<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- -----------
Commission file number 0-29026
ENSTAR INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1831611
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7450 Flying Cloud Drive
Eden Prairie, Minnesota 55344
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (612) 942-3800
Indicate by check mark whether the 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 12 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
------- --------
At November 5, 1999, 2,976,723 shares of common stock of the registrant were
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 12,012 $ 17,155
Accounts receivable, net 5,711 4,769
Finished goods inventories 2,388 1,734
Prepaid expenses and other current assets 301 161
--------------------------
Total current assets 20,412 23,819
Property and equipment, net 566 1,072
Investment in unconsolidated subsidiaries 15,242 13,293
Goodwill, net 4,366 4,486
Other assets 1,274 903
--------------------------
$ 41,860 $ 43,573
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 2,728 $ 1,680
Current portion of long-term debt 819 4,899
Accounts payable 3,481 3,186
Accrued expenses 4,087 4,580
--------------------------
Total current liabilities 11,115 14,345
Long-term debt, net of current maturities 15,280 14,104
Deferred income taxes 2,293 1,539
Commitments and contingencies -- --
Shareholders' Equity
Common stock, $.01 par value 1,000,000,000
shares authorized, issued and outstanding
2,976,723 shares in 1999 and 1998 30 30
Additional paid-in-capital 13,724 13,839
Retained deficit (582) (284)
--------------------------
Total shareholders' equity 13,172 13,585
--------------------------
$ 41,860 $ 43,573
================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<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,
---------------------------------------
1999 1998 1999 1998
---------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 9,319 $10,887 $27,251 $32,360
Operating and product costs 7,061 8,778 20,702 25,967
---------------------------------------
Gross profit 2,258 2,109 6,549 6,393
Selling, general,
and administrative expenses 2,477 2,905 7,272 9,352
---------------------------------------
Operating loss (219) (796) (723) (2,959)
Interest expense, net (290) (369) (871) (980)
---------------------------------------
Loss before income taxes and equity in
earnings of unconsolidated subsidiaries (509) (1,165) (1,594) (3,939)
Income tax benefit -- (370) -- (370)
---------------------------------------
Loss before equity in earnings
of unconsolidated subsidiaries (509) (795) (1,594) (3,569)
Equity in earnings of
unconsolidated subsidiaries 449 387 1,296 1,122
---------------------------------------
Loss from continuing operations (60) (408) (298) (2,447)
Discontinued operations, net of taxes
Gain from operations -- 543 -- 575
---------------------------------------
Net income (loss) $ (60) $ 135 $ (298) $(1,872)
=======================================
Basic and diluted income
(loss) per share:
Continuing operations $ (0.02) $ (0.13) $ (0.10) $ (0.76)
Discontinued operations -- .17 -- .18
---------------------------------------
Net income (loss) $ (0.02) $ 0.04 $ (0.10) $ (0.58)
=======================================
Weighted average shares outstanding 2,977 3,208 2,977 3,208
=======================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
------------------------------
<S> <C> <C>
Net cash used in operating activities $ (2,794) $ (1,829)
Cash flows from investing activities
Capital expenditures (122) (971)
Other (371) 27
------------------------------
Net cash used in investing activities (493) (944)
------------------------------
Cash flow from financing activities
Proceeds from long-term debt 1,103 2,360
Payments on long-term debt (4,007) (21)
Proceeds from notes payable 24,636 49,390
Payments on notes payable (23,588) (49,740)
Purchase of Common Stock -- (1,875)
--------------------------------
Net cash provided by (used in)
financing activities (1,856) 114
--------------------------------
Net decrease in cash
and cash equivalents (5,143) (2,659)
Cash and cash equivalents
at beginning of period 17,155 12,609
--------------------------------
Cash and cash equivalents
at end of period $ 12,012 $ 9,950
==================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ENStar Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business --
ENStar Inc., a Minnesota corporation formed in 1995 ("ENStar" or the
"Company"), is a holding company. Its principal subsidiaries are Americable,
Inc. ("Americable") and Enstar Networking Corporation ("Enstar Networking").
Americable is a provider of value-added connectivity products and custom OEM
manufacturing solutions to the telecommunications, Category 5, and premise
wiring markets. Enstar Networking is a network security integrator providing
solutions to design, manage and secure corporate network infrastructures.
ENStar also owns 2,050,000 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 and 1,350,000 shares in Vicom Incorporated ("Vicom"), or
an approximate 38.5% interest in Vicom, a telecommunications company providing
services to integrate voice, data, and video solutions. These investments are
accounted for as unconsolidated subsidiaries using the equity method of
accounting.
On December 10, 1998, ENStar sold its subsidiary, Transition Networks,
Inc. ("Transition"), to Communications Systems, Inc. ("Communications Systems").
The transaction involved the sale of all of Transition's common stock and has
been shown as discontinued operations in these financial statements. See Note 3
for additional discussion of this transaction.
Effective December 31, 1998, ENStar sold the assets of the Midwest region
of Enstar Networking to Vicom. See Note 4 for additional discussion of this
transaction.
2. Basis of Presentation --
The accompanying unaudited condensed consolidated financial statements have
been prepared by ENStar without audit, in accordance with Regulation S-X
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, 1999, may not necessarily
Be indicative of the results to be expected for the full year.
<PAGE>
ENStar Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Discontinued Operations --
On December 10, 1998, ENStar sold all of its former subsidiary,
Transition's common stock to Communications Systems, a telecommunications
company, for approximately $9 million in cash. The gain on disposition was
approximately $2.5 million, net of income taxes of approximately $1.6 million.
Results of operations of Transition are reflected as discontinued
operations in the accompanying consolidated statement of operations. Operating
results of Transition for the three and nine months ended September 30, 1998
were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------ -----------------
<S> <C> <C>
Revenues $ 6,851 $16,607
Operating income 912 973
Net income from
discontinued operations 543 575
</TABLE>
4. Sale of Assets --
Effective December 31, 1998, ENStar sold the assets of the Midwest region
of Enstar Networking to Vicom. The transaction involved the sale of
substantially all of the assets of the business in exchange for 1,350,000 shares
of Vicom common stock and a $750,000 promissory note to ENStar bearing interest
at an annual rate of 9%, interest payable quarterly, with the principal due on
or before December 2003. There was no gain or loss on this transaction. As a
result of this transaction, ENStar owns a 38.5% ownership interest in Vicom,
which is accounted for as an unconsolidated subsidiary using the equity method
of accounting.
The following sets forth the unaudited consolidated results of operations
for the three and nine months ended September 30, 1998, as if this transaction
had occurred as of January 1, 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Revenues $ 8,653 $24,745
Loss from continuing operations (257) (1,704)
Basic and diluted loss per
share from continuing operations (.08) (.53)
</TABLE>
<PAGE>
ENStar Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Net Loss Per Share --
The Company's basic and diluted net loss per share was computed by dividing
the net loss by the weighted average number of outstanding common shares, as all
common share equivalents relating to stock options were antidilutive during the
periods presented. Options to purchase 412,250 and 359,250 shares of common
stock with weighted average exercise prices of $7.72 and $7.78 were outstanding
during the three and nine months ended September 30, 1999 and 1998, but were
excluded from the computation of common share equivalents because they were
antidilutive.
6. Investment in Unconsolidated Subsidiaries --
The Company's unconsolidated subsidiaries consist of its investments in
CorVel and Vicom. Corvel is a health care services company with a fiscal
year end of March 31. Vicom is a telecommunications company with a December 31
year end. Vicom is a non-reporting public company and since the Company's
investment in Vicom is not considered to be material, summary financial
statement information has not been provided. The following is unaudited
summarized balance sheet and income statement information for CorVel as of,
and for the nine month period ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 47,810
Total assets 72,628
Current liabilities 11,810
Noncurrent liabilities 2,943
Revenues 134,971
Gross profit 24,320
Net income 8,569
</TABLE>
At September 30, 1999, the fair value of the Company's investment in CorVel
based on the closing market price was $45.1 million. This amount does not
reflect the tax expense which would be incurred on the sale of these shares.
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, 1999, the deferred tax liability includes a
cumulative tax effect of approximately $5.6 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 benefit has been recorded in either of the periods presented due to the
additional valuation allowance recorded against the net deferred tax asset
generated in the period.
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. Contingencies --
In connection with the February 1997 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 condensed 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 1998 amounts have been reclassified to conform to the 1999
presentation.
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. Business Segments --
ENStar consists of two operating segments, Americable and Enstar
Networking. The operating results of Enstar Networking are segregated with
respect to the Midwest operations sold to Vicom (see Note 4) ("ENC - business
disposition").
Certain financial information on the Company's segments is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------------------ -----------------
<S> <C> <C> <C> <C>
Revenues - external
Americable $ 4,777 $ 4,799 $13,658 $13,750
Enstar Networking 4,542 3,854 13,593 10,995
------------------ -----------------
$ 9,319 $ 8,653 $27,251 $24,745
ENC - business disposition -- 2,234 -- 7,615
------------------ -----------------
Total Revenues - external $ 9,319 $10,887 $27,251 $32,360
================== =================
Revenues - intersegment
Americable $ -- $ -- $ 34 $ --
ENC - business disposition -- 821 -- 1,423
================== =================
Total Revenues - intersegment $ -- $ 821 $ 34 $ 1,423
================== =================
Operating Income (Loss)
Americable $ (48) $ 103 $ 50 $ 115
Enstar Networking 1 (499) (96) (1,605)
Corporate (172) (249) (677) (726)
------------------ -----------------
(219) (645) (723) (2,216)
ENC - business disposition -- (151) -- (743)
------------------ -----------------
Total Operating Loss $ (219) $ (796) $ (723) $(2,959)
================== =================
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. Proposed Transaction --
On March 8, 1999, the Company announced that it had established a Special
Committee to consider a proposal by the majority shareholders to acquire the
outstanding shares of ENStar common stock not already owned by them or certain
entities under their control. The majority shareholders preliminarily
proposed that the shares not controlled by them be acquired for a cash price
of $10.00 per share, however, the proposal was subject to change based on a
number of factors including determination of the structure of the transaction.
On August 13, 1999, the Company announced that it had signed an agreement
to be acquired by ENStar Acquisition, Inc., a corporation formed by James
Michael and Jeffrey Michael and certain related entities. As a result of the
agreement, shareholders of ENStar other than the Michaels (including certain
related entities and family members) will receive $12.50 in cash per share of
ENStar common stock. The agreement was approved by a Special Committee of the
Board of Directors and by the Board of Directors on August 13, 1999.
Closing of the transaction is expected in the fourth quarter of 1999, and
is subject to ENStar shareholder approval by a majority of the non-Michael
family shareholders, regulatory approval and customary closing conditions.
Additionally, the agreement provides that the transaction may be terminated by
the Special Committee if the dollar-weighted trading price of CorVel Corporation
stock during the 15 trading days prior to shareholder approval exceeds $26.00,
and by ENStar Acquisition, Inc. if that price is less than $20.00 during the
same period.
<PAGE>
ENStar Inc.
ITEM 2 - 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 certain forward-looking statements which are made in
reliance upon 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, risks relating to "Year 2000" issues,
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, 1998.
GENERAL
ENStar is a holding company. Its principal subsidiaries are Americable,
Inc. and Enstar Networking Corporation. ENStar also owns 2,050,000 shares of
common stock of CorVel Corporation, or an approximate 25% interest. CorVel is
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. ENStar also owns 1,350,000 shares in Vicom
Incorporated, or an approximate 38.5% interest in Vicom, a telecommunications
Company providing services to integrate voice, data, and video solutions.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Historically, Enstar Networking operated in various regional locations in
the Southwest, Southeast, and Midwest, and has added and deleted locations on
the basis of business opportunities and operating performance of each location.
Following the sale of the Midwest region to Vicom on December 31, 1998, Enstar
Networking's business is focused on the Southwest region of the United States.
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 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.
Since its organization in 1997, Enstar Networking has made significant
investments in new sales, consulting, engineering and technical personnel as
part of its effort to build its network security integration business. As
part of this strategy in 1998, Enstar Networking has shifted its focus from
historical commodity-based networking and structured wiring product sales
towards more security integrated solutions. As part of this change, the company
experienced a significant increase in operating expenses resulting in operating
losses in 1997 and 1998. Enstar Networking expects to incur an operating loss
in 1999 as it continues to build its network security consulting practice.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The accompanying management discussion and analysis of results of operation
reflects pro forma operating results of Enstar Networking exclusive of the
Midwest region sold to Vicom ("ENC - business disposition"). In addition,
results of operations are restated to give effect to discontinued operations as
discussed in Note 3 to the Condensed Consolidated Financial Statements. The
following are summarized operating results for ENStar's operating subsidiaries
for the three and nine months ended September 30 (in thousands):
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------------------ -----------------
<S> <C> <C> <C> <C>
Revenues
Americable $ 4,777 $ 4,799 $13,692 $13,750
Enstar Networking 4,542 3,854 13,593 10,995
Eliminations -- -- (34) --
------------------ -----------------
Pro Forma Revenues 9,319 8,653 27,251 24,745
ENC - business disposition -- 3,055 -- 9,038
Eliminations -- (821) -- (1,423)
------------------ -----------------
Total Revenues $ 9,319 $10,887 $27,251 $32,360
================== =================
Gross Profit
Americable $ 1,226 $ 1,091 $ 3,545 $ 2,997
Enstar Networking 1,032 523 3,004 1,747
------------------ -----------------
Pro Forma Gross Profit 2,258 1,614 6,549 4,744
ENC - business disposition -- 495 -- 1,649
------------------ -----------------
Total Gross Profit $ 2,258 $ 2,109 $ 6,549 $ 6,393
================== =================
Selling, General, and
Administrative Expenses
Americable $ 1,274 $ 988 $ 3,495 $ 2,882
Enstar Networking 1,031 1,022 3,100 3,352
Corporate 172 249 677 726
------------------ -----------------
Pro Forma S.G.&A. Expenses 2,477 2,259 7,272 6,960
ENC - business disposition -- 646 -- 2,392
------------------ -----------------
Total Selling, General,
and Administrative $ 2,477 $ 2,905 $ 7,272 $ 9,352
================== =================
Operating Income (Loss)
Americable $ (48) $ 103 $ 50 $ 115
Enstar Networking 1 (499) (96) (1,605)
Corporate (172) (249) (677) (726)
------------------ -----------------
Pro Forma Operating Loss (219) (645) (723) (2,216)
ENC - business disposition -- (151) -- (743)
------------------ -----------------
Total Operating Loss $ (219) $ (796) $ (723) $(2,959)
================== =================
</TABLE>
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 vs. THREE MONTHS ENDED SEPTEMBER 30, 1998
Consolidated pro forma revenues increased $666,000, or 7.7%, to
$9,319,000 from $8,653,000 in 1998.
Revenues at Americable were $4,777,000, relatively unchanged between
periods. Sales of fiber optic products increased due to increased focus along
with higher demand. This was offset by a reduction in sales of networking
products by approximately $175,000, primarily due to lower demand.
Revenues at Enstar Networking increased $688,000, or 17.9%, to
$4,542,000. During the quarter, sales of networking security products and
services increased $1,606,000, or 525%, due primarily to higher demand.
Offsetting this increase was approximately $670,000 of lower network integration
products due primarily to lower demand.
Consolidated pro forma gross profit, as a percent of revenues, increased to
24.2% in 1999, as compared to 18.7% in 1998. Increased margins at Americable
from 22.7% to 25.7% are primarily due to higher margins on fiber optic products.
Margins at Enstar Networking increased to 22.7% from 13.6%, primarily due to a
shift in sales toward networking security products and services and away from
lower margin structured wiring business.
ENStar's consolidated pro forma selling, general, and administrative
expenses increased $218,000, or 9.7%, to $2,477,000 from $2,259,000 in 1998.
Operating expenses at Americable were $1,274,000, an increase of $286,000.
Included in this was an increase in selling expenses of approximately $147,000
due to the addition of sales and product support personnel. Enstar Networking's
operating expenses were $1,031,000, relatively unchanged between periods. This
includes approximately $49,000 of decreased administrative expenses due
primarily to lower personnel costs. Corporate expenses decreased $77,000, or
30.9%, due primarily to lower professional fees.
No tax benefit was recorded in either period due to the Company's recording
an additional valuation allowance against the net deferred tax asset generated
in the respective periods.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1999 vs. NINE MONTHS ENDED SEPTEMBER 30, 1998
Consolidated pro forma revenues increased $2,506,000, or 10.1%, to
$27,251,000 from $24,745,000 in 1998.
Revenues at Americable were $13,692,000, relatively unchanged between
periods. Sales of networking products and value added assembly products
increased approximately $753,000, or 8% primarily due to higher demand. This
was offset by a reduction in sales of bulk cable of approximately $778,000,
or 33%.
Revenues at Enstar Networking increased $2,598,000, or 23.6%, to
$13,593,000. Sales of networking security products and services increased
$3,305,000, or 311%, due primarily to higher demand. Offsetting this increase
was approximately $1,300,000 of lower structured wiring services and products
due to a shift in focus to network integration and security services.
Consolidated pro forma gross profit, as a percent of revenues, increased
to 24% in 1999, as compared to 19.2% in 1998. Increased margins at Americable
from 25.9% to 21.8% are primarily due to higher margins on connectivity products
and fiber optic products. Margins at Enstar Networking increased to 22.1% from
15.9%, primarily due to a shift in sales toward networking security products and
services and away from lower margin structured wiring business.
ENStar's consolidated pro forma selling, general, and administrative
expenses increased $312,000, or 4.5%, to $7,272,000 from $6,960,000 in 1998.
Operating expenses at Americable were $3,495,000, an increase of $613,000.
Included in this was an increase in selling expenses of approximately
$391,000 due to the addition of sales and product support personnel. Enstar
Networking's operating expenses decreased to $3,100,000 from $3,352,000 in 1998.
This includes approximately $308,000 of decreased administrative expenses due
primarily to lower personnel costs. Corporate expenses decreased to $677,000
from $726,000 in 1998, primarily due to lower professional fees.
No tax benefit was recorded in either period due to the Company's recording
an additional valuation allowance against the net deferred tax asset generated
in the respective periods.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
CAPITAL RESOURCES AND LIQUIDITY
ENStar has experienced cash flow deficits from operations due primarily to
the losses incurred at its operating companies. Cash used in operations was
$2,794,000 in 1999 versus $1,829,000 in 1998.
ENStar does not have the use of cash generated by CorVel. 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.
The Company maintains a program (the "Debenture Program") 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 September 30, 1999, the
Company had $16,099,000 principal amount of subordinated debentures outstanding
with weighted average interest rate of 10%. Long-term debt proceeds includes
approximately $595,000 of new debentures sold and $508,000 of compounded
interest for the nine months ended September 30, 1999. Approximately $4.9
million of debentures are scheduled to mature during 1999, of which
approximately $4 million have been redeemed. As of September 30, 1999, the
Company was not offering debentures for sale due to the pending transaction by
the majority shareholder to purchase the outstanding minority shares. See note
12 for additional discussion on this transaction.
Americable and Enstar Networking maintain a credit agreement that provides
a revolving line of credit facility of up to $4 million and a $1 million swing
line loan, both of which expire July 19, 2001, and carry an interest rate of
prime plus .5% (8.75% at September 30, 1999). At September 30, 1999, there were
outstanding borrowings of $2,728,000, and approximately $2,186,000 of available
borrowings. Borrowings under the line of credit facility are based upon the
lesser of $4 million or a defined borrowing base of eligible accounts receivable
and inventory as defined in the agreement. The agreement contains certain
restrictive covenants, the most significant of which are capital expenditure
limitations and the maintenance of certain levels of tangible net worth. This
agreement is collateralized by substantially all assets of the companies.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
In March 1998, the Company announced a stock repurchase plan pursuant to
which the Company could repurchase up to 350,000 shares of its common stock
from time-to-time in open market or privately negotiated transactions. The
Company has repurchased no shares during 1999. Through December 31, 1998,
290,266 shares had been repurchased at an average price of $6.46 per share
for an aggregate cost of approximately $1,875,000.
On March 8, 1999, the Company reported in a press release that its Board of
Directors had established a Special Committee consisting of one of its outside
directors to consider a proposal by James Michael and Jeffrey Michael to acquire
the shares of Common Stock of ENStar Inc. not already owned by members of the
Michael family and certain entities controlled by the Michael family. On
August 13, the Company reported the execution of a merger agreement in
connection with the proposed transaction. See Note 12 to the Condensed
Consolidated Financial Statements of ENStar.
ENStar expects to be able to fund its working capital and capital
expenditures along with any repurchases of common stock for 1999 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 5, 1999, ENStar had approximately $11.5 million of cash and cash
equivalents, excluding cash of its operating subsidiaries.
YEAR 2000 ISSUES
General. The Company has completed a preliminary assessment of Year
2000 compliance with respect to the holding company as well as its operating
subsidiaries and is currently modifying its systems to accommodate the Year
2000. The Year 2000 problem relates to the fact that many computer systems
and applications were developed to recognize the year as a two-digit number,
with the digits "00" being recognized as the year 1900. The Company
commenced its assessment of Year 2000 Compliance in January 1998, and expects
to complete its Year 2000 remediation efforts in the fourth quarter of 1999.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
YEAR 2000 ISSUES (CONTINUED)
Company Systems. The Company has determined that through normal recurring
system upgrades, the majority of the Company's computer hardware and software
systems covering its operations, including business processes and financial
systems, are currently Year 2000 compliant.
Products. Americable sells products to customers under non-exclusive
agreements with its suppliers. Americable is not an agent for its suppliers and
cannot make representations regarding the Year 2000 compliance or readiness of
its suppliers.
Third Parties. The potential impact of Year 2000 issues will depend to
a large extent of the Year 2000 efforts of the Company's vendors, customers,
service providers, utilities, governmental agencies and other entities with
which the Company does business. The Company is communicating with certain of
these parties to determine their efforts to prepare for the Year 2000 and to
evaluate any likely impact on the Company. These communications are focused
on third parties that the Company believes could have the greatest impact on its
business and operations. This process will continue throughout 1999. The
efforts of third parties are not within the control of the Company and their
failure to remedy Year 2000 issues successfully could result in business
disruption, loss of revenue and increased operating cost for the Company.
Contingency Plans. The Company has not yet established contingency plans
in the event that it is unable to complete its remediation efforts by December
31, 1999. These contingency plans are expected to be developed by the end of
the fourth quarter of 1999.
Costs. The total cost to upgrade the Company's systems to Year 2000
compliance are expected to be approximately $17,000, of which approximately
$7,000 has been spent to date.
<PAGE>
ENStar Inc.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS
There were no material changes in the Company's market risk during the
nine months ended September 30, 1999.
<PAGE>
PART II - OTHER INFORMATION
ENStar Inc. and Subsidiaries
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
See Note 12 to the ENStar Inc. Notes to Consolidated Financial
Statements included in Item 1 of this report, which is incorporated
by reference in this Item 5.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed with this report on
Form 10-Q.
Exhibit 27.1 Financial Data Schedule
(b) The Company filed a report on Form 8-K on July 21, 1999, reporting
execution of a letter of intent under Item 5. The letter of
intent related to the transaction described in Note 12 to the
ENStar Inc. Notes to Consolidated Financial Statements included
in Item 1 of this report.
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
ENSTAR INC.
--------------------------
(Registrant)
Date November 12, 1999 by /s/ Jeffrey J. Michael
--------------------------- ----------------------------
Jeffrey J. Michael
President and Chief Executive Officer
Date November 12, 1999 by /s/ Peter E. Flynn
--------------------------- ----------------------------
Peter E. Flynn
Executive Vice President
and Secretary (principal
financial and accounting officer)
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