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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A-1
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)
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<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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 941-3200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
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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 JUNE 20, 1998, 3,266,989 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
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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.
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DOCUMENT INCORPORATED PART OF FORM 10-K
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PROXY STATEMENT FOR 1998 ANNUAL MEETING ITEMS 10, 11, 12 AND 13
OF SHAREHOLDERS
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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/A-1. [X]
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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.
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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 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.
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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.
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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.
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.
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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.
- 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.
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- 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.
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.
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PRODUCTS AND SERVICES
Americable. The following is a summary of Americable's sales by principal
product group for 1997:
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As a Percent of Sales
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Networking Products 28%
Cable Assemblies 38%
Bulk Cable 14%
Other Connectivity Products 20%
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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.
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Enstar Networking. The following is a summary of the company's revenues by
principal business unit for 1997:
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Percent of Revenues
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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
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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.
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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.
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.
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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:
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Percent Of Sales
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Media Conversion 54%
Rate Conversion 1% (new in 1997)
Transport Conversion 0% (new in 1998)
Supporting Products 45%
</TABLE>
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.
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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.
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.
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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.
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
-13-
<PAGE>
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.
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.
-14-
<PAGE>
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
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.
-15-
<PAGE>
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
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> <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 1989, Mr. Flynn was an Audit Manager with Arthur Andersen & Co. Mr. Flynn
also serves as a director of CorVel.
-16-
<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.
-17-
<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.
-18-
<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.
-19-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Consolidated Statement Of Operations Data
(In Thousands, Except Per Share Amounts)
Years ended December 31,
--------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ---------------------------
(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.
</TABLE>
-20-
<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.
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.
-21-
<PAGE>
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.
-22-
<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>
-23-
<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.
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.
-24-
<PAGE>
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
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.
-25-
<PAGE>
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.
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.
-26-
<PAGE>
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.
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.
-27-
<PAGE>
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.
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.
-28-
<PAGE>
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.
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.
-29-
<PAGE>
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>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-30-
<PAGE>
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) 1. 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-18
Report of Independent Certified Public Accountants F-19
Schedule II -- Valuation and Qualifying Accounts F-20
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-6
Notes to Consolidated Financial Statements S-7 to S-17
Schedule II -- Valuation and Qualifying Accounts S-18
</TABLE>
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.
-31-
<PAGE>
<TABLE>
<S> <S>
3. EXHIBITS
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)).
2.2 Subscription Agreement for the purchase of Debentures (filed as
Exhibit 2.2 to the Company's Registration Statement on Form S-1,
Registration No. 333-24007 and incorporated herein by refererce).
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.
333-24007 and incorporated herein by reference).
4.2 Form of Supplemental Indenture to the Indenture, dated as of
November 7, 1996 between the Company and National City Bank of
Minneapolis, as Trustee (filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-1, Registration No. 333-24007
and incorporated herein by reference).
+10.1 1996 Stock Incentive Plan, including forms of option agreements
(filed as Exhibit 10.1 to the Company's Registration Statement on
Form S-4, Registration No. 333-1925, and incorporated herein by
reference).
10.2 Amended and Restated Loan and Security Agreement, dated June 1, 1993,
among Americable, Inc., Transition Networks, Inc., Cable Distribution
Systems, Inc., and First Bank National Association (filed as Exhibit
10.31 to the Quarterly Report on Form 10-Q of North Star Universal,
Inc. for the quarter ended June 30, 1993, and incorporated herein by
reference).
10.3 First Amendment to the Amended and Restated Loan and Security
Agreement, dated November 29, 1993, among Americable, Inc.,
Transition Networks, Inc., Cable Distribution Systems, Inc., and
First Bank National Association (filed as Exhibit 10.26 to the Annual
Report on Form 10-K of North Star Universal, Inc. for the year ended
December 31, 1994, and incorporated herein by reference).
10.4 Waiver and Second Amendment to the Amended and Restated Loan and
Security Agreement, dated March 3, 1995, among Americable, Inc.,
Transition Networks, Inc., Cable Distribution Systems, Inc., and
First Bank National Association (filed as Exhibit 10.27 to the
Annual Report on Form 10-K of North Star Universal, Inc. for the
year ended December 31, 1994, and incorporated herein by reference).
-32-
<PAGE>
10.5 Amendment to Supplement A to Amended and Restated Loan and Security
Agreement, dated as of June 1, 1993, among Americable, Inc.,
Transition Networks, Inc., Cable Distribution Systems, Inc., and
First Bank National Association (filed as Exhibit 10.28 to the Annual
Report on Form 10-K of North Star Universal, Inc. for the year ended
December 31, 1993 and incorporated herein by reference).
10.6 Sixth Amendment to the Amended and Restated Loan and Security
Agreement, dated August 9, 1995, 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 Quarterly
Report on Form 10-Q of North Star Universal, Inc. for the quarter
ended June 30, 1996, and incorporated herein by reference).
10.7 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).
10.8 Lease Agreement dated February 21, 1989 between Americable, Inc.
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).
10.9 Distribution Agreement between North Star Universal, Inc., and the
Company (filed as Exhibit C 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 incorporated herein by
reference).
10.10 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).
10.11 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).
10.12 Separation and General Release, dated February 17, 1997, between
Americable, Inc. 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 referenced).
+10.13 Americable, Inc. 1996 Stock Option Plan (filed as Exhibit 10.9 to
the Company's Registration Statement on Form S-1, Registration No.
333-24007 and incorporated herein by reference).
+10.14 Transition Networks, Inc. 1996 Stock Option Plan (filed as Exhibit
10.10 to the Company's Registration Statement on Form S-1,
Registration No. 333-24007 and incorporated herein by reference).
-33-
<PAGE>
10.15 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).
10.16 Seventh Amendment to the 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).
10.17 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).
10.18 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).
10.19 Assumption Agreement And Ninth Amendment to the 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 (previously filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997).
10.20 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
(previously filed as Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
21.1 Subsidiaries of the Company (previously filed as Exhibit 21.1 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
23.1 Consent of independent auditors, Ernst & Young LLP.
23.2 Consent of Grant Thornton LLP as independent public accountants
of ENStar Inc.
-34-
<PAGE>
27.1 Financial Data Schedule Company (previously filed as Exhibit 27.1 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
99.1 Cautionary Statement Regarding Forward Looking Statements (previously
filed as Exhibit 99.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
.
- --------------------------
+ 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 Annual Report.
</TABLE>
-35-
<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.
Dated: June 30, 1998
ENSTAR INC.
By /s/ JEFFREY J. MICHAEL
------------------------------
Jeffrey J. Michael
President and Chief Executive Officer
-36-
<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-19
Schedule II -- Valuation and Qualifying Accounts............ F-20
</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, 1996, 1997, and 1998...................... S-2
Consolidated Balance Sheets as of March 31, 1997 and 1998... S-3
Consolidated Statements of Stockholders' Equity for the
three years ended March 31, 1996, 1997, and 1998.......... S-4
Consolidated Statements of Cash Flows for the three years
ended March 31, 1996, 1997, and 1998...................... S-6
Notes to Consolidated Financial Statements.................. S-7
Schedule II -- Valuation and Qualifying Accounts............ S-18
</TABLE>
F-1
<PAGE>
ENStar Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
-------------------------------
<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
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996
------------------------
<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
=====================
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
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
================================================================
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
F-4
<PAGE>
ENStar Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
-------------------------------
<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.
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
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
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.
F-6
<PAGE>
ENStar Inc.
Notes To Consolidated Financial Statements - (Continued)
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
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>
F-7
<PAGE>
ENStar Inc.
Notes To Consolidated Financial Statements - (Continued)
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.
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.
F-8
<PAGE>
ENStar Inc.
Notes To Consolidated Financial Statements - (Continued)
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 shares of common stock with a weighted average exercise price of $8.97
were outstanding during 1997, but were excluded from the computation of common
share equivalents because they were antidilutive.
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.
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.
F-9
<PAGE>
ENStar Inc.
Notes To Consolidated Financial Statements - (Continued)
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.
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.
F-10
<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>
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.
F-11
<PAGE>
ENStar Inc.
Notes To Consolidated Financial Statements - (Continued)
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 -- 91 30
------------------------------
-- 54 870
Deferred
Federal (1,899) (69) (405)
State (279) (10) (60)
------------------------------
(2,178) (79) (465)
------------------------------
$(2,178) $ (25) $ 405
==============================
</TABLE>
F-12
<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
------------------
<S> <C> <C>
Investment in CorVel $(4,187) $(5,072)
Accrued expenses not
deductible until paid 1,921 1,956
Net operating loss carryforwards 3,158 --
Other (510) (533)
------------------
$ 382 $(3,649)
Valuation allowance (382) --
------------------
$ -- $(3,649)
==================
</TABLE>
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.
F-13
<PAGE>
ENStar Inc.
Notes To Consolidated Financial Statements - (Continued)
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.
F-14
<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.
F-15
<PAGE>
ENStar Inc.
Notes To Consolidated Financial Statements - (Continued)
Option transactions under these plans since adoption are summarized as
follows:
<TABLE>
<CAPTION>
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>
F-16
<PAGE>
ENStar Inc.
Notes To Consolidated Financial Statements - (Continued)
The following table summarizes information concerning currently outstanding
options:
<TABLE>
<CAPTION>
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:
<TABLE>
<CAPTION>
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>
F-17
<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>
F-18
<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
F-19
<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
of Period Expenses Describe Describe(1) Period
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Description
- -----------
Allowance for Doubtful Accounts:
1995 $ 333 $ 135 $ -- $ (68) $ 400
1996 400 132 -- (92) 440
1997 440 145 -- (171) 414
- ------------
(1) Write off of accounts deemed uncollectible.
</TABLE>
F-20
<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, 1997 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and 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, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation 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 11, 1998
S-1
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended March 31
------------------------------------------
1996 1997 1998
------------------------------------------
<S> <C> <C> <C>
REVENUES $109,052,000 $121,704,000 $141,709,000
COSTS AND EXPENSES
Cost of revenues 88,937,000 99,323,000 115,553,000
General and administrative 8,106,000 8,645,000 11,029,000
------------------------------------------
97,043,000 107,968,000 126,582,000
------------------------------------------
Income before income taxes 12,009,000 13,736,000 15,127,000
Income tax provision 4,684,000 5,220,000 5,670,000
------------------------------------------
NET INCOME $ 7,325,000 $ 8,516,000 $ 9,457,000
==========================================
Net income per share:
Basic $ 1.65 $ 1.86 $ 2.26
==========================================
Diluted $ 1.57 $ 1.82 $ 2.21
==========================================
Shares used in computing
net income per share:
Basic 4,435,000 4,585,000 4,193,000
Diluted 4,660,000 4,685,000 4,286,000
</TABLE>
See accompanying notes to consolidated financial statements.
S-2
<PAGE>
CORVEL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31
---------------------------
1997 1998
---------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 15,665,000 $ 8,430,000
Accounts receivable (less allowance
for doubtful accounts of $1,686,000
in 1997 and $2,082,000 in 1998) 22,294,000 25,633,000
Prepaid taxes and expenses 124,000 736,000
Deferred income taxes 1,746,000 2,376,000
---------------------------
Total current assets 39,829,000 37,175,000
---------------------------
Property and equipment, net 13,100,000 16,542,000
Other assets 5,895,000 6,774,000
---------------------------
$ 58,824,000 $ 60,491,000
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable $ 6,603,000 $ 6,078,000
Accrued liabilities 4,630,000 6,371,000
---------------------------
Total current liabilities 11,233,000 12,449,000
---------------------------
Deferred income taxes 1,504,000 2,271,000
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.0001 par value: 20,000,000
shares authorized; 4,697,853 and 4,853,472
shares issued and outstanding in 1997 and
1998, respectively
Paid-in Capital 28,122,000 30,615,000
Treasury Stock, at cost (357,000 and 730,600
shares in 1997 and 1998, respectively) (9,461,000) (21,727,000)
Retained Earnings 27,426,000 36,883,000
---------------------------
Total stockholders' equity 46,087,000 45,771,000
---------------------------
$ 58,824,000 $ 60,491,000
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
S-3
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1996, 1997, and 1998
<TABLE>
<CAPTION>
Common stock
Common and paid in Treasury
stock-shares capital shares
-------------------------------------------------
<S> <C> <C> <C>
Balance - March 31, 1995 4,238,250 $ 24,169,000 ---
Stock issued under employee
stock purchase plan 18,384 444,000 ---
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased 337,041 1,788,000 ---
Net income --- --- ---
-------------------------------------------------
Balance - March 31, 1996 4,593,675 $ 26,401,000 ---
-------------------------------------------------
Stock issued under employee
stock purchase plan 23,039 536,000 ---
Stock issued and income tax
benefits under stock option
plan 81,139 1,185,000 ---
Purchase of common stock --- --- (357,000)
Net income --- --- ---
-------------------------------------------------
Balance - March 31, 1997 4,697,854 $ 28,122,000 (357,000)
-------------------------------------------------
Stock issued under employee
stock purchase plan 20,520 540,000 ---
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased 135,099 1,953,000 ---
Purchase of common stock --- --- (373,600)
Net income --- --- ---
-------------------------------------------------
Balance - March 31, 1998 4,853,472 $ 30,615,000 (730,600)
=================================================
See accompanying notes to consolidated financial statements.
</TABLE>
S-4
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1996, 1997, and 1998
<TABLE>
<CAPTION>
Total
Treasury Retained shareholders'
shares-cost earnings equity
---------------------------------------------
<S> <C> <C> <C>
Balance - March 31, 1995 $ --- $ 11,585,000 $ 35,754,000
Stock issued under employee
stock purchase plan --- --- 444,000
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased --- --- 1,788,000
Net income --- 7,325,000 7,325,000
---------------------------------------------
Balance - March 31, 1996 --- 18,910,000 $ 45,311,000
---------------------------------------------
Stock issued under employee
stock purchase plan --- --- 536,000
Stock issued and income tax
benefits under stock option
plan --- --- 1,185,000
Purchase of common stock (9,461,000) --- (9,461,000)
Net income --- 8,516,000 8,516,000
----------------------------------------------
Balance - March 31, 1997 (9,461,000) $ 27,426,000 46,087,000
----------------------------------------------
Stock issued under employee
stock purchase plan --- --- 540,000
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased --- --- 1,953,000
Purchase of common stock (12,266,000) --- (12,266,000)
Net income --- 9,457,000 9,457,000
----------------------------------------------
Balance - March 31, 1998 $(21,727,000) $ 36,883,000 $ 45,771,000
==============================================
</TABLE>
See accompanying notes to consolidated financial statements.
S-5
<PAGE>
<TABLE>
<CAPTION>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31
---------------------------------------
1996 1997 1998
---------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,325,000 $ 8,516,000 $ 9,457,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 3,048,000 4,215,000 5,349,000
Deferred income taxes (79,000) 420,000 137,000
Loss on write down and disposal
of property and equipment 23,000 96,000 124,000
Changes in operating assets
and liabilities:
Accounts receivable (2,526,000) (3,900,000) (3,339,000)
Prepaid taxes and expenses (363,000) 421,000 (612,000)
Accounts and taxes payable 700,000 3,546,000 (525,000)
Accrued liabilities (382,000) 384,000 1,741,000
Other assets (511,000) (1,607,000) (1,069,000)
----------------------------------------
Net cash provided by
operating activities 7,235,000 12,091,000 11,263,000
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,565,000) (5,799,000) (8,725,000)
----------------------------------------
Net cash used in investing activities (5,565,000) (5,799,000) (8,725,000)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds and tax benefits from
exercise of stock options 2,232,000 1,721,000 2,493,000
Purchase of common stock --- (9,461,000) (12,266,000)
----------------------------------------
Net cash provided by (used in)
financing activities 2,232,000 (7,740,000) (9,773,000)
----------------------------------------
Net increase (decrease) in cash
and cash equivalents 3,902,000 (1,448,000) (7,235,000)
Cash and cash equivalents
at beginning of year 13,211,000 17,113,000 15,665,000
----------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $17,113,000 $15,665,000 $ 8,430,000
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
S-6
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
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, 1997 and 1998.
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,
1997 and 1998. Receivables generally are due within 60 days. Credit losses
relating to customers in the worker's 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 whenever events and circumstances indicated that the assets might be
impared. 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 $4,886,000 (net of
accumulated amortization of $898,000) at March 31, 1997 and $5,342,000 (net of
accumulated amortization of $1,088,000) at March 31, 1998.
S-7
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
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 $1,580,000 and $1,582,000 of unbilled receivables at March 31, 1997 and
1998, respectively. No one customer accounted for more than 10% of consolidated
revenues during the years ended March 31, 1996, 1997 and 1998.
INCOME TAXES: The consolidated financial statements reflect the
application of Statement of Financial Accounting Standards No. 109 -
"Accounting for Income Taxes".
EARNINGS PER SHARE: The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128) in 1998. SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share is computed
by dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
reflects the assumed conversion of all dilutive securities. Earnings per share
amounts for all periods presented have been calculated in accordance with the
requirements of SFAS No. 128.
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.
RECENT ACCOUNTING PRONOUNCEMENT: In June 1997, the FASB issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
(SFAS No. 131) which requires publicly-held companies to report financial and
descriptive information about its operating segments in financial statements
issued to shareholders for interim and annual periods. The statement also
requires additional disclosures with respect to products and services,
geographical areas of operations, and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented.
S-7
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at March 31:
<TABLE>
<CAPTION>
1997 1998
-----------------------------
<S> <C> <C>
Office equipment and computers $ 19,875,000 $ 24,930,000
Computer software 5,186,000 7,808,000
Leasehold improvements 784,000 1,154,000
-----------------------------
25,845,000 33,892,000
Less: accumulated depreciation
and amortization 12,745,000 17,350,000
-----------------------------
$ 13,100,000 $ 16,542,000
=============================
</TABLE>
NOTE C - ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities consists of the following at March 31:
1997 1998
----------------------------
<S> <C> <C>
Payroll and related benefits $ 2,891,000 $ 3,303,000
Self-insurance reserves 599,000 650,000
Other 1,140,000 2,418,000
----------------------------
$ 4,630,000 $ 6,371,000
============================
</TABLE>
S-8
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
NOTE D - INCOME TAXES
<TABLE>
<CAPTION>
The income tax provision consists of the following for the three years
ended March 31:
1996 1997 1998
----------------------------------------------
<S> <C> <C> <C>
Current - Federal $ 4,045,000 $ 4,212,000 $ 4,955,000
Current - State 718,000 588,000 346,000
----------------------------------------------
Subtotal 4,763,000 4,800,000 5,301,000
----------------------------------------------
Deferred - Federal (102,000) 368,000 345,000
Deferred - State 23,000 52,000 24,000
----------------------------------------------
Subtotal (79,000) 420,000 369,000
----------------------------------------------
$ 4,684,000 $ 5,220,000 $ 5,670,000
==============================================
</TABLE>
Income tax benefits associated with the exercise of stock options were
$4,245,000, $228,000 and $1,212,000 for fiscal 1996, 1997 and 1998,
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:
1996 1997 1998
----------------------------------------------
<S> <C> <C> <C>
Income taxes at federal
statutory rate $ 4,203,000 $ 4,808,000 $ 5,294,000
State income taxes, net
of federal benefit 446,000 423,000 453,000
Goodwill amortization 37,000 40,000 42,000
Other (2,000) (51,000) (119,000)
-----------------------------------------------
$ 4,684,000 $ 5,220,000 $ 5,670,000
===============================================
</TABLE>
S-9
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
NOTE D - INCOME TAXES (Continued)
Income taxes paid totaled $1,193,000, $1,683,000 and $5,690,000 for the
years ended March 31, 1996, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
Deferred taxes at March 31, 1997 and 1998 consists of:
1997 1998
----------------------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities not currently deductible $ 939,000 $ 1,427,000
Allowance for doubtful accounts 580,000 814,000
Other 227,000 135,000
----------------------------
Deferred assets $ 1,746,000 $ 2,376,000
Deferred tax liabilities:
Excess of tax under book basis
of fixed assets (1,504,000) (2,271,000)
----------------------------
Deferred liability (1,504,000) (2,271,000)
----------------------------
Net deferred tax asset $ 242,000 $ 105,000
============================
</TABLE>
S-10
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
NOTE E - STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for 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 No. 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 ("the Plan"),
as amended, options for up to 1,735,000 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. As of March 31, 1998, all of these options have
S-11
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
NOTE E - STOCK OPTION PLANS (Continued)
vested and have been exercised. Summarized information for all stock options
for the past three fiscal years follow:
<TABLE>
<CAPTION>
------------------------------------------
1996 1997 1998
------------------------------------------
<S> <C> <C> <C>
Options outstanding at the
beginning of the year 827,018 423,411 455,832
Options granted 81,300 126,450 102,750
Options exercised (468,572) (81,139) (158,937)
Options cancelled (16,335) (12,890) (18,679)
------------------------------------------
Options outstanding at the
end of the year 423,411 455,832 380,966
==========================================
During the year:
Weighted average fair value
of options granted during
the year $7.43 $8.67 $9.29
Weighted average price of
options granted $ 25.19 $ 28.48 $ 32.31
Weighted average price of
options exercised $ 2.54 $ 11.71 $ 10.28
Weighted average price of
options cancelled $ 18.40 $ 22.80 $ 27.63
At the end of the year:
Price range of
outstanding options $.0001- $.0001- $10.75-
$31.50 $31.50 $37.75
Weighted average price
per share $15.73 $19.77 $26.75
Options available for
future grants 202,444 288,884 404,813
Exercisable options 242,575 244,881 167,895
</TABLE>
S-12
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
NOTE E - Stock Option Plans (continued)
<TABLE>
<CAPTION>
The following table summarizes the status of stock options
outstanding and exercisable at March 31, 1998:
Outstanding Exercisable
Weighted Options- Exercisable Options-
Average Weighted Options- Weighted
Number of Remaining Average Number of Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices Options Life Price Options Price
- - ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$10.75-$18.50 40,538 1.88 years $16.20 37,930 $16.06
19.50- 25.75 111,983 2.20 years 23.01 76,193 22.52
26.50- 29.63 133,855 4.04 years 28.09 46,778 28.29
30.63- 37.75 94,590 5.08 years 33.78 6,994 31.42
----------------------------------------------------------
Total 380,966 3.53 years $26.75 167,895 $23.04
==========================================================
</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, $8,315,000 and $9,185,000
from $7,325,000, $8,516,000 and $9,457,000 for the years ended March 31, 1996,
1997 and 1998, respectively. Pro forma diluted earnings per share would have
been reduced to $1.56, $1.77 and $2.14 for the three years ending March 31,
1996, 1997 and 1998, respectively. Pro forma basic earnings per share would
have been reduced to $1.63, $1.81, and $2.19 for the three years ending
March 31, 1996, 1997, and 1998.
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 0.45; risk free
interest rate of 6.4%. The following weighted average assumptions were used
for fiscal 1997: expected volatility of 0.41; risk free interest rate of 6.4%.
The following weighted average assumptions were used for fiscal 1998: expected
S-13
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
NOTE E - STOCK OPTION PLANS (Continued)
volatility of 0.34; risk free interest rate of 5.5%. The assumptions for
all three years reflect no dividend yield and a weighted average option life of
three years.
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 No. 123 is applicable only to the
Company's options granted subsequent to April 1, 1995, its proforma effect
will not be fully reflected until 1999. The aforementioned results are not
likely to be representative of the effects of applying SFAS No. 123 on reported
net income for future years as these amounts reflect the expense for only one
to three 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 250,000 shares has been authorized for issuance under
the plan, as amended. As of March 31, 1998, 134,000 shares had been issued
S-14
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
NOTE F - EMPLOYEE STOCK PURCHASE PLAN (Continued)
pursuant to the plan. Summarized plan information is as follows:
<TABLE>
<CAPTION>
------------------------------------------
1996 1997 1998
------------------------------------------
<S> <C> <C> <C>
Employee contributions $ 444,000 $ 536,000 $ 540,000
Shares acquired 18,384 23,039 20,520
Average purchase price $24.15 $23.27 $26.32
</TABLE>
NOTE G - TREASURY STOCK
During fiscal 1997, the Company's Board of Directors approved a plan to
repurchase up to 100,000 shares of the Company's common stock, and subsequently
increased the number of shares authorized to repurchase to a total of 850,000
shares. The share repurchases for fiscal years ending March 31, 1997 and 1998,
are as follows:
<TABLE>
<CAPTION>
1997 1998 Cumulative
---- ---- ----------
<S> <C> <C> <C>
Shares repurchased 357,000 373,600 730,600
Cost $9,461,000 $12,266,000 $21,727,000
Average price $26.50 $32.83 $29.74
The repurchased shares were recorded as treasury stock, at cost, and is
available for general corporate purposes. The repurchases were financed from
cash generated from operations and on hand cash balances.
S-15
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under noncancelable operating leases.
Future minimum rental commitments under operating leases at March 31, 1998 are
$5,489,000 in fiscal 1999, $4,646,000 in fiscal 2000, $3,507,000 in fiscal 2001,
$2,623,000 in fiscal 2002, $1,218,000 in fiscal 2003, and $329,000, thereafter.
Total rental expense of $3,901,000, $4,573,000, and $5,022,000 was charged to
operations for the years ended March 31, 1996, 1997, and 1998, 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.
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 $50,000, $135,000 and
$143,000, were charged to operations for the years ended March 31, 1996, 1997
and 1998, 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. Unless earlier redeemed or exchanged in accordance
with the Rights Agreement, the Rights are due to expire on February 10, 2007.
The issuance of the Rights has no dilutive effect on the Company's earnings per
share.
S-16
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1998
NOTE K - QUARTERLY RESULTS
The following is a summary of unaudited results of operations for the two
years ended March 31, 1997 and 1998:
</TABLE>
<TABLE>
<CAPTION>
Net income Net income
ISCAL YEAR per basic per diluted
ENDED MARCH 31, Gross Net common common
1997: Revenues Margin income share share
-------- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
First Quarter $ 29,851,000 $ 5,390,000 $ 2,042,000 $ .44 $ .43
Second Quarter 29,719,000 5,488,000 2,092,000 .45 .44
Third Quarter 30,441,000 5,681,000 2,177,000 .47 .46
Fourth Quarter 31,693,000 5,822,000 2,205,000 .50 .49
FISCAL YEAR
ENDED MARCH 31,
1998:
First Quarter $ 34,024,000 $ 6,467,000 $ 2,275,000 $ .53 $ .52
Second Quarter 34,683,000 6,475,000 2,381,000 .57 .55
Third Quarter 35,558,000 6,595,000 2,395,000 .58 .56
Fourth Quarter 37,444,000 6,619,000 2,406,000 . 58 .57
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
Schedule II
CORVEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Additions
---------
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, 1998: $1,686,000 $2,437,000 $(2,041,000) $2,082,000
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
</TABLE>
S-18
<PAGE>
EXHIBIT 23.1 - CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated May 11, 1998, with respect to the
consolidated financial statements and schedule of CorVel Corporation included in
the ENStar Inc. Annual Report (Form 10-K/A-1) for the year ended December 31,
1997.
/S/ ERNST & YOUNG LLP
Orange County, California
June 29, 1998
EXHIBIT 23.2 - CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated February 18, 1998, accompanying
the consolidated financial statements and schedule of ENStar Inc. and
subsidiaries included in the Annual Report on Form 10-K of ENStar Inc.
for the year ended December 31, 1997. We hereby consent to the inclusion
and use of said report in Amendment 1 to the ENStar Inc. Annual Report
on Form 10-K.
/S/ GRANT THORNTON LLP
Minneapolis, Minnesota
June 30, 1998
