Universal, Inc. (NSU)....... -- -- 20,208 -- (20,208) --
Additional capital invested........ -- -- 660 -- -- 660
Net income from November 7, 1996
through December 31, 1996........ -- -- -- 204 -- 204
Effect of equity transactions of
unconsolidated subsidiary........ -- -- (125) -- -- (125)
Issuance of shares of ENStar
common stock to shareholders
in February 1997................. 3,304,279 33 (33) -- -- --
--------- ---- ------- ------- ------- -------
Balance at December 31, 1996......... 3,304,279 33 20,710 204 -- 20,947
--------- ---- ------- ------- ------- -------
Net loss........................... -- -- -- (2,261) -- (2,261)
Effect of equity transactions of
unconsolidated subsidiary....... -- -- (1,434) -- -- (1,434)
Constructive dividend to NSU....... -- -- (2,082) -- -- (2,082)
Purchase of common stock........... (37,290) -- (233) -- -- (233)
--------- ---- ------- ------- ------- -------
Balance at December 31, 1997 3,266,989 $ 33 $16,961 $(2,057) $ -- $14,937
========= ==== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
ENSTAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss).......................... $ (2,261) $ 1,072 $ 1,572
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Equity in earnings of unconsolidated
subsidiary............................ (1,349) (1,304) (1,191)
Depreciation and amortization........... 1,145 940 837
Deferred income taxes................... (2,187) (25) (465)
Changes in operating assets
and liabilities
Accounts receivable................... 1,699 (1) (1,268)
Inventories........................... 561 925 (548)
Accounts payable, accrued expenses
and other........................... 599 (1,679) 2,202
-------- -------- -------
Net cash provided by (used in)
operating activities.................. (1,793) (72) 1,139
-------- -------- -------
Cash flows from investing activities
Capital expenditures.................... (1,408) (1,070) (543)
Collections on notes receivable......... -- 258 1,096
Other................................... (26) (226) --
-------- -------- -------
Net cash provided by (used in)
investing activities.................. (1,434) (1,038) 553
-------- -------- -------
Cash flows from financing activities
Proceeds from long-term debt............ 15,183 -- --
Payments on long-term debt.............. (28) -- --
Proceeds from notes payable.............. 62,687 69,017 56,073
Payments on notes payable................(61,317) (68,712) (57,497)
Additional capital invested
(constructive dividends)............... (1,280) 1,383 (96)
Purchase of common stock (233) -- --
-------- -------- --------
Net cash provided by (used in)
financing activities.................. 15,012 1,688 (1,520)
-------- -------- --------
Net increase in cash
and cash equivalents.................. 11,785 578 172
Cash and cash equivalents at
beginning of year.......................... 824 246 74
-------- -------- --------
Cash and cash equivalents at end of year.....$ 12,609 824 $ 246
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................$ 986 $ 225 $ 247
Taxes.................................... 69 -- --
See Note 5.
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS
ENStar Inc. ("ENStar" or the "Company") is a holding company principally
comprised of three operating companies, Americable, Inc. ("Americable"), Enstar
Networking Corporation ("Enstar Networking") 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"). 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.
Americable is a distributor of premise wiring, connectivity products, and
low-end networking electronics and represents approximately 20% of the Company's
consolidated sales. Enstar Networking (formerly a division of Americable) is
a network integrator that provides services to design, build, maintain, and
protect corporate network infrastructures, and accounts for approximately 50%
of the Company's sales. Transition designs, manufactures and markets
connectivity devices and network applications, and accounts for approximately
30% of sales. CorVel is a health care services company. At December 31, 1997
and 1996, the Company owned a 25% and 26% ownership in CorVel. The Company's
investment in CorVel is accounted for as an unconsolidated subsidiary using the
equity method of accounting.
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. For the period prior to November 1996, financial statements are
those of the combined operating units 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, and formerly
combined, financial statements 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
-F6-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
CASH AND CASH EQUIVALENTS The Company considers its highly liquid temporary
investments with original maturities of three months or less to be cash
equivalents. The carrying value of cash and cash equivalents approximate fair
value because of the short-term maturity of these investments.
ACCOUNTS RECEIVABLE The Company grants credit to customers in the normal
course of business, but generally does not require collateral or any other
security to support amounts due. Management performs ongoing credit evaluations
of customers. The Company maintains an allowance for potential credit losses
which when realized, have been within management expectations.
INVENTORIES Inventories are stated at the lower of average cost (determined
on a first-in, first-out basis) or market. Inventories consist of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
---- ----
<S> <C> <C>
Finished goods.............................................. $3,934 $3,285
Purchased parts............................................. 1,211 2,421
------ ------
$5,145 $5,706
====== ======
</TABLE>
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost.
Depreciation and amortization for financial reporting purposes are provided on
the straight-line method over the estimated useful lives of the respective
assets which are generally three to five years. Accelerated methods are used
-F7-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for income tax reporting. Property and equipment consist of the following
(in thousands):
<TABLE>
<CAPTION> DECEMBER 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Leasehold improvements...................................... $ 207 $ 183
Office and computer equipment............................... 4,857 3,490
------ ------
5,064 3,673
Less -- accumulated depreciation and amortization........... 2,900 1,931
------ ------
$2,164 $1,742
====== ======
</TABLE>
GOODWILL Goodwill is amortized on a straight-line basis over a period of 40
years. Accumulated amortization was $1,701,000 and $1,542,000 at December 31,
1997 and 1996. The Company maintains separate financial records for each of its
acquired entities and evaluates its goodwill annually to determine potential
impairment by comparing the carrying value to the undiscounted future cash flows
of the related assets. The Company adjusts the value of a subsidiary's goodwill
if an impairment is identified.
ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION> DECEMBER 31,
----------------
1997 1996
---- ----
<S> <C> <C>
Payroll and related benefits................................ $ 867 $ 701
Insurance reserves.......................................... 544 968
Business disposition obligations............................ 1,974 2,000
Other....................................................... 1,780 1,161
------ ------
$5,165 $4,830
====== ======
</TABLE>
The business disposition obligations primarily represent a lease commitment
of a business disposed by North Star. These obligations were part of the
liabilities assumed by ENStar under the indemnification agreement discussed in
Note 6.
-F8-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION The Company recognizes revenue from product sales at
the time product is shipped to a customer. Service revenue is recognized at the
time service is provided or ratably over the contractual service period.
RESEARCH AND DEVELOPMENT All research and development costs are charged to
expense as incurred. Research and development expenses were approximately $1.4
million in 1997, $1.5 million in 1996, and $1 million in 1995.
ADVERTISING The Company expenses advertising costs as incurred, except for
direct response advertising, which is capitalized and amortized over its
expected period of future benefit. Direct response advertising consists
primarily of catalog production costs which are amortized over the estimated
useful life of the publication, generally two years. Advertising costs charged
to expense were approximately $1.2 million in 1997, $1.1 million in 1996, and
$600,000 in 1995. Deferred advertising costs included within prepaid expenses
were $23,000 and $95,000 at December 31, 1997 and 1996.
NET INCOME (LOSS) PER SHARE On December 31, 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings per
Share". All current and prior year earnings (loss) per share data have been
restated to conform to the provisions of SFAS 128.
The Company's basic net income (loss) per share is computed by dividing
net income (loss) by the weighted average number of outstanding common shares.
The Company's diluted net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of outstanding common shares and
common share equivalents relating to stock options, when dilutive. Options to
purchase 78,600 and 62,750 shares of common stock with weighted average
exercise prices of $8.97 and $9.00 were outstanding during 1997 and 1996, but
were excluded from the computation of common share equivalents because they were
antidilutive. There were no options outstanding in 1995.
For 1996 and 1995, net income (loss) per share was computed based on the
weighted average number of shares of North Star common stock outstanding
(9,927,000 and 9,650,000). This weighted average number of shares was
adjusted to reflect the distribution of ENStar Inc. common stock to North Star
shareholders whereby one share of ENStar Inc. common stock was issued
to each holder of three shares of North Star common stock.
-F9-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" are effective for fiscal years beginning after December 15, 1997.
SFAS 130 requires a company to display an amount representing comprehensive
income, as defined by the statement, as part of the Company's basic financial
statements. Comprehensive income will include items such as unrealized gains
or losses on certain investment securities and foreign currency items. The
adoption of SFAS 130 should not affect the Company's consolidated financial
statements.
SFAS 131 requires a company to disclose financial and other information,
as defined by the statement, about its business segments, their products and
services, geographic areas, major customers, revenues, profits, assets and
other information. The Company will include the required SFAS 131 business
segment disclosures in its 1998 annual report.
CAPITAL STOCK The Company has available for issue 100,000,000 shares,
consisting of 20,000,000 shares of preferred stock, par value of $.01 per share,
of which none have been issued or are outstanding at December 31, 1997. The
Company also has 80,000,000 shares of common stock, par value of $.01 per share,
of which 3,304,279 were issued in February 1997 in connection with the
distribution of ENStar common stock to NSU shareholders. These shares have been
reported in the Company's financial statements as if they were outstanding at
December 31, 1996. During 1997, the Company repurchased 37,290 shares of its
common stock using a modified "Dutch Auction" self tender offer. In March 1998,
the Company's Board of Directors authorized the repurchase of up to 350,000
shares of common stock.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION As a result of equity
transactions in CorVel stock, the Company's investment in its unconsolidated
subsidiary decreased $2,349,000 and $337,000, while shareholders' equity
decreased $1,434,000 and $170,000, net of taxes, during the years ended
December 31, 1997 and 1996. For the year ended December 31, 1995, the
Company's investment in its unconsolidated subsidiary increased $70,000,
while the shareholders' equity increased by $42,000, net of taxes.
STOCK BASED COMPENSATION The Company utilizes the intrinsic value method of
accounting for its employee stock based compensation plans. Information related
to the fair value based method of accounting is contained in Note 8.
-F10-
<PAGE>
USE OF ESTIMATES In the preparation of the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and related revenues and
expenses. Actual results could differ from the estimates used by management.
RECLASSIFICATIONS Certain 1996 and 1995 amounts have been reclassified to
conform to the 1997 presentation.
NOTE 3 -- INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
The Company's unconsolidated subsidiary consists of its investment in
CorVel, a health care services company. CorVel has a fiscal year end of March
31. The following is unaudited summarized balance sheet and income statement
information for CorVel as of, and for the twelve month period ended December 31,
1997 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Current assets.............................................. $ 36,764
Total assets................................................ 58,859
Current liabilities......................................... 12,360
Noncurrent liabilities...................................... 1,459
Revenues.................................................... 135,958
Gross profit................................................ 25,359
Net income.................................................. 9,256
</TABLE>
At December 31, 1997, shareholders' equity includes approximately $4.2
million of unremitted earnings related to the Company's investment in CorVel. At
December 31, 1997, the fair value of the Company's investment in CorVel, based
on the closing market price, was approximately $38.7 million.
-F11-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- NOTES PAYABLE AND LONG-TERM DEBT
Americable and Transition maintain revolving line of credit facilities
to provide borrowings up to $4 million each ($4 million and $2 million at
December 31, 1996), due in June and May 1998, respectively. The Company
believes it will be able to renew or obtain new agreements at substantially
the same terms and conditions. Borrowings under these facilities are based
on eligible accounts receivable and inventory with interest at prime (8.5% at
December 31, 1997). At December 31, 1997, there were aggregate outstanding
borrowings of $2,680,000, and approximately $2 million of available
borrowings under these credit facilities. The notes contain certain restrictive
covenants; the most significant of which are: maintenance of specific tangible
capital base levels, capital expenditure limitations, and minimum leverage and
interest coverage. 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 (including Enstar Networking) incurs pretax losses in excess
of specified levels. At December 31, 1997, the companies were in compliance
with or had obtained waivers for all covenants under these agreements.
During 1997, ENStar provided an aggregate of $348,000 in cash to Americable
pursuant to the terms of the amended credit agreement. Additional cash
investments from ENStar are expected in 1998 to fund anticipated operating
losses and capital expenditures.
The carrying value of long-term debt, which approximates fair value,
consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
---- ----
<S> <C> <C>
Subordinated debentures.......................$16,127 $ 945
Other......................................... 206 233
------- ------
16,333 1,178
Less current maturities....................... 165 28
------- ------
$16,168 $1,150
======= ======
</TABLE>
-F12-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, the Company registered with the Securities and Exchange
Commission $25 million of debentures, of which $8,873,000 remained unissued at
December 31, 1997. Subordinated debentures are unsecured and due in varying
monthly installments beginning November 1998 through 2003 and had a weighted
average interest rate of 9.62% at December 31, 1997.
Aggregate minimum annual principal payments of long-term debt are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998.....................................................$ 165
1999..................................................... 4,778
2000..................................................... 89
2001..................................................... 95
2002..................................................... 5,768
Thereafter............................................... 5,438
-------
$16,333
=======
</TABLE>
NOTE 5 -- INCOME TAXES
The activity of the Company through February 1997 has been included in the
income tax return of North Star. For financial reporting purposes, the Company
has been allocated a provision for income taxes in an amount generally
equivalent to the provision that would have resulted had the Company filed
separate income tax returns. The provision for income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current
Federal..........................................$ -- $ 45 $ 740
State............................................ -- 9 130
------- ------ -----
-- 54 870
------- ------ -----
Deferred
Federal.......................................... (1,899) (69) (405)
State............................................ (279) (10) (60)
------- ------ -----
(2,178) (79) (465)
------- ------ -----
$(2,178) $ (25) $ 405
======= ====== =====
</TABLE>
-F13-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of income taxes at the federal statutory
rate to the effective rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...............................(34.0)% (34.0)% 34.0%
State income taxes................................... (4.8) (.3) 8.9
Goodwill amortization................................ .9 21.1 7.0
Other................................................ .3 3.5 1.6
----- ---- ----
(37.6)% (9.7)% 51.5%
===== ==== ====
</TABLE>
The tax effects of the cumulative temporary differences resulting in the
net deferred tax liability are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
<C> <C> <C>
Investment in CorVel............................ $(4,187) $(5,072) $(4,339)
Accrued expenses not deductible until paid...... 1,921 1,956 1,729
Net operating loss carryforwards................ 3,158 -- --
Other........................................... (510) (533) (362)
------- ------- -------
$ 382 $(3,649) $(2,972)
Valuation allowance............................. (382) -- --
------- ------- -------
$ -- $(3,649) $(2,972)
======= ======= =======
</TABLE>
-F14-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
To the extent the Company's financial reporting basis in its investment in
its 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.
The Company's deferred tax liability includes, among other things, the initial
tax effect of $1.8 million for the difference in the financial reporting and tax
basis of the Company's investment in CorVel following the initial public
offering along with the income taxes recorded on the equity in earnings of
CorVel of $897,000 in 1997, $869,000 in 1996, and $794,000 in 1995.
The Company was allocated, as required under the federal consolidated
income tax regulations, approximately $8,100,000 of net operating loss
carryforwards from North Star at the time of its merger with Michael Foods.
The tax benefit of a portion of these available carryforwards, $2,776,000,
was treated as additional capital invested by North Star and the Company's
deferred tax liability was reduced by a like amount. Should any of the tax
benefit of loss carryforwards, currently reserved in the amount of $382,000,
be recognized in future periods, they will be treated as an additional
capital contribution in the period utilized. At December 31, 1997, the
entire operating loss carryforward was available to the Company. These loss
carryforwards begin to expire in 2009.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
LEASING COMMITMENTS The Company leases certain equipment and facilities
under operating leases. The future aggregate minimum rental payments under such
leases which expire at various dates through 2002 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998................................. $691
1999................................. 673
2000................................. 480
2001................................. 307
2002................................. 126
Thereafter........................... --
------
$2,277
======
</TABLE>
Certain of the leases provide for payment of taxes and other expenses.
Total rent expense on all leases including month-to-month leases for the years
ended December 31 was $1,069,000 in 1997, $1,029,000 in 1996, and $939,000 in
1995.
-F15-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENCIES As a result of the transfer of a substantial portion of the
assets of North Star to ENStar, ENStar entered into a supplemental indenture
with North Star in which ENStar assumed the obligations of North Star with
respect to certain debenture indebtedness of North Star. North Star however,
separately agreed to satisfy, and hold ENStar harmless from, all payment and
other obligations with respect to such debenture indebtedness. The amount of
such indebtedness, net of cash transferred to Michael Foods, was $21,250,000 at
the date of the North Star merger with Michael Foods. During 1997, Michael
Foods repaid all outstanding indebtedness under the old North Star debenture
program. In addition, 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.
NOTE 7 -- EMPLOYEE RETIREMENT PLAN
ENStar maintains an incentive savings plan for its employees. Full-time
employees that meet certain requirements are eligible to participate in the
plan. Contributions are made annually, primarily at the discretion of ENStar's
Board of Directors. Contributions of $281,000, $189,000, and $144,000, were
charged to operations in the years ended December 31, 1997, 1996 and 1995.
NOTE 8 -- STOCK OPTION PLANS
The Company and each of its operating subsidiaries maintain non-qualified
stock option plans in their own stock for the benefit of selected officers and
key employees. These original plans were approved by the respective Company's
Board of Directors in 1996. The ENStar plan reserved 300,000 shares for
issuance. At December 31, 1997, 347,100 options to acquire ENStar shares have
been issued subject to additional authorized shares being approved by the
Company's shareholders. The Americable plan reserved 600,000 shares for
issuance, while the Transition plan reserved 750,000 shares. Options granted to
date under all plans have been at fair market value on the date of the grant.
Each grant awarded specifies the period for which the options are exercisable,
the rate at which they vest, and provides that the options shall expire at the
end of such period.
-F16-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option transactions under these plans since adoption are summarized as
follows:
[CAPTION]
<TABLE>
ENStar Americable Transition
---------------- ---------------- ----------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1, 1996 -- $ -- -- $ -- -- $ --
Granted 77,100 9.00 345,000 0.82 298,500 1.25
------------------------------------------------------
Outstanding at
December 31, 1996 77,100 9.00 345,000 0.82 298,500 1.25
Granted 270,000 7.38 45,000 0.82 70,000 1.25
Cancelled -- -- (240,000) 0.82 (64,250) 1.25
------------------------------------------------------
Outstanding at
December 31, 1997 347,100 $7.74 150,000 $0.82 304,250 $1.25
======================================================
Options exercisable
at December 31:
1996 -- $ -- 101,000 $0.82 16,100 $1.25
======================================================
1997 19,275 $9.00 40,000 $0.82 60,850 $1.25
======================================================
</TABLE>
-F17-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information concerning currently outstanding
options:
[CAPTION]
<TABLE>
OPTIONS OUTSTANDING
Weighted average
Number remaining Weighted average
of shares contractual life and exercise price
----------------------------------------------------
<S> <C> <C> <C>
ENStar 270,000 9.9 years $7.38
77,100 8.2 years $9.00
-------
347,100
=======
Americable 150,000 9.3 years $0.82
=======
Transition 304,250 9.2 years $1.25
=======
</TABLE>
Had the Company or its operating subsidiaries elected to use the fair
value method for valuing options granted, the pro forma effect on net
income would have been an additional expense of $69,000, or 1 cent per
share in 1997, and $73,000, or 2 cents per share in 1996. The impact on
net income (loss) may not be representative of future disclosures because
they do not take into effect pro forma compensation expense related to
grants made before 1995.
The following represents the weighted average fair value of options
granted for the respective entities and the weighted average assumptions
used in the Black-Scholes option pricing model:
[CAPTION]
<TABLE>
ENStar Americable Transition
--------------------------------------------------
1997 1996 1997 1996 1997 1996
--------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fair value of
options granted $2.76 $3.89 $0.41 $0.52 $0.49 $0.48
Assumptions used:
Dividends $ -- $ -- $ -- $ -- $ -- $ --
Volatility 49.6% 57.5% 70.0% 98.0% 49.0% 49.0%
Risk-free interest rate 5.5% 5.5% 5.9% 5.9% 5.9% 5.9%
Expected option term 3 years 3 years 3 years 3 years 3 years 3 years
</TABLE>
-F18-
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- RELATED PARTY TRANSACTION
At December 31, 1995, ENStar had an unsecured note receivable from North
Star's majority shareholder and former chairman of the board of $257,872 which
was paid in full during 1996.
NOTE 10 -- GEOGRAPHIC AREA AND BUSINESS SEGMENT INFORMATION
The Company, through Transition, has sales throughout the world.
Substantially all of the export sales are denominated in U.S. dollars.
Revenues classified by major geographic area are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues from unaffiliated customers in the
United States..................................$48,288 $58,124 $49,668
Europe......................................... 4,141 4,192 3,363
Other.......................................... 1,923 1,807 1,860
------- ------- -------
$54,352 64,123 $54,891
======= ======= =======
</TABLE>
-F19-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
ENStar Inc.
We have audited the accompanying consolidated balance sheets of ENStar Inc.
(a Minnesota corporation) and subsidiaries, as of December 31, 1997 and 1996
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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 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 overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of ENStar Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
We have also audited schedule II for each of the three years in the period
ended December 31, 1997. In our opinion, this schedule, when considered in
relationship to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 18, 1998
-F20-
<PAGE>
ENSTAR INC.
*
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGES
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS- AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(1) PERIOD
----------- ---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
1995.............................. 333 135 -- (68) 400
1996.............................. 400 132 -- (92) 440
1997.............................. 440 145 -- (171) 414
</TABLE>
- --------------------------
(1) Write off of accounts deemed uncollectible.
-F21-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
CorVel Corporation
We have audited the accompanying consolidated balance sheets of CorVel
Corporation as of March 31, 1996 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and this schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CorVel Corporation at March 31, 1996 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relationship to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
May 8, 1997
-S1-
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION> Years Ended March 31
------------------------------------------
1995 1996 1997
------------------------------------------
<S> <C> <C> <C>
REVENUES $ 95,783,000 $109,052,000 $121,704,000
COSTS AND EXPENSES
Cost of revenues 78,950,000 88,937,000 99,323,000
General and administrative 7,186,000 8,106,000 8,645,000
------------------------------------------
86,136,000 97,043,000 107,968,000
------------------------------------------
Income before income taxes 9,647,000 12,009,000 13,736,000
Income tax provision 3,762,000 4,684,000 5,220,000
------------------------------------------
NET INCOME $ 5,885,000 $ 7,325,000 $ 8,516,000
==========================================
Net income per common
and common equivalent share $ 1.30 $ 1.57 $ 1.82
==========================================
Weighted average common
and common equivalent
shares outstanding 4,542,000 4,674,000 4,689,000
==========================================
See accompanying notes to consolidated financial statements.
</TABLE>
-S2-
<PAGE>
<TABLE>
<CAPTION>
CORVEL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31
---------------------------
1996 1997
---------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 17,113,000 $ 15,665,000
Accounts receivable (less allowance
for doubtful accounts of $1,268,000
in 1996 and $1,686,000 in 1997) 18,394,000 22,294,000
Prepaid taxes and expenses 545,000 124,000
Deferred income taxes 2,032,000 1,746,000
---------------------------
Total current assets 38,084,000 39,829,000
---------------------------
Property and equipment, net 11,468,000 13,100,000
Other assets 4,432,000 5,895,000
---------------------------
$ 53,984,000 $ 58,824,000
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable $ 3,057,000 $ 6,603,000
Accrued liabilities 4,246,000 4,630,000
---------------------------
Total current liabilities 7,303,000 11,233,000
---------------------------
Deferred income taxes 1,370,000 1,504,000
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.0001 par value: 20,000,000
shares authorized; 4,593,675 and 4,697,853
shares issued and outstanding in 1996 and
1997, respectively
Paid-in Capital 26,401,000 28,122,000
Treasury Stock, at cost (no shares in 1996,
357,000 shares in 1997) --- (9,461,000)
Retained Earnings 18,910,000 27,426,000
---------------------------
Total stockholders' equity 45,311,000 46,087,000
---------------------------
$ 53,984,000 $ 58,824,000
===========================
See accompanying notes to consolidated financial statements.
-S3-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1995, 1996, and 1997
Common
stock and Treasury Total
Common paid in Treasury shares- Retained stockholders'
stock-shares capital shares cost earnings equity
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1994 4,071,195 $ 21,625,000 --- $ --- $ 5,700,000 $27,325,000
Stock issued under employee
stock purchase plan 19,634 374,000 --- --- --- 374,000
Stock issued under employee
stock option plan and
related income tax benefits 147,421 2,170,000 --- --- --- 2,170,000
Net income --- --- --- --- 5,885,000 5,885,000
---------------------------------------------------------------------------
Balance - March 31, 1995 4,238,250 $ 24,169,000 --- --- $11,585,000 $35,754,000
----------------------------------------------------------------------------
Stock issued under employee
stock purchase plan 18,384 444,000 --- --- --- 444,000
Stock issued under employee
stock option plan and
related income tax benefits,
net of shares repurchased
upon exercise 337,041 1,788,000 --- --- --- 1,788,000
Net income --- --- --- --- 7,325,000 7,325,000
---------------------------------------------------------------------------
Balance - March 31, 1996 4,593,675 $ 26,401,000 --- --- $18,910,000 $45,311,000
---------------------------------------------------------------------------
Stock issued under
employee stock purchase
plan 23,039 536,000 --- --- --- 536,000
Stock issued under
employee stock option
plan and related income
tax benefits 81,139 1,185,000 --- --- --- 1,185,000
Purchase of Common Stock --- --- (357,000) (9,461,000) --- (9,461,000)
Net income --- --- --- --- 8,516,000 8,516,000
---------------------------------------------------------------------------
Balance - March 31, 1997 4,697,853 $ 28,122,000 (357,000) $(9,461,000)$27,426,000 $46,087,000
===========================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
-S4-
<PAGE>
<TABLE>
<CAPTION>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31
----------------------------------------
1995 1996 1997
----------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,885,000 $ 7,325,000 $ 8,516,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 2,335,000 3,048,000 4,215,000
Deferred income taxes (44,000) (79,000) 420,000
Loss on write down and disposal
of property and equipment 39,000 23,000 96,000
Changes in operating assets
and liabilities:
Accounts receivable (2,657,000) (2,526,000) (3,900,000)
Prepaid taxes and expenses 795,000 (363,000) 421,000
Accounts and taxes payable 27,000 700,000 3,546,000
Accrued liabilities 538,000 (382,000) 384,000
Other assets (425,000) (511,000) (1,607,000)
----------------------------------------
Net cash provided by operating activities 6,493,000 7,235,000 12,091,000
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,219,000) (5,565,000) (5,799,000)
----------------------------------------
Net cash used in investing activities (4,219,000) (5,565,000) (5,799,000)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds and tax benefits from
exercise of stock options 2,544,000 2,232,000 1,721,000
Purchase of common stock --- --- (9,461,000)
----------------------------------------
Net cash provided by (used in)
financing activities 2,544,000 2,232,000 (7,740,000)
----------------------------------------
Net increase (decrease) in cash
and cash equivalents 4,818,000 3,902,000 (1,448,000)
Cash and cash equivalents at beginning of year 8,393,000 13,211,000 17,113,000
----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,211,000 $ 17,113,000 $ 15,665,000
========================================
See accompanying notes to consolidated financial statements.
</TABLE>
-S5-
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1997
NOTE A - Summary of Significant Accounting Policies
Organization: CorVel Corporation (CorVel or the Company) provides
services and programs nationwide that are designed to enable insurance
carriers, third party administrators and employers with self-insured programs
to administer, manage and control the cost of worker's compensation and other
healthcare benefits.
Basis of Presentation: The consolidated financial statements include the
accounts of CorVel and its subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
financial statements. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents consists of
short-term, highly-liquid investments with maturities of 90 days or less when
purchased. The carrying amounts of the Company's financial instruments
approximate their relative fair values at March 31, 1996 and 1997.
Concentrations of Credit Risk: The Company performs periodic credit
evaluations of its customers' financial condition and does not require
collateral. No customer represented 10% of accounts receivable at March 31,
1996 and 1997. Receivables generally are due within 60 days. Credit losses
relating to customers in the workers compensation insurance industry
consistently have been within management's expectations.
Property and Equipment: Additions to property and equipment are recorded
at cost. Depreciation and amortization are provided using the straight-line
and accelerated methods over the estimated useful lives of the related assets
which range from three to seven years.
Long-Lived Assets: The carrying amount of all long-lived assets is
evaluated periodically to determine if adjustment to the depreciation and
amortization period or to the unamortized balance is warranted. Such
evaluation is based principally on the expected utilization of the long-lived
assets and the projected, undiscounted cash flows of the operations in which
the long-lived assets are deployed.
Other Assets: Other assets consists primarily of the excess of the
purchase price over the estimated fair value of the net assets of businesses
acquired (goodwill) and is being amortized using the straight-line method over
periods not exceeding 40 years. Goodwill amounted to $3,636,000 (net of
accumulated amortization of $754,000) at March 31, 1996 and 4,886,000 (net of
accumulated amortization of $898,000) at March 31, 1997.
-S6-
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1997
(Continued)
NOTE A - Summary of Significant Accounting Policies (continued)
Revenue Recognition: The Company's revenues are recognized primarily as
services are rendered based on time and expenses incurred. A certain portion
of the Company's revenues are derived from fee schedule auditing which is
based on the number of provider charges audited and, to a limited extent, on a
percentage of savings achieved for the Company's clients. Accounts receivable
includes $1,527,000 and $1,580,000 of unbilled receivables at March 31, 1996
and 1997, respectively. No one customer accounted for more than 10% of
consolidated revenues during the years ended March 31, 1995, 1996 and 1997.
Income Taxes: The consolidated financial statements reflect the
application of Statement of Financial Accounting Standards No. 109 -
"Accounting for Income Taxes".
Income Per Share: Income per share is computed by dividing net income
by the weighted average number of common and common equivalent shares
outstanding during the year.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Account Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS
128 redefines the standards for computing earnings per share and is effective
for the Company on March 31, 1998. The Company believes adoption of SFAS No.
128 will not have a material impact on future earnings per share calculations.
Stock Option Plans: Effective April 1, 1996, the Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123) and accordingly, is
continuing to account for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
and related interpretations. The adoption of SFAS No. 123 had no impact on
the Company's consolidated results of operations or financial position.
-S7-
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1997
(Continued)
NOTE B - Property and Equipment
Property and equipment consists of the following at March 31:
<TABLE>
<CAPTION>
1996 1997
-----------------------------
<S> <C> <C>
Office equipment and computers $ 15,542,000 $ 19,875,000
Computer software 4,207,000 5,186,000
Leasehold improvements 613,000 784,000
-----------------------------
20,362,000 25,845,000
Less: accumulated depreciation
and amortization 8,894,000 12,745,000
-----------------------------
$ 11,468,000 $ 13,100,000
=============================
</TABLE>
NOTE C - Accrued Liabilities
<TABLE>
<CAPTION>
Accrued liabilities consists of the following at March 31:
1996 1997
----------------------------
<S> <C> <C>
Payroll and related benefits $ 2,366,000 $ 2,891,000
Self-insurance reserves 737,000 599,000
Other 1,143,000 1,140,000
----------------------------
$ 4,246,000 $ 4,630,000
============================
</TABLE>
-S8-
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1997
(Continued)
NOTE D - Income Taxes
<TABLE>
<CAPTION>
The income tax provision consists of the following for the three years
ended March 31:
1995 1996 1997
----------------------------------------------
<S> <C> <C> <C>
Current - Federal $ 3,172,000 $ 4,045,000 $ 4,212,000
Current - State 634,000 718,000 588,000
Utilization of net
operating loss (538,000) --- ---
----------------------------------------------
3,268,000 4,763,000 4,800,000
----------------------------------------------
Deferred - Federal (37,000) (102,000) 368,000
Deferred - State (7,000) 23,000 52,000
----------------------------------------------
(44,000) (79,000) 420,000
----------------------------------------------
Utilization of net
operating loss carryovers 538,000 --- ---
----------------------------------------------
$ 3,762,000 $ 4,684,000 $ 5,220,000
==============================================
</TABLE>
Income tax benefits associated with the exercise of stock options were
$991,000, $4,245,000 and $228,000 for fiscal 1995, 1996 ,and 1997,
respectively.
<TABLE>
<CAPTION>
The following is a reconciliation of the income tax provision from the
statutory federal income tax rate to the effective rate for the three years
ended March 31:
1995 1996 1997
----------------------------------------------
<S> <C> <C> <C>
Income taxes at federal
statutory rate $ 3,377,000 $ 4,203,000 $ 4,808,000
State income taxes, net
of federal benefit 399,000 446,000 423,000
Goodwill amortization 35,000 37,000 40,000
Other (49,000) (2,000) (51,000)
----------------------------------------------
$ 3,762,000 $ 4,684,000 $ 5,220,000
==============================================
</TABLE>
-S9-
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1997
(Continued)
Note D - Income Taxes (continued)
Income taxes paid totaled $1,100,000, $1,193,000 and $1,683,000 for the
years ended March 31, 1995, 1996, and 1997, respectively. At March 31, 1994,
the Company had net operating loss (NOLs) carryforwards of $1,600,000 for
income tax purposes. A valuation allowance of $538,000 was recorded in 1994 to
offset the deferred tax assets related to the NOLs. This $538,000 valuation
allowance was applied to additional paid-in capital in 1995 since the related
NOLs were principally attributable to deductions for the exercise of non-
qualified stock options in 1994.
<TABLE>
<CAPTION>
Deferred taxes at March 31, 1996 and 1997 are:
1996 1997
----------------------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities not currently deductible $ 1,310,000 $ 939,000
Allowance for doubtful accounts 495,000 580,000
Other 227,000 227,000
----------------------------
Deferred assets $ 2,032,000 $ 1,746,000
Deferred tax liabilities:
Excess of tax under book basis
of fixed assets (1,370,000) (1,504,000)
----------------------------
Deferred liability (1,370,000) (1,504,000)
----------------------------
Net deferred tax asset $ 662,000 $ 242,000
============================
</TABLE>
-S10-
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1997
(Continued)
NOTE E - Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting of its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
SFAS No. 123 requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Under the Company's Restated 1988 Executive Stock Option Plan, as
amended, options for up to 1,535,000 shares of the Company's common stock may
be granted to key employees, nonemployee directors and consultants at prices
not less than 85% of the fair value of the stock at the date of grant as
determined by the Board. Options granted under the Plan may be either
incentive stock options or non-statutory stock options and are generally
exercisable beginning one year from the date of grant and vest monthly
thereafter for three years. In addition to the aforementioned Plan, the
Company's President was issued an option to purchase 750,000 shares of common
stock at an exercise price of $.0001 per share in January 1988. As of March
31, 1997, all of these options have vested and options to purchase 60,000
shares of common stock are outstanding.
<TABLE>
<CAPTION>
Summarized information for all of the stock options follows:
------------------------------------------
1995 1996 1997
------------------------------------------
<S> <C> <C> <C>
Options outstanding at the
beginning of the year 903,867 827,018 423,411
Options granted 88,850 81,300 126,450
Options exercised (147,421) (468,572) (81,139)
Options canceled (18,278) (16,335) (12,890)
------------------------------------------
Options outstanding at the
end of the year 827,018 423,411 455,832
==========================================
During the year
Weighted average price of
options granted $ 22.26 $ 25.19 $ 28.48
Weighted average price of
options exercised $ 4.36 $ 2.54 $ 11.71
Weighted average price of
options cancelled $ 15.25 $ 18.40 $ 22.80
At the end of the year:
Price range of
outstanding options $.0001- $.0001- $.0001-
$26.50 $31.50 $31.50
Weighted average price
per share $ 7.38 $15.73 $19.77
Options available for
future grants 266,988 202,444 288,884
Exercisable options 622,348 242,575 244,881
</TABLE>
-S11-
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1997
(Continued)
NOTE E - Stock Option Plans (continued)
<TABLE>
<CAPTION>
The following table summarizes the status of fixed stock options
outstanding and exercisable at March 31, 1997:
Outstanding Exercisable
Weighted Options- Options-
Average Weighted Weighted
Remaining Average Number of Average
Range of Number of Contractual Exercise Exercisable Exercise
Exercise Prices Options Life Price Options Price
- - ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$.0001-$.0001 60,000 .76 years $.0001 60,000 $.0001
10.75 - 15.00 71,640 .81 years 12.67 69,859 12.72
17.00 - 23.00 148,002 2.70 years 21.07 95,299 20.88
25.50 - 31.50 176,190 5.11 years 28.33 19,723 27.79
----------------------------------------------------------
455,832 3.08 years $19.77 244,881 $13.99
==========================================================
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation cost for the Company's stock option and stock purchase plans
been recorded consistent with the provisions of SFAS No. 123, pro forma net
income would have been reduced to $7,251,000 and $8,315,000 from $7,325,000
and $8,516,000 for the years ended March 31, 1996 and 1997, respectively.
Pro forma earnings per share would have been reduced to $1.55 and $1.77 from
$1.57 and $1.82 for the years ended March 31, 1996 and 1997, respectively.
The fair value of each plan is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted average
assumptions were used for fiscal 1996: expected volatility of .45; risk free
interest rate of 6.4%. The following weighted average assumptions were used
for fiscal 1997: expected volatility of .41; risk free interest rate of 6.4%.
The assumptions for both years reflect no dividend yield and a weighted average
option life of three years.
-S12-
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1997
(Continued)
NOTE E - Stock Option Plans (continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjecting assumptions including the
expected stock price volatility. Because the Company's employee stock options
have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
Because SFAS 123 is applicable only to the Company's options granted
subsequent to April 1, 1995, its pro forma effect will not be fully reflected
until 1999. The aforementioned results are not likely to be representative
of the effects of applying SFAS 123 on reported net income for future years
as these amounts reflect the expense for only one or two years of vesting.
NOTE F - Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan which allows
employees of the Company and its subsidiaries to purchase shares of common
stock on the last day of two six-month purchase periods (i.e. March 31 and
September 30) at a purchase price which is 85% of the closing sale price of
shares as quoted on NASDAQ on the first or last day of such purchase period,
whichever is lower. Employees are allowed to participate up to 20% of their
gross pay. A maximum of 150,000 shares has been authorized for issuance under
the plan. As of March 31, 1997, 114,141 shares had been issued pursuant to
the plan.
<TABLE>
<CAPTION>
-S13-
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1997
(Continued)
NOTE F - Employee Stock Purchase Plan (continued)
Summarized plan information is as follows:
------------------------------------------
1995 1996 1997
------------------------------------------
<C> <C> <C>
Employee contributions $ 374,000 $ 444,000 $ 536,000
Shares acquired 19,634 18,384 23,039
Average purchase price $19.02 $24.15 $23.27
</TABLE>
NOTE G - Treasury Stock
In August 1996, the Company announced that its Board of Directors had
approved a plan to repurchase up to 100,000 shares, or approximately 2% of the
Company's then outstanding Common Stock. The Company's Board of Directors
subsequently increased the number of shares authorized to repurchase to a
total 550,000 shares, or approximately 12% of the Company's stock. Through
March 31, 1997, the Company had repurchased 357,000 shares of its common stock
for $9,461,000, at prices ranging from $24.63 to $30.00 per share, with an
average price of $26.50. The stock was recorded as treasury stock, at cost,
and is available for general corporate purposes. The repurchases were
financed from cash generated from operations.
NOTE H - Commitments and Contingencies
The Company leases office facilities under noncancelable operating
leases. Future minimum rental commitments under operating leases at March 31,
1997 are $4,013,000 in fiscal 1998, $2,896,000 in fiscal 1999, $2,166,000 in
fiscal 2000, $1,194,000 in fiscal 2001, $547,000 in fiscal 2002, and $69,000,
thereafter. Total rental expense of $3,559,000, $3,901,000, and $4,573,000
was charged to operations for the years ended March 31, 1995, 1996, and 1997,
respectively.
The Company is involved in litigation arising in the normal course of
business. The Company believes that resolution of these matters will not
result in any payment that, in the aggregate, would be material to the
financial position and results of the operations of the Company.
-S14-
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1997
(Continued)
NOTE I - Savings Plan
The Company maintains a retirement savings plan for its employees which
is a qualified plan under section 401(k) of the Internal Revenue Code. Full-
time employees that meet certain requirements are eligible to participate in
the plan. Contributions are made annually primarily at the discretion of the
Company's Board of Directors. Contributions of $157,000, $50,000, and
$135,000 were charged to operations for the years ended March 31, 1995, 1996,
and 1997, respectively.
NOTE J - Shareholder Rights Plan
During fiscal 1997, the Company's Board of Directors approved the
adoption of a Shareholder Rights Plan. The Rights Plan, which is similar to
rights plans adopted by numerous other public companies, provides for a
dividend distribution to CorVel stockholders of one preferred stock purchase
"Right" for each outstanding share of CorVel's common stock. The Rights are
designed to assure that all stockholders receive fair and equal treatment in
the event of any proposed takeover of the Company and to encourage a potential
acquirer to negotiate with the Board of Directors prior to attempting a
takeover. The Rights have an exercise price of $125.00 per Right, subject to
subsequent adjustment. Initially, the Rights will trade with the Company's
common stock, and will not be exercisable until the occurrence of certain
takeover-related events. The issuance of the Rights has no dilutive effect on
the Company's earnings per share.
-S15-
PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1997
(Continued)
NOTE K - Quarterly Results
<TABLE>
<CAPTION>
The following is a summary of unaudited results of operations for the two
years ended March 31, 1996 and 1997:
Net income
per common Weighted
and common common
Gross Net equivalent equivalent
Revenues Margin income share shares
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended
March 31, 1996:
First Quarter $ 26,779,000 $ 4,856,000 $ 1,701,000 $ .37 4,592,000
Second Quarter 26,863,000 4,989,000 1,818,000 .39 4,661,000
Third Quarter 27,082,000 5,127,000 1,887,000 .40 4,718,000
Fourth Quarter 28,328,000 5,143,000 1,919,000 .41 4,724,000
Fiscal Year Ended
March 31, 1997:
First Quarter $ 29,851,000 $ 5,390,000 $ 2,042,000 $ .43 4,759,000
Second Quarter 29,719,000 5,488,000 2,092,000 .44 4,760,000
Third Quarter 30,441,000 5,681,000 2,177,000 .46 4,736,000
Fourth Quarter 31,693,000 5,822,000 2,205,000 .49 4,501,000
-S16-
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Schedule II
CORVEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Costs and End of
of Year Expenses Deductions Year
------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended March 31, 1997: $1,268,000 $1,763,000 $(1,345,000) $1,686,000
Year ended March 31, 1996: 825,000 500,000 (57,000) 1,268,000
Year ended March 31, 1995: 725,000 100,000 --- 825,000
</TABLE>
-S17-
EXHIBIT 10.13
SUPPLEMENT A
to
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
Dated as of JUNE 1, 1993 Among
U.S. BANK NATIONAL ASSOCIATION, as the successor
by merger with First Bank National Association (the "Bank") and
AMERICABLE, INC., CABLE DISTRIBUTION SYSTEMS, INC.
and ENSTAR NETWORKING CORPORATION
(collectively, the "Borrowers")
(AMENDED 3/98)
1. Loan Agreement Reference. This Supplement A, as it may be amended or
modified from time to time, is a part of the Amended and Restated Loan and
Security Agreement, dated as of June 1, 1993, among the Borrowers and the Bank
(together with all amendments, modifications and supplements thereto, the "Loan
Agreement"). Terms used herein which are defined in the Loan Agreement shall
have the meanings given such terms in the Loan Agreement unless the context
other requires.
2. Credit Amount; Borrowing Base.
2.1 Credit Amount. The maximum amount of Revolving Loans which the
Bank will make available to the Borrowers shall not exceed FOUR MILLION AND
NO/100 DOLLARS ($4,000,000) (such amount is herein called the "Credit
Amount") (unless such amount is increased by the Bank in its sole and
absolute discretion).
2.2 Borrowing Base.
The term "Borrowing Base," as used herein, shall mean:
(a) an amount of up to 85% of the net amount (as determined by
the Bank after deduction of such reserves and allowances as the Bank
deems proper and necessary) of the Borrowers' Eligible Accounts
Receivable; plus
(b) an amount of up to the lesser of (i) 40% of the net value
(the lower of the cost or market value of such Inventory as determined
by the Bank on a first in first out basis and after deduction of such
reserves and allowances as the Bank deems proper and necessary) of the
Borrowers' Eligible Inventory or (ii) $1,500,000;
provided, however, that the Bank, in its sole discretion, may: (x) limit
the amount of ENC's Eligible Accounts Receivable and Eligible Inventory
included in the consolidated Borrowing Base for all Borrowers to an amount
which does not exceed the sum of the outstanding principal balance of
Advances obtained by ENC directly from the Bank or obtained by any other
<PAGE>
Borrower and disbursed to, or for the benefit of ENC; and/or (y) require
that the Borrowing Base be separately calculated for each of Americable and
ENC and that the Advances made to such Borrower be limited to such
Borrower's Base.
2.3 Bank's Rights. The Borrowers agree that nothing contained in this
Supplement A (a) shall be construed as the Bank's agreement to resort or
look to a particular type or item of Collateral as security for any specific
Loan or advance or in any way limit the Bank's right to resort to any or all
of the Collateral as security for any of the obligations, (b) shall be
deemed to limit or reduce any lien on or any security interest in or upon
any portion of the Collateral or other security for the Obligations or (c)
shall supersede Section 2.10 of the Loan Agreement.
3. Interest.
3.1 Revolving Loans. The unpaid balance of the Revolving Loans shall
bear interest to maturity as follows:
(a) Eurodollar Advances. The unpaid principal amount of each
Eurodollar Advance shall bear interest prior to maturity at a rate per
annum equal to the Eurodollar Rate (Reserve Adjusted) in effect for
each Interest Period for such Eurodollar Advance plus 2.50% per annum.
(b) Reference Rate Advances. The unpaid principal amount of
Revolving Loans accruing interest as Reference Rate Advances shall bear
interest prior to maturity as follows: (i) on that portion of the
aggregate outstanding principal of the Revolving Loans which is equal
to or less than $2,500,000, at a rate per annum equal to the Reference
Rate; and (ii) on that portion of the aggregate outstanding principal
of the Revolving Loans which exceeds $2,500,000, at a rate per annum
equal to the sum of the Reference Rate plus one-half of one percent
(0.50) per annum.
3.2 Default Rate. If any amount of the Loans is not paid when due,
whether by acceleration or otherwise, the entire unpaid principal balance
of the Loans (other than overdraft Loans and Over Advances) shall bear
interest until paid at a rate per annum equal to the greater of (i) the
Reference Rate from time to time in effect plus four percent (4%) or (ii)
two percent (2%) above the rate in effect at the time such amount became
due for such past due amount.
3.3 Overdraft Loans; Over Advances. Overdraft Loans and over Advances
shall bear interest at the rate(s) determined pursuant to Section 2.8 or
Section 2.9 of the Original Agreement, as applicable.
-2-
<PAGE>
4. Eligible Account Receivable Data.
(a) The Account Receivable must not be unpaid on the date that is
90 days after the date of the invoice evidencing such Account Receivable.
(b) If invoices representing 10% or more of the unpaid net amount of
all Accounts Receivable from any one Account Debtor are unpaid more than 90
days after the dates of the invoices evidencing such Accounts Receivable,
then all Accounts Receivable relating to such Account Debtor shall cease to
be Eligible Accounts Receivable.
5. Additional Covenants. From the date of the Loan Agreement and thereafter
until all of the Borrowers' Obligations under the Loan Agreement are paid in
full, the Borrowers agree that, unless the Bank shall otherwise consent in
writing, it will not, and will not permit any Subsidiary to, do any of the
following:
5.1 Tangible Capital Base. [INTENTIONALLY DELETED.]
5.2 Leverage Ratio. [INTENTIONALLY DELETED.]
5.3 Interest Coverage Ratio. [INTENTIONALLY DELETED.]
5.4 Capital Expenditures. Make Capital Expenditures in an amount
exceeding $600,000 determined on a consolidated basis for the Borrowers
only (excluding Transition) during Americable's fiscal year ending
December 31, 1998.
5.5 Year-to-date Loss. Sustain, at any fiscal month-end, a fiscal
year-to-date loss before taxes computed on a consolidated basis for
Americable and its consolidated Subsidiaries in accordance with GAAP
greater than (i.e., a greater negative number than) the amount set forth
below opposite the relevant fiscal month:
Month Loss
----- ----
December 31, 1997 ($3,351,000)
January 31, 1998 ($242,000)
February 28, 1998 ($307,000)
March 31, 1998 ($269,000)
April 30, 1998 ($251,000)
May 31, 1998 ($218,000)
June 30, 1998 ($105,000);
provide, however, that:
(a) the permitted maximum fiscal year-to-date loss for any fiscal
month shall be reduced (i.e., made a less negative number) by the
-3-
<PAGE>
amount of any insurance recoveries in excess of $650,000 (the amount
presently recovered) on Americable's fraud claim of approximately
$950,000; and
(b) if the fiscal year-to-date loss as of any fiscal month-end
exceeds the maximum permitted fiscal year-to-date loss, then Borrowers,
by no later than 10 days after submitting its financial statements for
such fiscal month to Bank, shall obtain a capital contribution from
ENStar in the amount of such excess.
Borrowers' Initials
------
------
------
Bank's Initials
-----
Date: March 5, 1998
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
AMERICABLE, INC., a Minnesota corporation
By: /s/ PETER E. FLYNN
---------------------------
Peter E. Flynn, President
and Chief Executive Officer
CABLE DISTRIBUTION SYSTEMS, INC.,
a Georgia corporation
By: /s/ PETER E. FLYNN
---------------------------
Peter E. Flynn, Secretary
ENSTAR NETWORKING CORPORATION,
a Minnesota corporation
By: /s/ THOMAS S. WARGOLET
---------------------------
Thomas S. Wargolet, Vice
President Finance
U.S. BANK NATIONAL ASSOCIATION,
a national banking association
and the successor by merger with
First Bank National Association
By:
----------------------------
Title:
ASSUMPTION AGREEMENT AND NINTH AMENDMENT TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AND WAIVER
THIS ASSUMPTION AGREEMENT AND NINTH AMENDMENT TO AMENDED AND RESTATED LOAN
AND SECURITY AGREEMENT AND WAIVER (the "Amendment") is dated as of March 5,
1998, and is by and among AMERICABLE, INC., a Minnesota corporation
("Americable"), CABLE DISTRIBUTION SYSTEMS, INC., a Georgia corporation
("Cable"), (Americable and Cable are hereinafter each individually referred to
as an "Original Borrower" and collectively as the "Original Borrowers") ENSTAR
NETWORKING CORPORATION, a Minnesota corporation ("ENC") (Americable, Cable, and
ENC are hereinafter each individually referred to as a "Borrower" and
collectively as the "Borrowers") and U.S. BANK NATIONAL ASSOCIATION, a national
banking association and the successor by merger with First Bank National
Association, (the "Bank"). Capitalized terms not otherwise expressly defined
herein shall have the meanings set forth in the Loan Agreement hereinafter
described.
RECITALS
WHEREAS, the Original Borrowers and the Bank are parties to an Amended and
Restated Loan and Security Agreement, dated as of June 1, 1993, as amended by a
First Amendment dated as of November 29, 1993, a Waiver, a Second Amendment
dated March 3, 1995, a Third Amendment dated May 31, 1996, a letter amendment
dated June 28, 1996, a letter amendment dated July 31, 1996, a Sixth Amendment
dated as of August 9, 1996, a Seventh Amendment dated as of May 29, 1997 and an
Eighth Amendment dated as of September 30, 1997 (as so amended, the "Loan
Agreement");
WHEREAS, Americable has transferred certain of its assets to ENC and such
transfer requires the Bank's consent; and
WHEREAS, as a condition to consenting to such transfer, the Bank has
required that ENC assume the Obligations on a joint and several basis with the
Original Borrowers by executing and delivering this Amendment.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1 - ASSUMPTION AGREEMENT
1.1 Assumption of Loan Agreement. ENC hereby expressly assumes and agrees
to perform, observe and confirm, on a joint and several basis with the Original
Borrowers, all and singular, the covenants, agreements, terms, conditions,
obligations, appointments, duties and liabilities of the Original Borrowers, or
any of them, under the Original Agreement, and each other Loan Document to which
any Original Borrower is a party and any other document or instrument executed
<PAGE>
and delivered or furnished by any Original Borrower in connection therewith. By
virtue of the foregoing, ENC hereby accepts and assumes, on a joint and several
basis with each of the Original Borrowers, any and all liability of any Original
Borrower relating to any representation or warranty made by any Original
Borrower in the Loan Agreement and confirms and restates all such
representations and warranties made by each Original Borrower with respect to
itself as being true and correct except for the representations and warranties
that relate solely to an earlier date.
1.2 Collateral Accounts. Without limiting the generality of the foregoing,
the Original Borrowers and ENC agree that the Collateral Account for all of the
Borrowers is Account No. 170225066456 and that the Disbursement Account for all
of the Borrowers is Account No. 180121002836.
1.3 Binding Effect. Effective immediately upon the Effective Date of this
Amendment, ENC shall be bound by, and shall enjoy the benefits of, the Original
Agreement and each other Document to which any Original Borrower is a party as
if ENC had been an original signatory thereto.
ARTICLE II - AMENDMENTS TO THE LOAN AGREEMENT
2.1 Amendments to Loan Agreement. The Loan Agreement is hereby amended
as follows:
(a) the definition of "Borrower" and "Borrowers" set forth in the
preamble to the Loan Agreement is hereby amended in its entirety to read as
follows:
"Americable, Cable and ENC are hereinafter each individually
referred to as a 'Borrower' and collectively as the 'Borrowers'."
(b) Section 1.1 of the Loan Agreement is further amended to add the
following new definition of "ENC":
"ENC': Enstar Networking Corporation, a Minnesota corporation."
(c) Section 7.1(o) is amended in its entirety to read as follows:
"(o) Ownership. (i) So long as the Americable Spin-off has not
occurred, NSU shall cease to own at least 90% of the shares of all
voting stock of Americable; or (ii) Americable shall cease to own at
least 90% of the shares of all voting stock of either of Cable or
ENC."
-2-
<PAGE>
(d) Section 12.11 is amended in its entirety to read as follows:
"12.11 Joint and Several Obligations. Each Borrower, and all of
them, shall be jointly and severally obligated hereunder and under
the other Loan Documents; provided, however, that if Cable's or
ENC's liability for Obligations would otherwise be held or
determined to be void, invalid or unenforceable in any action or
proceeding involving any state corporate law, or any state or
federal bankruptcy, insolvency, reorganization or other law
affecting the rights of creditors generally on account of the
amount of such liability, then, notwithstanding any other
provision of this Agreement to the contrary, the amount of such
Borrower's liability shall, without any further action by such
Borrower, the Lender or any other person, be automatically limited
and reduced to the highest amount which is valid and enforceable
as determined in such action or proceeding."
(e) Supplement A (Amended 9/97) attached to the Loan Agreement is
hereby deleted and Supplement A (Amended 3/98) attached to this Amendment
is substituted therefor. All references in the Loan Agreement to
"Supplement A" shall be references to Supplement A (Amended 3/98).
2.2 Construction. All references in the Loan Agreement to "this
Agreement," "herein" and similar references shall be deemed to refer to the Loan
Agreement as amended by this Amendment.
ARTICLE III - REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to make and maintain the
Loans under the Loan Agreement as amended hereby, the Borrowers hereby warrant
and represent to the Bank that: (a) The execution, delivery and performance by
the Borrowers of this Amendment and any other documents to which any Borrower
is a party have been duly authorized by all necessary corporate or partnership
action, do not require any approval or consent of, or any registration,
qualification or filing with, any government agency or authority or any approval
or consent of any other person (including, without limitation, any stockholder
or partner), do not and will not conflict with, result in any violation of or
constitute any default under, any provision of such Borrower's articles of
incorporation or bylaws, any agreement binding on or applicable to such
Borrower or any of its property, or any law or governmental regulation or
court decree or order, binding upon or applicable to such Borrower or of any
of its property and will not result in the creation or imposition of any
security interest or other lien or encumbrance in or on any of its property
pursuant to the provisions of any agreement applicable to the such Borrower
or any of its property; (b) The Loan Agreement as amended by this Amendment
is the legal, valid and binding obligations of each Borrower and is
-3-
<PAGE>
enforceable in accordance with its terms, subject only to bankruptcy,
insolvency, reorganization, moratorium or similar laws, rulings or decisions
at the time in effect affecting the enforceability of rights of creditors
generally and to general equitable principles which may limit the right to
obtain equitable remedies.
ARTICLE IV - CONDITIONS AND EFFECTIVENESS
This Amendment shall become effective on the date first set forth above,
provided, however, that the effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions:
4.1 Before and after giving effect to this Amendment, the representations
and warranties in ARTICLE IV of the Loan Agreement shall be true and correct as
though made on the date hereof except for changes that are permitted by the
terms of the Loan Agreement. The execution by the Borrowers of this Amendment
shall be deemed a representation that the Borrowers have complied with the
foregoing condition.
4.2 Before and after giving effect to this Amendment, no Event of Default
or no Default, shall have occurred and be continuing under the Loan Agreement
except for those expressly waived by the terms hereof. The execution by the
Borrowers of this Amendment shall be deemed a representation that the
Borrowers have complied with the foregoing condition.
4.3 The Bank shall have received the following documents appropriately
completed and duly executed by the Borrowers and the other Obligors where
appropriate:
(a) This Amendment appropriately completed and duly executed by
the Borrowers, together with a resolution of each of the Borrowers
authorizing the execution and delivery of this Amendment in form and
substance satisfactory to the Bank;
(b) UCC Financing Statements duly executed by ENC in form and
substance satisfactory to the Bank;
(c) UCC Searches on ENC showing no other Person holds any Lien on
any of ENC's assets other than Liens permitted by the Bank;
(d) A favorable opinion of counsel to the Borrowers in form and
substance satisfactory to the Bank;
(e) An Acknowledgment and Consent duly executed by ENStar in form
and substance satisfactory to the Bank; and
(f) Such other approvals, opinions or documents, as the Bank may
reasonably request.
-4-
<PAGE>
ARTICLE V - GENERAL
5.1 Expenses. The Borrowers jointly and severally agree to reimburse the
Bank upon demand for all reasonable expenses, including reasonable fees of
attorneys (who may be employees of the Bank) and legal expenses incurred by the
Bank in the preparation, negotiation and execution of this Amendment and any
other document required to be furnished herewith, and in enforcing the
obligations of the Borrowers hereunder, and to jointly and severally pay and
save the Bank harmless from all liability for, any stamp or other taxes which
may be payable with respect to the execution or delivery of this Amendment,
which obligations of the Borrowers shall survive any termination of the Loan
Agreement.
5.2 Counterparts. This Amendment may be executed in as many counterparts
as may be deemed necessary or convenient, and by the different parties hereto
on separate counterparts as may be deemed necessary or convenient, and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed an original but all such counterparts shall constitute
but one and the same instrument.
5.3 Severability. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining portions hereof or affecting the validity or enforceability of such
provisions in any other jurisdiction.
5.4 Law. This Amendment shall be a contract made under the laws of the
State of Minnesota, which laws shall govern all the rights and duties hereunder.
5.5 Successors: Enforceability. This Amendment shall be binding upon the
Borrowers and the Bank and their respective successors and assigns, and shall
inure to the benefit of the Borrowers and the Bank and the successors and
assigns of the Bank. Except as hereby amended, the Loan Agreement shall remain
in full force and effect and is hereby ratified and confirmed in all respects.
5.6 Recitals. The recitals hereto are incorporated herein by reference and
constitute an integral part of this Amendment.
5.7 Acknowledgement and Release. In order to induce the Bank to enter into
this Amendment, the Borrowers: (a) represent and warrant to the Bank that no
events have taken place and no circumstances exist at the date hereof which
would give the Borrowers the right to assert a defense, offset or counterclaim
to any claim by the Bank for payment of the Obligations; and (b) hereby release
and forever discharge the Bank and its successors, assigns, directors, officers,
agents, employees and participants from any and all actions, causes of action,
suits, proceedings, debts, sums of money, covenants, contracts, controversies,
claims and demands, at law or in equity, which the Borrowers ever had or now
have against the Bank or its successors, assigns, directors, officers, agents,
employees or participants by virtue of their relationship to the Borrowers in
connection with the Loan Documents and the transactions related thereto.
-5-
EXHIBIT 10.14
THIRD AMENDMENT TO
LOAN AND SECURITY AGREEMENT AND WAIVER
THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT AND WAIVER (the
"Amendment") is dated as of March 31, 1998, and is by and between TRANSITION
NETWORKS, INC., a Minnesota corporation (the "Borrower") and U.S. BANK
NATIONAL ASSOCIATION, f/k/a First Bank National Association, a national banking
association (the "Bank"). Capitalized terms not otherwise expressly defined
herein shall have the meanings set forth in the Loan Agreement.
RECITALS
WHEREAS, the Borrower and the Bank are parties to a Loan and Security
Agreement, dated as of August 9, 1996, as amended by a First Amendment dated
as of May 29, 1997 and a Second Amendment dated as of September 30, 1997 (as so
amended, the "Loan Agreement");
WHEREAS, the Borrower and the Bank desire to amend the terms of the Loan
Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1 - AMENDMENTS TO THE LOAN AGREEMENT
1.1 Amendments to Loan Agreement. Supplement A attached to the Loan
Agreement is hereby deleted and Supplement A (Amended 3/98 attached to this
Amendment is substituted therefor. All references in the Loan Agreement to
"Supplement A" shall be references to "Supplement A (Amended 3/98)."
1.2 Construction. All references in the Loan Agreement to "this
Agreement," "herein" and similar references shall be deemed to refer to the Loan
Agreement as amended by this Amendment.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to make and
maintain the Loans under the Loan Agreement as amended hereby, the Borrower
hereby warrants and represents to the Bank that: (a) The execution, delivery
and performance by the Borrower of this Amendment and any other documents to
which the Borrower is a party have been duly authorized by all necessary
corporate or partnership action, do not require any approval or consent of,
<PAGE>
or any registration, qualification or filing with, any government agency or
authority or any approval or consent of any other person (including, without
limitation, any stockholder or partner), do not and will not conflict with,
result in any violation of or constitute any default under, any provision of
the Borrower's articles of incorporation or bylaws, any agreement binding on
or applicable to the Borrower or any of its property, or any law or
governmental regulation or court decree or order, binding upon or applicable,
to the Borrower or of any of its property and will not result in the creation
or imposition of any security interest or other lien or encumbrance in or on
any of its property pursuant to the provisions of any agreement applicable to
the Borrower or any of its property; (b) The Loan Agreement as amended by this
Amendment is the legal, valid and binding obligations of the Borrower and is
enforceable in accordance with its terms, subject only to bankruptcy,
insolvency, reorganization, moratorium or similar laws, rulings or decisions
at the time in effect affecting the enforceability of rights or creditors
generally and to general equitable principles which may limit the right to
obtain equitable remedies.
ARTICLE III - CONDITIONS AND EFFECTIVENESS
This Amendment shall become effective on the date first set forth above,
provided, however, that the effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions:
3.1 Before and after giving effect to this Amendment, the
representations and warranties in ARTICLE IV of the Loan Agreement shall
be true and correct as though made on the date hereof except for changes
that are permitted by the terms of the Loan Agreement. The execution by
the Borrower of this Amendment shall be deemed a representation that the
Borrower has complied with the foregoing condition.
3.2 Before and after giving effect to this Amendment, no Event of
Default or no Default, shall have occurred and be continuing under the
Loan Agreement except for those expressly waived by the terms hereof. The
execution by the Borrower of this Amendment shall be deemed a
representation that the Borrower has complied with the foregoing
condition.
3.3 The Bank shall have received the following documents
appropriately completed and duly executed by the Borrower and the other
Obligors where appropriate:
(a) This Amendment appropriately completed and duly executed by
the Borrower, together with a resolution of the Borrower authorizing the
execution and delivery of this Amendment in form and substance
satisfactory to the Bank; and
-2-
<PAGE>
(b) Such other approvals, opinions or documents, as the Bank
may reasonably request.
ARTICLE IV - GENERAL
4.1 Expenses. The Borrower agrees to reimburse the Bank upon demand
for all reasonable expenses, including reasonable fees of attorneys (who
may be employees of the Bank) and legal expenses incurred by the Bank in
the preparation, negotiation and execution of this Amendment and any other
document required to be furnished herewith, and in enforcing the
obligations of the Borrower hereunder, and to pay and save the Bank
harmless from all liability for, any stamp or other taxes which may be
payable with respect to the execution or delivery of this Amendment, which
obligations of the Borrower shall survive any termination of the Loan
Agreement.
4.2 Counterparts. This Amendment may be executed in as many
counterparts as may be deemed necessary or convenient, and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed an original but all such counterparts shall
constitute but one and the same instrument.
4.3 Severability. Any provision of this Amendment which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining portions hereof or
affecting the validity or enforceability of such provisions in any other
jurisdiction.
4.4 Law. This Amendment shall be a contract made under the laws of
the State of Minnesota, which laws shall govern all the rights and duties
hereunder.
4.5 Successors: Enforceability. This Amendment shall be binding
upon the Borrower and the Bank and their respective successors and
assigns, and shall inure to the benefit of the Borrower and the Bank and
the successors and assigns of the Bank. Except as hereby amended, the
Loan Agreement shall remain in full force and effect and is hereby
ratified and confirmed in all respects.
4.6 Recitals. The recitals hereto are incorporated herein by
reference and constitute and integral part of this Amendment.
-3-
<PAGE>
4.7 Acknowledgement and Release. In order to induce the Bank
to enter into this Amendment, the Borrower: (a) represents and warrants
to the Bank that no events have taken place and no circumstances exist
at the date hereof which would give the Borrower the right to assert a
defense, offset or counterclaim to any claim by the Bank for payment of
the Obligations; and (b) hereby releases and forever discharges the Bank
and its successors, assigns, directors, officers, agents, employees and
participants from any and all actions, causes of action, suits,
proceedings, debts, sums of money, covenants, contracts, controversies,
claims and demands, at law or in equity, which the Borrower ever had or
now has against the Bank or its successors, assigns, directors, officers,
agents, employees or participants by virtue of their relationship to the
Borrower in connection with the Loan Documents and the transactions
related thereto.
ARTICLE V - WAIVER
5.1 Waiver. The Bank hereby waives the Events of Default arising
under Section 7.1(g)(i) of the Loan Agreement because of the Borrower's
failure to comply with:
a. Section 5.1 of Supplement A for the periods ending on
December 31, 1997 and January 31, 1998, respectively; and
b. Section 5.3 of Supplement A for the period ending on
December 31, 1997.
5.2 Limitation on Waiver. The waivers granted herein is limited to
the specific Events of Default described above and is not intended, and
shall not be construed, to be a general waiver of any term or provision
of the Loan Agreement or a waiver of any other existing or future
Unmatured Event of Default or event of Default.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the
date first written above.
TRANSITION NETWORKS, INC.,
a Minnesota corporation
By:/s/ THOMAS S. WARGOLET
-------------------------
Thomas S. Wargolet,
Vice President, Finance
FIRST BANK NATIONAL ASSOCIATION,
a national banking association
By:
-------------------------
Title:
-------------------------
-5-
<PAGE>
SUPPLEMENT A
to
LOAN AND SECURITY AGREEMENT
Dated as of AUGUST 9, 1996 Between
U.S.BANK NATIONAL ASSOCIATION f/k/a First Bank National Association
(the "Bank") and
TRANSITION NETWORKS, INC.
(the "Borrower")
(AMENDED 3/98)
1. Loan Agreement Reference. This Supplement A, as it may be amended or
modified from time to time, is a part of the Loan and Security Agreement, dated
as of August 9, 1996, between the Borrower and the Bank (together with all
amendments, modifications and supplements thereto, the "Loan Agreement"). Terms
used herein which are defined in the Loan Agreement shall have the meanings
given such terms in the Loan Agreement unless the context otherwise requires.
2. Credit Amount; Borrowing Base.
2.1 Credit Amount. The maximum amount of Loans which the Bank will make
available to the Borrower shall not exceed FOUR MILLION AND N0/100 DOLLARS
($4,000,000) (such amount is herein called the "Credit Amount") (unless such
amount is increased by the Bank in its sole and absolute discretion); provided,
however, that the aggregate outstanding principal balance of the Loans plus the
Letter of Credit Obligations shall not exceed the Credit Amount.
2.2 Borrowing Base. The term "Borrowing Base," as used herein, shall mean:
(a) an amount of up to 75% (or such higher percentage with respect to
the portion of the Borrower's Eligible Accounts Receivable that are
foreign insured Accounts Receivable as permitted by the Lender, in its
sole discretion from time to time) of the net amount (as determined by
the Bank after deduction of such reserves and allowances as the Bank
deems proper and necessary) of the Borrower's Eligible Accounts
Receivable; plus
(b) an amount of up to the lesser of (i) 20% (or such higher percentage
with respect as permitted by the Lender, in its sole discretion, from
time to time) of the net value (the lower of the cost or market value
of such Inventory as determined by the Bank on a first in first out basis
and after deduction of such reserves and allowances as the Bank deems
proper and necessary ) of the Borrower's Eligible Inventory or (ii)
$1,000,000.
2.3 Bank's Rights. The Borrower agrees that nothing contained in this
Supplement A (a) shall be construed as the Bank's agreement to resort or
look to a particular type or item of Collateral as security for any
specific Loan or advance or in any way limit the Bank's right to resort
to any or all of the Collateral as security for any of the obligations,
<PAGE>
(b) shall be deemed to limit or reduce any lien on or any security
interest in or upon any portion of the Collateral or other security for
the Obligations or (c) shall supersede Section 2.10 of the Loan Agreement.
3. Interest.
3.1 Revolving Loans. The unpaid balance of the Revolving Loans shall bear
interest to maturity as follows:
(a) Eurodollar Advances. The unpaid principal amount of each Eurodollar
Advance shall bear interest prior to maturity at a rate per annum equal
to the Eurodollar Rate (Reserve Adjusted) in effect for each Interest
Period for such Eurodollar Advance plus 2.50% per annum.
(b) Reference Rate Advances. The unpaid principal amount of each
Reference Rate Advance shall bear interest prior to maturity at a rate
per annum equal to the Reference Rate.
3.2 Default Rate. If any amount of the Loans is not paid when due, whether
by acceleration or otherwise, the entire unpaid principal balance of the Loans
(other than overdraft Loans and Over Advances) shall bear interest until paid at
a rate per annum equal to the greater of (i) the Reference Rate from time to
time in effect plus four percent (4%) or (ii) two percent (2%) above the rate
in effect at the time such amount became due for such past due amount.
3.3 Overdraft Loans; Over Advances. Overdraft Loans and over Advances shall
bear interest at the rate(s) determined pursuant to Section 2.8 or Section 2.9
of the Credit Agreement, as applicable.
4. Eligible Account Receivable Data.
(a) The Account Receivable must not be unpaid on the date that is 90 days
after the date of the invoice evidencing such Account Receivable.
(b) If invoices representing 10% or more of the unpaid net amount of all
Accounts Receivable from any one Account Debtor are unpaid more than 90
days after the dates of the invoices evidencing such Accounts Receivable,
then all Accounts Receivable relating to such Account Debtor shall cease
to be Eligible Accounts Receivable.
5. Additional Covenants. From the date of the Loan Agreement and thereafter
until all of the Borrower's Obligations under the Loan Agreement are paid in
full, the Borrower agrees that, unless the Bank shall otherwise consent in
writing, it will not, and will not permit any Subsidiary to, do any of the
following:
-2-
<PAGE>
5.1 Tangible Capital Base. During each of the periods set forth below, permit
the Tangible Capital Base to be less than the amount set forth below opposite
such period at any time:
Period Tangible Capital Base
------ ---------------------
June 1, 1996 through and
including March 29, 1997 $3,500,000
March 31, 1997 through and
including December 30, 1997 $3,300,000
December 31, 1997 through and
including May 30, 1998 $3,600,000
February 28, 1998 through and
including May 30, 1998 $2,650,000
5.2 Leverage Ratio. During each of the periods set forth below, permit the
ratio of (a) the total of (i) the Borrower's unconsolidated Indebtedness, minus
(ii) the Borrower's unconsolidated Subordinated Debt, minus (iii) the aggregate
unpaid accrued interest on all Subordinated Debt of the Borrower owing to NSU,
to (b) Tangible Capital Base to be greater than: (a)1.75:1 during the Borrower's
fiscal year ending December 31, 1996; (b) 2.50:1 during any of the Borrower's
fiscal years thereafter.
5.3 Interest Coverage Ratio. Permit the ratio, as of any Measurement Date, for
the period commencing on the first day of the Borrower's fiscal year through and
including such Measurement Date, of (a) the Borrower's unconsolidated EBITDA to
(b) the total of (i) the Borrower's unconsolidated interest expense (including,
without limitation, imputed interest expense on Capitalized Leases) minus (ii)
the aggregate unpaid accrued interest on all Subordinated Debt of the Borrower
owing to NSU, to be less than: (r) 2:1 for any Measurement Date occurring prior
to January 1, 1997; (s) 1.5:1 for any Measurement Date occurring during the
Borrower's 1997 fiscal year; or (t) 2:1 for any Measurement Date occurring
thereafter. For purposes of this Supplement A, "Measurement Date" means: (x) at
any time other than during the Borrower's 1997 fiscal year, the last day of any
fiscal quarter; or (y) at any time during the Borrower's 1997 fiscal year, the
last day of such fiscal year.
5.4 Capital Expenditures. Make Capital Expenditures in an amount exceeding:
(a) $1,000,000 during the Borrower's fiscal year ending December 31, 1997; or
(b) $450,000 during any fiscal year thereafter.
Borrower's Initials tw
---------
Bank's Initials
----------
Date: March 27, 1998
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF ENSTAR INC.
Americable, Inc., a Minnesota corporation
Cable Distribution Systems, Inc., a Georgia corporation and wholly owned
subsidiary of Enstar Networking Corporation.
Cable Distribution Systems of Minnesota, Inc., a Minnesota corporation and
wholly owned subsidiary of Enstar Networking Corporation.
Enstar Networking Corporation, a Minnesota corporation and wholly owned
subsidiary of Americable, Inc.
Transition Networks, Inc., a Minnesota corporation and wholly owned subsidiary
of Americable, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated May 8, 1997, with respect to the
consolidated financial statements and schedule of CorVel Corporation included
in the ENStar Inc. Annual Report (Form 10-K) for the year ended December 31,
1997.
/s/Ernst & Young LLP
Orange County, California
March 27, 1998
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE BELOW CONTAINS SUMMARY FINANCIAL IINFORMATION
EXTRACTED FROM THE AUDITED FINANCIAL STATEMENTS OF ENSTAR INC. AND THE NOTES
THERETO, AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,609
<SECURITIES> 0
<RECEIVABLES> 7,500
<ALLOWANCES> (414)
<INVENTORY> 5,145
<CURRENT-ASSETS> 25,156
<PP&E> 5,064
<DEPRECIATION> (2,900)
<TOTAL-ASSETS> 43,315
<CURRENT-LIABILITIES> 12,210
<BONDS> 16,168
0
0
<COMMON> 33
<OTHER-SE> 14,904
<TOTAL-LIABILITY-AND-EQUITY> 43,315
<SALES> 54,352
<TOTAL-REVENUES> 54,352
<CGS> 39,122
<TOTAL-COSTS> 39,122
<OTHER-EXPENSES> 20,034
<LOSS-PROVISION> 175
<INTEREST-EXPENSE> 809
<INCOME-PRETAX> (5,788)
<INCOME-TAX> (2,178)
<INCOME-CONTINUING> (3,610)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,261)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> (.69)
</TABLE>
EXHIBIT 99.1
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
ENStar Inc. ("ENStar" or the "Company") desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
and is filing this cautionary statement in connection with such safe harbor
legislation. The Company's Annual Report on Form 10-K, the Company's Annual
Report to Shareholders, any Quarterly Report on Form 10-Q or Report on Form 8-K
filed by the Company or any other written or oral statements made by or on
behalf of the Company may also include forward-looking statements which reflect
the Company's current views with respect to future events and financial
performance. The words "believe," "expect," "anticipate," "intends," "estimate,"
"forecast," "project" and similar expressions identify forward-looking
statements.
The Company wishes to caution investors that any forward-looking statements
made by or on behalf of the Company are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not limited
to, the factors listed below (many of which have been discussed in the Company's
prior filings with the Securities and Exchange Commission). Though the Company
has attempted to list comprehensively these important factors, the Company
wishes to caution investors that other factors may in the future prove to be
important in affecting the Company's results of operations. New factors emerge
from time to time and it is not possible for management to predict all of such
factors, nor can it assess the impact of each such factor on the business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only of the Company's views as of the
date the statement was made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Except to the extent otherwise defined below, capitalized terms set forth
below have the meanings assigned to such terms in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
-1-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(continued)
LIMITED HISTORY OF PROFITABILITY; UNCERTAINTY OF FUTURE RESULTS
ENStar has a limited history of profitability. During 1997, ENStar
experienced an operating loss of approximately $5 million as a result of a
reduction in demand from certain large customers, costs associated with the
introduction of Enstar Networking as a separate business, and the addition of
new engineering and sales personnel within each of its operating companies.
Despite the impact of certain cost reduction efforts implemented in the fourth
quarter of 1997, ENStar expects to record an operating loss for the year ended
December 31, 1998. ENStar's ability to achieve profitability is primarily
dependent upon Enstar Networking generating higher volumes of service revenues
from network integration and network security consulting. No assurance can be
made, however, that Enstar Networking will be successful in increasing its
service revenues to an adequate level to achieve profitability.
Transition's ability to achieve sales growth is highly dependent upon its
ability to offer new products that meet customers' demands in a rapidly changing
market, particularly in light of the relatively short life cycle of its
products. In order to achieve market acceptance of new products, Transition
plans to continue its investment in research and development. Transition had
research and development expenses of approximately $1.0 million (7% of net
sales) in 1995, $1.5 million (9% of net sales) in 1996, and $1.4 million
(8.1% of net sales) in 1997. There can be no assurance, however, that its
research and development efforts will result in commercially successful new
products in the future. In addition, Transition believes that sales and
marketing expenses will continue to increase in terms of absolute dollars in an
effort to differentiate its products and enhance its competitive position.
These anticipated increases in operating expenses at Transition may result
in lower operating profit at ENStar, if Transition unable to maintain its
current gross profit margins and/or achieve an appropriate level of sales
growth. Further, if Enstar Networking is not successful in generating higher
volumes of service revenues, its ability to achieve operating profitability will
be materially adversely affected. Based on the above factors, there can be no
assurance that ENStar will be able to achieve profitability on a quarterly or
annual basis in the future.
-2-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(continued)
CASH FLOW DEFICITS
ENStar has experienced cash flow deficits from operations in certain prior
years. ENStar's ratio of earnings to fixed charges for each of the five fiscal
years ended December 31, 1997, 1996, 1995, 1994 and 1993 was (3.76), (.50),
2.54, (0.72), and (2.68), respectively. During the years 1997, 1996, 1994, and
1993, the Company's earnings were inadequate to cover its fixed charges. The
coverage deficiency was approximately $5,788,000, $257,000, $1,050,000, and
$2,339,000 for the fiscal years ended December 31, 1997, 1996, 1994 and 1993,
respectively. Based on the Company's recent cash flow deficits, the Company
does not expect its fixed charges to decrease significantly or for its earnings
from its operating subsidiaries to improve significantly.
CERTAIN RISKS PERTAINING TO THE CORVEL COMMON STOCK
Because CorVel is not a wholly owned subsidiary, the Company does not have
the ability to utilize cash flows from CorVel in connection with its wholly
owned operating subsidiaries or to repay its indebtedness, including the
Debentures. The only cash the Company can obtain from CorVel is cash dividend
payments made to all CorVel shareholders. Since its initial public offering,
CorVel has not paid any dividends and it has indicated that it does not
anticipate doing so during the foreseeable future.
ENStar does not have any agreement with CorVel requiring CorVel to register
the shares of CorVel Common Stock currently held by ENStar for sale under
federal or state securities laws. In the absence of registration of its CorVel
Common Stock, the ability of ENStar to sell the CorVel Common Stock will be
limited to sales pursuant to Rule 144 of the Securities Act of 1933, as amended
(the "Securities Act"), and the volume limitations thereof, and privately
negotiated sales, which may adversely affect the ability of ENStar to sell a
large portion of its holdings of CorVel Common Stock at a given time.
PRODUCT AND SERVICE DEVELOPMENT RISKS
With respect to Transition, the market for networking products is subject
to rapid technological change, declining prices, evolving industry standards and
frequent new product introductions and, therefore, requires a high level of
expenditures for research and development. Transition may be required to incur
significant expenditures to develop such product offerings. There can be no
-3-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(continued)
assurance that Transition will be successful in identifying, sourcing,
developing and marketing product enhancements or new products that respond to
this rapidly changing market. Also, there can be no assurance that its product
enhancements and new products will adequately meet the requirements of the
marketplace and achieve market acceptance. A critical factor in market
acceptance of product enhancements and new products is the timely introduction
of such products and enhancements in order to take advantage of existing market
opportunities. Transition has, in the past, experienced delays in the
introduction of certain of its new products and enhancements.
The markets for the products and services offered by Americable and Enstar
Networking are also characterized by rapidly changing technology and frequent
new product and service offerings by its competitors. The introduction of new
technologies can render existing products and services obsolete or unmarketable.
The companies' success will depend on its ability to enhance existing products
and services and to develop and introduce, on a timely and cost-effective basis,
new products and services that keep pace with technological developments and
address increasingly sophisticated customer requirements.
ENStar's business, financial condition and results of operations could be
materially adversely affected if Transition were to incur delays in developing
or introducing new products or product enhancements or if such new products or
product enhancements did not gain market acceptance or in the event that
Americable or Enstar Networking were to incur delays in sourcing and developing
new products and services or that these products and services fail to achieve
market acceptance.
EXPANSION STRATEGY
ENStar's expansion strategy includes the addition of new locations in new
geographical markets at Enstar Networking. Enstar Networking currently
operates in seven locations and the success and the rate of its expansion into
new geographical markets will depend on a number of factors, including general
economic and business conditions affecting the industries of Enstar Networking's
customers in such markets, competition, the availability of sufficient capital,
and the ability to attract and retain qualified personnel and operate
effectively in geographic areas in which Enstar Networking has no prior
experience. As a result, there can be no assurance that Enstar Networking will
be able to achieve its planned expansion on a timely or profitable basis.
-4-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(continued)
Further, if Enstar Networking experiences significant internal growth,
it may be required to make further investments in personnel and information
systems. Failure to successfully hire or retain such personnel or implement
such systems could have a material adverse effect on ENStar's results of
operations and financial condition. There can be no assurance that Enstar
Networking will be able to manage its expanding operations effectively, that
it will be able to maintain or accelerate its recent growth or that Enstar
Networking will be able to operate profitably.
FLUCTUATIONS IN QUARTERLY RESULTS
ENStar's quarterly revenues and operating results have varied significantly
in the past and will likely continue to do so in the future. Quarterly revenues
and operating results may fluctuate as a result of the demand for the products
and services of its operating companies, the introduction of new hardware and
software technologies offering improved features, the introduction of new
products and services by competitors, changes in the level of operating
expenses, competitive conditions and economic conditions generally.
At Enstar Networking, the purchase of its products and services generally
involves a significant commitment of capital, with the delays frequently
associated with large capital expenditures and required authorization procedures
within an organization. Such expenditures by customers can range from $50,000
to over $500,000. The sales cycle for Enstar Networking's products and services
generally ranges from three to nine months depending on the size of the project,
extent of competition and degree of the customer's technical expertise. For
these and other reasons, Enstar Networking's operating results are subject to a
number of risks over which it has little or no control, including customers'
technology life cycle needs, budgetary constraints and internal authorization
reviews.
A variety of factors may cause period-to-period fluctuations in the
operating results of Americable and Transition. Such factors include, but are
not limited to, product mix, competitive pricing pressures, material costs and
timely availability, revenue and expenses related to new product introductions,
as well as delays in customer purchases in anticipation of new products or
enhancements. Further, Transition plans to continue to invest in research and
development, sales and marketing and technical support staff.
ENStar's operating results also could be adversely affected if its
operating subsidiaries are unable to adjust spending sufficiently in a timely
manner to compensate for any unexpected revenue shortfall.
-5-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(continued)
DEPENDENCE ON, AND NEED TO RECRUIT AND RETAIN, KEY PERSONNEL
ENStar's success depends to a significant extent on its ability to attract
and retain key personnel. In particular, Enstar Networking and Transition are
dependent on their respective engineering and technical personnel. Competition
for such technical personnel is intense and no assurance can be given that
ENStar will be able to recruit and to retain such personnel. The failure to
recruit and to retain management and technical personnel could have a material
adverse effect on ENStar's anticipated growth, revenues and results of
operations.
CONCENTRATION OF REVENUES
Enstar Networking provides its products and services to customers in
various industries including health care, financial services, legal,
manufacturing, and education. In 1997 and 1996, Enstar Networking derived
approximately 43% and 52%, respectively, of its revenues from its 25 largest
customers. While Enstar Networking seeks to build long-term customer
relationships, revenues from any particular customer can fluctuate from
period-to-period due to such customer's purchasing patterns.
Americable sells products to a number of installers, resellers, other
distributors and system integrators. During 1997 and 1996, Americable derived
approximately 68% and 76%, respectively, of its sales from its largest 100
customers.
Transition distributes its products through a number of volume
distributors and resellers throughout the United States and in over 50 countries
worldwide. During 1997 and 1996, Transition derived approximately 46% and 59%,
respectively, of its sales from its largest 25 customers.
Any termination or significant disruption of the companies' relationships
with a number of its principal customers could have a material adverse effect on
ENStar's business, financial condition and results of operations. In addition, a
deterioration in the financial condition of any of its principal customers could
expose ENStar to the possibility of large accounts receivable write-offs, which
would adversely affect ENStar's financial condition and results of operations.
DEPENDENCE ON KEY SUPPLIERS AND PRODUCT SUPPLY
The networking industry has experienced product supply shortages and
customer order backlogs due to the inability of certain manufacturers to supply
certain products on a timely basis. In addition, certain suppliers have
initiated new channels of distribution that increase competition for the
available product supply. There can be no assurance that suppliers will be able
-6-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(continued)
to maintain an adequate supply of products to fulfill customer orders for each
of the operating companies on a timely basis. Each of the operating companies
have experienced product supply shortages in the past and expect to experience
such shortages from time to time in the future. Failure to obtain adequate
product supplies or fulfill customer orders on a timely basis or substantial
change in the cost of components could affect the companies' ability to deliver
products in a timely and cost-effective manner and could have a material adverse
effect on ENStar's business, financial condition, and results of operations.
Transition's products include certain components that are currently
available from single or limited sources, some of which require long order lead
times. Although Transition believes that it would be able to obtain alternative
sources of supply for the components included in its products if required, there
can be no assurance that Transition will be able to locate any such sources or
will be able to obtain alternative sources of supply on a timely and economic
basis, if at all. Any reduction in supply, interruption or extended delay in
timely supply or change in costs of components could materially adversely affect
Transition's business and results of operations and, consequently, the business,
financial condition and results of operations of ENStar.
A significant portion of Enstar Networking's revenues is derived from sales
of network hardware, including products of various major manufacturers such as
3Com Corporation, Bay Networks, Inc., and Cisco Systems, Inc. Americable
derives a significant portion of its sales from cable assemblies, bulk cable and
connectors, including components and materials of certain manufacturers
including Berk-Tek, Inc., AMP Incorporated, and General Cable Corporation.
The agreements with these suppliers from which the companies purchase products
directly generally contain provisions for periodic renewals and for termination
by the supplier without cause, generally upon relatively short notice. Although
Americable and Enstar Networking believe its supplier relationships are good,
there can be no assurance that their relationships will continue as presently in
effect. Although Americable and Enstar Networking believe that they would be
able to obtain alternative sources of supply for its products if required, there
can be no assurance that Americable and Enstar Networking will be able to locate
any such sources or will be able to obtain alternative sources of supply on a
timely and economic basis, if at all. The loss of a major manufacturer or
supplier, the deterioration of a relationship with a major supplier or the
failure of Americable or Enstar Networking to establish good relationships with
major new suppliers as they develop, could have a material adverse effect on
ENStar's business.
-7-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(continued)
INVENTORY MANAGEMENT
The networking industry is characterized by rapid product improvement and
technological change resulting in relatively short product life cycles and rapid
product obsolescence, which can place inventory at considerable valuation risk.
The typical life cycle of Transition's products ranges from 18 months to three
years. Some of Transition's products include components that are currently
available from limited sources and require long order lead times. Because of
the long lead times and Transition's desire to be responsive to customer demand,
Transition has maintained higher inventory levels compared to other networking
manufacturers. Transition's inventories are valued at the lower of cost or
market and management periodically assesses the appropriateness of the
inventory valuations giving consideration to any slow-moving and nonsalable
inventory relative to current market selling prices of comparable products.
Provisions for inventory obsolescence are recorded in the period any valuation
impairments are identified. For 1997 and 1996, total inventory write-offs as a
percentage of net sales were approximately 1% and 2.3%, respectively. During
the fourth quarter of 1996, Transition recorded approximately $500,000 of
provision for inventory obsolescence related to the discontinuance of one of its
advanced LAN stackable hub product lines. Due to the ongoing risk of product
obsolescence and changes in customer demand, there can be no assurances that
Transition will be able to successfully manage its existing and future
inventories.
Although it is industry practice for Americable's suppliers to provide
price protection to distributors such as Americable in order to reduce the risk
of inventory devaluation, such policies are subject to change. Americable also
has the option of returning, subject to certain limitations, a percentage of its
current product inventories each quarter to certain manufacturers as it assesses
each product's current and forecasted demand. The amount of inventory that can
be returned to suppliers varies under Americable's agreements and such return
policies may provide only limited protection against excess inventory. There can
be no assurance that suppliers will continue such policies, that unforeseen new
product developments will not affect Americable adversely or that Americable can
successfully manage its existing and future inventories. Any inventory
adjustments could adversely affect ENStar's financial condition and results of
operations.
-8-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(continued)
COMPETITION
Each of ENStar's businesses faces substantial competition from a large
number of companies, some of which are larger, have greater financial resources,
broader name recognition and, in many cases, lower product and operating costs
than ENStar.
The industry in which Transition operates is highly competitive, and
Transition believes that such competition will continue to intensify. The
industry is characterized by rapid technological change, declining prices,
short product life cycles, frequent product introductions and evolving industry
standards. Transition competes with a number of independent companies focused
on the LAN market, including companies with significantly greater financial
resources, more extensive business experience, and greater market and service
capabilities than Transition. Transition competes with a number of companies
focused on designing and manufacturing products for the LAN market, including,
among others, Allied Telesyn, AMP Incorporated, and Digi International. Enstar
Networking faces competition from large system integrators such as GE Capital
Information Technology Services, CompuCom Systems Inc., Vanstar Corporation and
a significant number of smaller regional VARs and network integrators.
Significant competitors within Americable's business include, among others,
Anixter International Inc., Anicom, Inc., Kent Electronics Corporation, and
Graybar, Inc. See "BUSINESS - Competition." There can be no assurance that
ENStar will be able to compete successfully.
ENStar expects to face further competition from new market entrants and
possible alliances between competitors in the future. Certain of ENStar's
current and potential competitors have greater financial, technical, marketing
and other resources than ENStar. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products and services than ENStar. No assurance can be given that ENStar will be
able to compete successfully against current and future competitors. See
"BUSINESS -- Competition."
SHARES ELIGIBLE FOR FUTURE SALE; CONTROL BY MICHAEL FAMILY
Sales of a substantial number of shares of ENStar Common Stock in the
public market could adversely affect the market price for the ENStar Common
Stock. James A. Michael and Jeffrey J. Michael, each a member of the Board of
Directors of ENStar, and certain limited partnerships controlled by them (the
"Michael Family Shareholders"), beneficially own approximately 1,895,000 (or
57%) of the outstanding Common Stock of ENStar as of March 20, 1998.
-9-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(continued)
Accordingly, the Michael Family Shareholders will have the ability to exercise
significant influence over the business and affairs of ENStar, including the
ability to approve or reject corporate actions requiring the approval of
shareholders. The shares of ENStar Common Stock held by the Michael Family
Shareholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Such shares are eligible for immediate sale, subject
to compliance with the volume limitations and other restrictions of Rule 144.
INDEMNIFICATION OBLIGATIONS WITH RESPECT TO REORGANIZATION TRANSACTIONS
In connection with the Reorganization Transactions, Enstar agreed to
indemnify Michael against certain losses and to assume certain liabilities of
NSU, including liabilities arising out of the Distribution and any taxes
resulting from the Distribution. There can be no assurance that any obligation
to indemnify Michael for any such loss or other liability will not have a
material adverse effect on the business, financial condition and results of
operations of ENStar.
-10-
