<PAGE>
Filed Pursuant to Rule 424B3
Registration Number 333-24007
$25,000,000
ENStar Inc.
6.75% Two Year
8.50% Five Year
9.75% Ten Year
Subordinated Debentures
PROSPECTUS SUPPLEMENT NO. 3
TO PROSPECTUS DATED MAY 13, 1998
The following information amends and updates the Prospectus of ENStar Inc.,
dated May 13, 1998 (the "Prospectus"), and should be read in conjunction
therewith. Please keep this Prospectus Supplement with your Prospectus for
future reference.
---------------------------
The date of this Prospectus Supplement is November 12, 1998.
<PAGE>
ENStar Inc. and Subsidiaries
INDEX TO PROSPECTUS SUPPLEMENT NO. 3
Page
Summary Financial Data 3
Management's Discussion and Analysis of Financial
Condition and Results of Operations 4
General 4
Results of Operations 7
Capital Resources and Liquidity 11
Index to Condensed Consolidated Financial Statements 13
-2-
<PAGE>
ENStar Inc. and Subsidiaries
SUMMARY FINANCIAL DATA
(Unaudited, in thousands, except per share and ratio amounts)
The following table sets forth certain summary financial data for ENStar
Inc. ("ENStar" or the "Company") and should be read in conjunction with the
Condensed Consolidated Financial Statements of the Company included in this
Prospectus Supplement.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
Unaudited
1998 1997
----------------------
<S> <C> <C>
OPERATIONS
Revenues $ 48,967 $ 41,314
Operating loss (1,986) (3,332)
Net loss (1,872) (1,540)
Basic and diluted loss per share (0.58) (0.47)
Ratio of earnings to fixed charges (1.34)X (3.60)X
Deficiency in earnings to fixed charges 2,994 3,854
September 30,
1998 December 31,
(Unaudited) 1997
------------------------
FINANCIAL POSITION
Total current assets $ 24,405 $ 25,156
Long-term debt, net of current maturities 13,828 16,168
Shareholders' equity 10,593 14,937
</TABLE>
-3-
<PAGE>
ENStar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
Operations of the Company should be read in conjunction with the Condensed
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 Private 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, 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 merger of North Star and Michael
Foods. 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. 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.
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
-4-
<PAGE>
ENStar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 has experienced an increase in operating expenses resulting
in operating losses in 1997 and 1998. Enstar Networking expects to incur an
operating loss for the remainder of 1998 as it continues to build its network
service and security consulting practice.
Transition's 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.
YEAR 2000 COMPLIANCE
The Company's operating subsidiaries have made a preliminary assessment of
its computer systems and equipment with respect to Year 2000 compliance. Based
on assessments to date, the Company does not believe the cost of addressing any
potential systems issues will have a material impact on its results of
operations or financial position. However, the Company could be adversely
impacted if Year 2000 compliance is not properly completed by the Company, its
vendors, or any entity with whom its operating companies conduct business.
-5-
<PAGE>
ENStar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following are unaudited summarized operating results for each of the
Company's continuing operations for the three and nine months ended September 30
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Americable $ 4,799 $ 5,063 $13,750 $14,373
Enstar Networking 6,909 7,958 20,033 18,437
Transition 7,226 4,518 17,697 12,556
Eliminations (1,196) (1,549) (2,513) (4,052)
-------------------------------------------------
$17,738 $15,990 $48,967 $41,314
=================================================
Gross Profit
Americable $ 1,091 $ 986 $ 2,995 $ 2,993
Enstar Networking 1,018 1,486 3,398 3,606
Transition 2,953 1,745 7,139 4,932
-------------------------------------------------
$ 5,062 $ 4,217 $13,532 $11,531
=================================================
Selling, General and Administrative Expenses
Americable $ 987 $ 993 $ 2,881 $ 2,639
Enstar Networking 1,669 2,130 5,745 6,401
Transition 2,031 1,701 6,166 4,884
Corporate 249 226 726 939
-------------------------------------------------
$ 4,936 $ 5,050 $15,518 $14,863
=================================================
Operating Income (Loss)
Americable $ 104 $ (7) $ 114 $ 354
Enstar Networking (651) (644) (2,347) (2,795)
Transition 922 44 973 48
Corporate (249) (226) (726) (939)
-------------------------------------------------
$ 126 $ (833) $(1,986) $(3,332)
=================================================
</TABLE>
-6-
<PAGE>
ENStar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 vs. THREE MONTHS ENDED SEPTEMBER 30, 1997
Consolidated revenues increased approximately $1.7 million or 11%, to $17.7
million from $16 million in 1997. This includes decreased intercompany sales
eliminations of approximately $350,000, which is primarily due to reduced
sales of structured wiring products from Americable to Enstar Networking.
Revenues at Americable decreased $264,000 to approximately $4.8 million.
The sales decrease resulted from a reduction in bulk distribution sales. The
company has shifted its product strategy to place greater emphasis on selling
value-added products to include fiber optic cable assemblies and accessories
to the Telco industry.
Revenues at Enstar Networking decreased approximately $1.1 million, or
13.2%, to $6.9 million. This includes increased sales of networking and network
security products of approximately $332,000 and $192,000 of higher network
and security integration service revenues. Offsetting these increases was
approximately $1.6 million of lower structured wiring services and products due
to lower demand in certain regional locations.
Revenues at Transition increased approximately $2.7 million, or 60%, to
$7.2 million. Sales of Transition's media and rate conversion products
increased approximately $2.9 million, or 109%, to $5.5 million, reflecting an
expansion of its distribution channel through partnerships with large wholesale
distributors. Sales of supporting LAN products decreased approximately
$600,000, or 26%, to $1.7 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 increased approximately
$2.3 million, or 75%, to $5.4 million. Sales to international customers
increased approximately $365,000, or 25%, to $1.8 million. Sales to
international customers accounted for approximately 25% and 32% of net sales in
1998 and 1997, 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.
-7-
<PAGE>
ENStar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
Consolidated gross profit, as a percent of revenues, increased to 28.5% in
1998 as compared to 26.4% in 1997. Margins at Transition increased to 40.9%
from 38.6% due to growth in media conversion products which have higher margins
than other products offered by the company. Margins at Americable increased to
22.7% in 1998, as compared to 19.5% in 1997. This increase results primarily
from a reduction in the distribution of low margin bulk cable and an increase in
the sale of higher margin fiber optic accessories and related products. Margins
at Enstar Networking decreased to 14.7% from 18.7% primarily due to unfavorable
labor variances on certain structured wiring projects.
ENStar's selling, general and administrative expenses decreased
$114,000, or 2%, to approximately $4.9 million from $5 million in 1997.
Operating expenses at Americable were $987,000 relatively unchanged between
periods. Enstar Networking's operating expenses decreased $461,000, or 22%, to
approximately $1.7 million, due primarily to cost reductions effected through
the elimination of personnel and consolidation of certain regional offices.
Transition had increased operating expenses of $330,000, or 19%, which reflects
the addition of international sales facilities and related personnel. Enstar's
research and development expenses (incurred exclusively within Transition) were
approximately $265,000 and $354,000 for 1998 and 1997, respectively. The
increase in corporate expenses primarily reflects higher professional fees.
Net interest expense increased $130,000 to $378,000 from $248,000 in 1997,
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 reflects ENStar's estimated effective annual
tax rate. No tax expense has been recorded in the current period as the net
operating loss carryforwards generated in the prior periods offset the current
period income. See Note 7 to the Condensed Consolidated Financial Statements of
ENStar.
Equity in earnings of unconsolidated subsidiary increased $37,000 to
$387,000, which is a result of higher earnings at CorVel. CorVel's net earnings
for the three months ended September 30, 1998 were approximately $2.6 million,
an increase of approximately $175,000 or 7% 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.
-8-
<PAGE>
ENStar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 vs. NINE MONTHS ENDED SEPTEMBER 30, 1997
Consolidated revenues increased approximately $7.7 million, or 18.5%, to
approximately $49 million from $41.3 million in 1997. This includes decreased
intercompany sales eliminations of approximately $1.5 million which is primarily
due to reduced sales of structured wiring products from Americable to Enstar
Networking.
Revenues at Americable decreased $623,000, or 4.3%, to approximately $13.8
million. The sales decrease resulted from a reduction in bulk distribution
sales. The company has shifted its product strategy to place greater emphasis
on selling value-added products to include fiber optic cable assemblies and
accessories to the Telco industry.
Revenues at Enstar Networking increased approximately $1.6 million, or
9%, to $20 million. This includes increased sales of networking and network
security products of approximately $3.4 million and $680,000 of higher network
and security integration service revenues. Offsetting these increases was
approximately $2.5 million of lower structured wiring services and products due
to lower demand in certain regional locations.
Revenues at Transition increased approximately $5.1 million, or 41%,
to $17.7 million. Sales of Transition's media and rate conversion products
increased approximately $6.3 million, or 96%, to $13 million, reflecting an
expansion of its distribution channel through partnerships with large
wholesale distributors. Sales of supporting LAN products decreased
approximately $1.2 million, or 19%, to $4.7 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
increased approximately $3.7 million, or 44%, to $12.3 million. Sales to
international customers increased approximately $1.4 million, or 35%, to $5.4
million. Sales to international customers accounted for approximately 31% and
32% of net sales in 1998 and 1997, 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.
-9-
<PAGE>
ENStar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
Consolidated gross profit, as a percent of revenues, was 27.6%,
relatively unchanged between periods. Margins at Transition and Americable
were 40% and 21.8%, respectively, relatively unchanged between periods. Margins
at Enstar Networking decreased to 17% from 19.6% primarily due to unfavorable
labor variances on certain structured wiring projects. ENStar expects its gross
profit margins to decline 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 $655,000,
or 4.4%, to approximately $15.5 million from $14.9 million in 1997. Operating
expenses at Americable increased $242,000, to approximately $2.9 million, or
9%, from $2.6 million in 1997, due primarily to the expansion of its fiber optic
operations. Enstar Networking's operating expenses decreased $656,000, or 10%,
to approximately $5.7 million from $6.4 million in 1997. This reflects
approximately $1 million of cost reduction effected through the elimination of
personnel and consolidation of certain regional offices. This was offset by
approximately $400,000 of increased salaries, benefits, training and other
related expenses due to the addition of new network security consulting
personnel. Transition had increased operating expenses of approximately
$1.3 million, or 26%, which reflects the addition of international sales
facilities and related personnel. Enstar's research and development expenses
(incurred exclusively within Transition) were approximately $919,000 and
$1.1 million for 1998 and 1997, respectively. The decrease in corporate
expenses reflects severance related costs in 1997 associated with a former
executive of Americable and lower costs associated with the debenture program.
Net interest expense increased $486,000 to approximately $1 million from
$522,000 in 1997, 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 reflects ENStar's estimated effective annual
tax rate. No tax benefit has been recorded in the current period due to the
Company's recording an additional valuation allowance against a net deferred
tax asset generated in the period. See Note 7 to the Condensed Consolidated
Financial Statements of ENStar.
Equity in earnings of unconsolidated subsidiary increased $133,000 to
$1,122,000, which is a result of higher earnings at CorVel. CorVel's net
earnings for the nine months ended September 30, 1998 were approximately $7.5
million, an increase of approximately $602,000 or 9% from the previous year.
Further information with respect to the results of operations of CorVel is
-10-
<PAGE>
ENStar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
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.
CAPITAL RESOURCES AND LIQUIDITY
ENStar has experienced cash flow deficits from operations and has
experienced fluctuations in its working capital, which are primarily
attributable to the change in receivables and inventories associated with
the fluctuation in sales and timing of payments on accounts payable. Cash used
in operations was approximately $1.8 million and $1.3 million for the nine
month periods ended September 30, 1998 and 1997, respectively.
ENStar does not have the use of cash generated by CorVel and its
subsidiaries. Also, since its initial public offering in 1991, CorVel has not
declared any dividends and has indicated that it does not anticipate doing so
for the foreseeable future. ENStar may from time to time, depending on market
conditions and other factors, sell a portion of its CorVel holdings. The
ability of ENStar to sell its CorVel holdings is limited, however, to sales
pursuant to Rule 144 of the Securities Act and the volume limitations thereof,
and to private negotiated sales, which may adversely affect the ability of
ENStar to sell a large portion of the CorVel holdings at a given time.
The Company maintains a program (the "Debenture Program") whereby it sells
subordinated debentures of various maturities primarily to individual investors.
The debentures are offered on a continuous basis at interest rates that change
from time to time depending on market conditions. Proceeds from long-term debt
of approximately $2.4 million represent sales of debentures under this program.
At September 30, 1998, the Company had approximately $18.5 million principal
amount of subordinated debentures outstanding with a weighted average interest
rate of 9.59%.
The companies maintain revolving line of credit facilities with their
principal bank to provide aggregate borrowings up to $8 million, due in
September 1998. Borrowings under these facilities are based on eligible
accounts receivable and inventory with interest at prime (8.25% at September
30, 1998). At September 30, 1998, there were aggregate outstanding borrowings
of approximately $2.3 million and approximately $4 million of available
borrowings under these credit facilities. At June 30, 1998, the companies
were in compliance or had obtained the necessary waivers from its bank to waive
its compliance with certain financial covenants under the terms of its credit
agreement. Under the terms of the credit agreement, ENStar is required to make
capital contributions if pretax losses are in excess of specified levels. The
-11-
<PAGE>
ENStar Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
CAPITAL RESOURCES AND LIQUIDITY (Continued)
companies are currently in the process of extending the terms of their credit
agreements with their principal bank beyond September 1998. Management believes
they will obtain credit facilities with terms comparable to its existing
agreements.
For the nine months ended September 30, 1998, ENStar has provided an
aggregate of $2,468,000 of cash contributions under the terms of the amended
credit agreement of Americable and Enstar Networking, as a result of operating
losses at Enstar Networking. Additional cash contributions from ENStar are
expected in 1998 to fund anticipated operating losses and capital expenditures
at Enstar Networking.
In March 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.
Through November 6, 1998, approximately 290,300 shares had been repurchased at
an average price of $6.46 per share.
ENStar expects to be able to fund its working capital and capital
expenditures along with any repurchase 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 November
6, 1998, ENStar had approximately $8.7 million of cash and cash equivalents,
excluding cash of its operating subsidiaries.
-12-
<PAGE>
Enstar Inc. and Subsidiaries
INDEX TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Page
Condensed Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997 14
Condensed Consolidated Financial Statements of Operations
for the Nine Months Ended September 30, 1998 and 1997 15
Condensed Consolidated Financial Statements of Cash Flows for
for the Nine Months Ended September 30, 1998 and 1997 16
Notes to Condensed Consolidated Financial Statements 17
-13-
<PAGE>
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 9,950 $ 12,609
Accounts receivable, net 9,665 7,086
Inventories 4,562 5,145
Prepaid expenses and other current assets 228 316
--------------------------------
Total current assets 24,405 25,156
Property and equipment, net 2,128 2,164
Investment in unconsolidated subsidiary 12,128 11,170
Goodwill, net 4,525 4,642
Other assets 156 183
--------------------------------
$ 43,342 $ 43,315
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 2,330 $ 2,680
Current portion of long-term debt 4,844 165
Accounts payable 5,756 4,200
Accrued expenses 5,991 5,165
--------------------------------
Total current liabilities 18,921 12,210
Long-term debt, net of current maturities 13,828 16,168
Commitments and contingencies --- ---
--------------------------------
Shareholders' Equity
Common stock, $.01 par value 100,000,000
shares authorized, issued and outstanding
2,976,723 shares in 1998 and 3,266,989 in
1997 30 33
Additional paid-in-capital 14,492 16,961
Retained deficit (3,929) (2,057)
--------------------------------
Total shareholders' equity 10,593 14,937
--------------------------------
$ 43,342 $ 43,315
================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-14-
<PAGE>
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
1998 1997 1998 1997
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 17,738 $ 15,990 $ 48,967 $ 41,314
Operating and product costs 12,676 11,773 35,435 29,783
----------------------------------------------
Gross profit 5,062 4,217 13,532 11,531
Selling, general,
and administrative expenses 4,936 5,050 15,518 14,863
----------------------------------------------
Operating profit (loss) 126 (833) (1,986) (3,332)
Interest expense, net (378) (248) (1,008) (522)
----------------------------------------------
Loss before income taxes
and equity in earnings of
unconsolidated subsidiary (252) (1,081) (2,994) (3,854)
Income tax benefit --- (375) --- (1,325)
----------------------------------------------
Loss before equity in earnings
of unconsolidated subsidiary (252) (706) (2,994) (2,529)
Equity in earnings of
unconsolidated subsidiary 387 350 1,122 989
----------------------------------------------
Net income (loss) $ 135 $ (356) $ (1,872) $ (1,540)
==============================================
Basic and diluted net income
(loss) per share $ 0.04 $ (0.11) $ (0.58) $ (0.47)
==============================================
Weighted average shares
outstanding 3,110,678 3,279,419 3,207,856 3,295,999
==============================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-15-
<PAGE>
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited, in thousands)
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Net cash used in operating activities $ (1,829) $ (1,262)
Cash flows from investing activities
Capital expenditures (971) (977)
Other 27 (50)
--------------------------------
Net cash used in investing activities (944) (1,027)
--------------------------------
Cash flow from financing activities
Proceeds from long-term debt 2,360 14,536
Payments on long-term debt (21) (21)
Proceeds from notes payable 49,390 45,792
Payments on notes payable (49,740) (44,822)
Additional capital invested
(constructive dividends) --- (1,280)
Purchase of common stock (1,875) (233)
--------------------------------
Net cash provided by financing
activities 114 13,972
--------------------------------
Net increase (decrease) in cash and
cash equivalents (2,659) 11,683
Cash and cash equivalents
at beginning of period 12,609 824
--------------------------------
Cash and cash equivalents
at end of period $ 9,950 $ 12,507
==================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-16-
<PAGE>
ENStar Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business --
ENStar Inc. ("ENStar" or the "Company") is a holding company principally
comprised of 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 provider 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 designs, manufactures and markets connectivity
devices and network applications. CorVel is a health care services company.
At September 30, 1998 and 1997, the Company's ownership interest in CorVel was
approximately 25%. The Company's investment in CorVel is accounted for as an
unconsolidated subsidiary using the equity method of accounting.
2. Principals of Consolidation and Basis of Presentation --
PRINCIPALS OF CONSOLIDATION The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
BASIS OF PRESENTATION The accompanying unaudited condensed consolidated
financial statements have been prepared by ENStar without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. The
information furnished in the condensed consolidated financial statements
includes normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of such financial statements. Certain
information and footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although the
Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements
and the notes thereto included in the Company's latest annual report on
Form 10-K.
Results for the nine months ended September 30 may not necessarily be
indicative of the results to be expected for the full year.
-17-
<PAGE>
ENStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Investment in Unconsolidated Subsidiary --
The Company's unconsolidated subsidiary consists of its investment in
CorVel Corporation ("CorVel"). At September 30, 1998, ENStar owned 1,025,000
shares, or an approximate 25% ownership, in CorVel. The Company's investment
in CorVel is accounted for as an unconsolidated subsidiary using the equity
method of accounting. CorVel has a fiscal year ended March 31. The following
is summarized balance sheet and income statement information of the Company's
unconsolidated subsidiary as of, and for the nine month period ended September
30,1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 36,391
Noncurrent assets 24,005
Current liabilities 9,715
Noncurrent liabilities 2,554
Revenues 117,470
Gross profit 20,977
Net income 7,463
</TABLE>
In January 1997, ENStar, at the direction of North Star, sold 200,000
shares of CorVel for approximately $5.1 million cash. The proceeds from the
sale were distributed to and retained by North Star. The book value of the
shares sold was approximately $1.4 million, net of deferred taxes, and was
reflected as a dividend to North Star during the period ended March 31, 1997.
In addition, as a result of other equity transactions of CorVel, ENStar
decreased its investment in unconsolidated subsidiary by approximately
$912,000, additional paid-in capital by $547,000, and deferred income taxes by
$356,000 for the nine months ended September 30, 1998. At September 30, 1998,
the value of the Company's investment in CorVel, based on the closing market
price, was approximately $39.7 million.
-18-
<PAGE>
ENStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. Inventories --
Inventories are stated at the lower of average cost (first-in, first-out)
or market. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------------------------
<S> <C> <C>
Finished goods $ 2,666 $ 3,934
Purchased parts 1,896 1,211
--------------------------------
$ 4,562 $ 5,145
--------------------------------
--------------------------------
</TABLE>
5. 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
income (loss) per share data have been restated to conform to the provisions
of SFAS 128.
The Company's basic and diluted net income (loss) per share was computed by
dividing the net income (loss) by the weighted average number of outstanding
common shares, after giving effect to the assumed exercise of outstanding stock
options, except where the effects are antidulutive. Options to purchase 348,250
and 78,250 shares of common stock with weighted average exercise prices of $7.74
and $9.00 were outstanding during the three and nine months ended September 30,
1998 and 1997. These options were included in the computation of common share
equivalents for the three months ended September 30, 1998, but were excluded
from all other periods presented, because they were antidilutive.
6. New Accounting Pronouncements --
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive
income includes certain changes in equity that are excluded from net earnings.
The adoption of this statement did not impact the Company's consolidated
financial statements; historically there have been no differences between net
earnings and comprehensive income.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." This
statement requires companies to disclose financial and other information about
its business segments as part of their consolidated financial statements. The
Company will include the required business segment disclosures in its 1998
annual report.
-19-
<PAGE>
ENStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. Income Taxes --
Deferred income taxes arise from temporary differences between financial
and tax reporting. To the extent the Company's financial reporting basis in
its investment in unconsolidated subsidiary exceeds its tax basis, and is not
expected to be realized in a tax-free manner, the Company records a deferred
tax liability. At September 30, 1998, the deferred tax liability includes a
cumulative tax effect of approximately $4.6 million for the differences in the
financial reporting and tax basis of the Company's investment in CorVel. This
deferred tax liability is offset by deferred tax assets related to accrued
expenses not deductible until paid and net operating loss carryforwards. No
tax expense has been recorded in the three month period ended September 30,
1998, as the net operating loss carryforwards generated in the prior periods
offset the current period income. For the nine months ended September 30, 1998,
no tax benefit has been recorded due to the additional valuation allowance
recorded against the net deferred tax asset generated in the period.
8. Contingencies --
In connection with the merger of North Star and Michael Foods, ENStar,
through the operation of an indemnification agreement, is contingently liable
for any, and all, liabilities arising from the activities of North Star,
through, and including, the reorganization of North Star and Michael Foods.
Under the terms of the indemnification agreement, the Company is required to
maintain certain minimum levels of market capitalization or net worth for a
period of five years.
9. 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.
10. Reclassification --
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
-20-
