<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
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, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-29026
ENSTAR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C>
MINNESOTA 41-1831611
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7450 FLYING CLOUD DRIVE
EDEN PRAIRIE, MN 55344
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 941-3200
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01
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 12, 1999 WAS APPROXIMATELY $8.5 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 30, 1999, 2,976,723 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
CERTAIN PORTIONS OF THE DOCUMENTS LISTED BELOW HAVE BEEN INCORPORATED BY
REFERENCE INTO THE INDICATED PART OF THIS FORM 10-K.
<TABLE>
<CAPTION>
DOCUMENT INCORPORATED PART OF FORM 10-K
--------------------- -----------------
<S> <C>
PROXY STATEMENT FOR 1999 ANNUAL MEETING OF SHAREHOLDERS ITEMS 10, 11, 12 AND 13
</TABLE>
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
================================================================================
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<S> <S> <C>
(a)l. CONSOLIDATED FINANCIAL STATEMENTS
ENStar Inc.
Consolidated Statements of Operations....................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Shareholders' Equity............. F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements..................F-6 to F-21
Report of Independent Certified Public Accountants.......... F-22
Schedule II -- Valuation and Qualifying Accounts............ F-23
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-16
Schedule II -- Valuation and Qualifying Accounts............ S-17
</TABLE>
<PAGE>
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
3. EXHIBITS
<TABLE>
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of December
21, 1995, by and among North Star Universal, Inc., Michael
Foods, Inc. and NSU Merger Co. (filed as Exhibit 2 to the
Company's Registration Statement on Form S-4, Registration
No. 333-1925 and incorporated herein by reference (schedules
omitted -- the Company agrees to furnish a copy of any
schedule to the Commission upon request)).
2.2 Asset Purchase Agreement, dated as of December 31, 1998
by and between Vicom, Inc. and Enstar Networking
Corporation (previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
2.3 Stock Purchase & Registration Rights Agreement, dated as of
December 31, 1998, by and between Americable, Inc.,
and Vicom, Inc. (previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
2.4 Stock Purchase Agreement dated December 10, 1998, between
Communications Systems, Inc., Ameriable, Inc., and ENStar Inc.
(filed as Exhibit 2.1 to the Company's current report on
Form 8-K, filed December 22, 1998, and incorporated herein by
reference).
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, 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).
<PAGE>
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).
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., and incorporated herein by
reference.)
10.6 Sixth Amendment to the Amended and Restated Loan and Security
Agreement, dated August 9, 1996, among Americable, Inc.,
Transition Networks, Inc., Cable Distribution Systems, Inc.,
and First Bank National Association, amending the terms of
the Amended and Restated Loan and Security Agreement (filed
as Exhibit 10.1 to the 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 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 an Exhibit to Agreement and Plan of Reorganization,
dated as of December 21, 1995, by and among North Star Universal,
Inc., Michael Foods, Inc. and NSU Merger Co., which agreement was
filed as Exhibit 2 to the Company's Registration Statement on Form
S-4, Registration No. 333-1925, and is incorporated herein by
reference).
10.10 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).
<PAGE>
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 and Gary L. Eizenga (filed as Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference). 10.13 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).
10.14 Seventh Amendment to Amended and Restated Loan and Security
Agreement, dated May 29, 1997, among Americable, Inc., Cable
Distribution Systems, Inc., and First Bank National Association,
amending the terms of the Amended and Restated Loan and Security
Agreement dated August 9, 1996 (filed as Exhibit 10.10 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference).
10.15 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).
10.16 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).
10.17 Assumption Agreement And Ninth Amendment To Amended And Restated Loan
and Security Agreement And Waiver dated as of March 5, 1998, among
Americable, Inc., Cable Distribution Systems, Inc., Enstar Networking
Corporation, and U.S. Bank National Association, amending the terms
of the Amended and Restated Loan and Security Agreement dated
September 30, 1997 (filed as exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference).
10.18 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 (filed
as exhibit 10.13 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by reference).
10.19 Assignment of Lease, dated as of January 1999, by and among Enstar
Networking Corporation, Vicom Incorporated and Lexmark Office One
Partners LLP. (previously filed with the Company's Annual Report on
Form 10-K for the year ended December 31, 1998).
<PAGE>
+10.20 Americable, Inc. 1999 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).
+10.21 Enstar Networking Corporation Stock Option Plan (previously filed
with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.22 Fourth Amendment to Loan and Security Agreement dated as of June 30,
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 (filed as
exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, and incorporated herein by reference).
10.23 Tenth Amendment to Amended and Restated Loan and Security Agreement
dated as of June 30, 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
(filed as exhibit 10.23 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, and incorporated herein by
reference).
10.24 Eleventh Amendment to Amended and Restated Loan and Security Agreement
dated as of August 31, 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 June 30, 1997
(filed as exhibit 10.24 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, and incorporated herein by
reference).
10.25 Lease Agreement dated September 23, 1998, by and between Lexmark
Office One Partners, LLP, a North Dakota limited liability
partnership, and Enstar Networking Corporation of Eden Prairie,
Minnesota (filed as exhibit 10.25 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, and incorporated
herein by reference).
10.26 Lease Agreement dated September 14, 1998, by and between PYLON, INC.,
a North Carolina corporation, and Americable, Inc., a Minnesota
corporation (filed as exhibit 10.26 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998, and
incorporated herein by reference).
10.27 Twelfth Amendment to Amended and Restated Loan and Security Agreement
dated November 30, 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 August 31, 1998
(previously filed with the Company's Annual Report on Form 10-K for
the year ended December 31, 1998).
10.28 Thirteenth Amendment to Amended and Restated Loan and Security
Agreement and Consent dated January 8, 1999, among Americable, Inc.,
Enstar Networking Corporation, and U.S. Bank National Association,
amending the terms of the Amended and Restated Loan and Security
Agreement dated November 30, 1998 (previously filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 1998).
<PAGE>
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors of CorVel Corporation - Ernst & Young LLP.
23.2 Consent of Independent Certified Public Accountants of ENStar Inc.
- Grant Thornton LLP.
27.1 Financial Data Schedule (previously filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
99.1 Cautionary Statement Regarding Forward Looking Statements (previously
filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
</TABLE>
- --------------------------
+ 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. On December 22, 1998, the Company filed a current
report on Form 8-K to report the disposition of assets in connection
with the sale of the stock of Transition Networks, Inc. (Item 2). The
filing included the Company's pro forma financial statements reflecting
the disposition (Item 7).
(c) See the Exhibits set forth above.
(d) See the Financial Statement Schedules of the Company, and Subsidiaries
Consolidated Financial Statements and the CorVel Corporation Financial
Statement Schedule attached as a separate section of this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: July 1, 1999
ENSTAR INC.
By /s/ JEFFREY J. MICHAEL
------------------------------------
Jeffrey J. Michael, President and
Chief Executive Officer
<PAGE>
ENSTAR INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF ENSTAR PAGE
------------------------------ ----
<S> <C>
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-2
Consolidated Balance Sheets as of December 31, 1998
and 1997.................................................. F-3
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997, and 1996............. F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997, and 1996............. F-5
Notes to Consolidated Financial Statements.................. F-6
Report of Independent Certified Public Accountants.......... F-22
Schedule II -- Valuation and Qualifying Accounts............ F-23
</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, 1997, 1998, and 1999...................... S-2
Consolidated Balance Sheets as of March 31, 1998 and 1999... S-3
Consolidated Statements of Stockholders' Equity for the
three years ended March 31, 1997, 1998, and 1999.......... S-4
Consolidated Statements of Cash Flows for the three years
ended March 31, 1997, 1998, and 1999...................... S-6
Notes to Consolidated Financial Statements.................. S-7
Schedule II -- Valuation and Qualifying Accounts............ S-17
</TABLE>
F-1
<PAGE>
ENSTAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues.........................................$43,358 $38,632 $48,667
Operating and product costs...................... 34,316 30,115 37,667
------- ------- -------
Gross profit..................................... 9,042 8,517 11,000
Selling, general and administrative expenses..... 12,731 13,284 10,956
------- ------- -------
Operating income (loss).......................... (3,689) (4,767) 44
Interest expense, net............................ (1,336) (722) (169)
------- ------- -------
Loss before taxes and equity in earnings
of unconsolidated subsidiary................... (5,025) (5,489) (125)
Income tax provision (benefit)................... (1,850) (2,078) 25
------- ------- -------
Loss before equity in earnings
of unconsolidated subsidiary................... (3,175) (3,411) (150)
Equity in earnings of
unconsolidated subsidiary...................... 1,512 1,349 1,304
------- ------- -------
Income (loss) from continuing operations......... (1,663) (2,062) 1,154
Discontinued operations, net of taxes
Income (loss) from operations.................. 946 (199) (82)
Gain on disposition............................ 2,490 --- ---
------- ------- -------
3,436 (199) (82)
------- ------- -------
Net income (loss)....... ........................$ 1,773 $(2,261) $ 1,072
======= ======= =======
Basic and diluted income (loss) per share
Continuing operations..........................$ (0.53) $ (0.63) $ 0.34
Discontinued operations........................$ 1.09 $ (0.06) $ (0.02)
------- ------- -------
Net income (loss) per share......................$ 0.56 $ (0.69) $ 0.32
======= ======= =======
Basic and diluted
weighted average shares outstanding............ 3,152 3,289 3,309
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE>
ENSTAR INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.........................$17,155 $12,563
Accounts receivable, net of allowance
for doubtful accounts ($374 in 1998
and $289 in 1997)............................... 4,769 4,979
Inventories....................................... 1,734 2,630
Prepaid expenses and other........................ 161 285
Net assets of discontinued operations............. -- 3,295
------- -------
Total current assets........................... 23,819 23,752
Property and equipment, net......................... 1,072 1,390
Goodwill............................................ 4,486 4,642
Investment in unconsolidated subsidiaries........... 13,293 11,170
Other............................................... 903 152
------- -------
$43,573 $41,106
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable to bank.............................$ 1,680 $ 2,380
Current maturities of long-term debt.............. 4,899 134
Accounts payable.................................. 3,186 2,827
Accrued expenses.................................. 4,580 4,835
------- -------
Total current liabilities.................... 14,345 10,176
Long-term debt, less current maturities............. 14,104 15,993
Deferred income taxes............................... 1,539 --
Commitments and contingencies....................... -- --
Shareholders' equity................................ 13,585 14,937
------- -------
$43,573 $41,106
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
ENSTAR INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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, 1996 -- $ -- $ -- $ -- $ 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...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
Net income........... -- -- -- 1,773 -- 1,773
Effect of equity
transactions of
unconsolidated
subsidiaries........ -- -- (640) -- -- (640)
Adjustment of net
operating loss
carryforward
allocation.......... -- -- (610) -- -- (610)
Purchase of
common stock...... (290,266) (3) (1,872) -- -- (1,875)
--------- ---- ------- ------- -------- ------
Balance at
December 31, 1998 2,976,723 $ 30 $13,839 $ (284) $ -- $13,585
========= ==== ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
ENSTAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)..............................$ 1,773 $(2,261) $ 1,072
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Equity in earnings of unconsolidated
subsidiary.................................. (1,512) (1,349) (1,304)
Depreciation and amortization................ 1,204 815 683
Deferred income taxes........................ (1,855) (2,078) 34
Gain on sale of discontinued operation....... (2,490) -- --
Net (income) loss from discontinued operation (946) 199 82
Discontinued operation - other............. 518 808 1,112
Changes in operating assets and liabilities,
net of effects from business dispositions
Accounts receivable....................... (1,263) 1,204 751
Inventories............................... 731 (205) 721
Accounts payable, accrued expenses and other 132 1,195 (2,331)
-------- -------- -------
Net cash provided by (used in)
operating activities.......................... (3,708) (1,672) 820
Cash flows from investing activities
Capital expenditures........................... (832) (1,145) (627)
Collections on notes receivable............... -- -- 258
Proceeds from sale of discontinued operations. 8,903 -- --
Other......................................... (1) (79) (240)
-------- ------- -------
Net cash provided by (used in)
investing activities.......................... 8,070 (1,224) (609)
Cash flows from financing activities
Long term debt repayments...................... (50,591) (47,671) (56,411)
Long term debt borrowings...................... 49,891 49,341 56,396
Proceeds from long-term debt................... 3,004 15,183 944
Payments on long-term debt..................... (128) -- (1,071)
Purchase of common stock....................... (1,875) (233) --
Additional capital invested
(constructive dividends)...................... -- (2,082) 351
Other.......................................... (71) 192 52
-------- ------- -------
Net cash provided by financing activities..... 230 14,730 261
-------- ------- -------
Net increase in cash
and cash equivalents......................... 4,592 11,834 472
Cash and cash equivalents at
beginning of year.............................. 12,563 729 257
-------- ------- -------
Cash and cash equivalents at end of year........$ 17,155 $12,563 $ 729
======== ======= =======
Cash paid during the year for:
Interest.......................................$ 1,336 $ 722 $ 169
Taxes.......................................... 20 69 --
See Note 2.
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS
ENStar Inc. ("ENStar" or the "Company") is a holding company principally
comprised of two operating companies, Americable, Inc. ("Americable") and Enstar
Networking Corporation ("Enstar Networking"), and equity investments in CorVel
Corporation ("CorVel") and Vicom, Incorporated ("Vicom"). 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.
In December 1998, ENStar sold Transition Networks, Inc. ("Transition") for
approximately $9 million cash. As described further in Note 3, the accompanying
consolidated financial statements and related notes have been restated for all
periods to reflect the effects of this discontinued operation. Also, effective
December 31, 1998, ENStar sold certain assets of Enstar Networking to Vicom in
exchange for common stock of Vicom and a promissory note (see Note 4). 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. Vicom is a telecommunications company providing services to
integrate voice, data and video solutions.
Americable is a distributor of premise wiring, connectivity products, and
low-end networking electronics, with sales throughout the United States.
Americable's sales represents approximately 43% of the Company's consolidated
sales. Enstar Networking is a security integrator providing solutions to
design, manage, and secure corporate network infrastructures and makes up the
remaining 57% of sales. CorVel is a health care services company. At December
31, 1998 and 1997, the Company had a 25% ownership interest in CorVel, which 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
F-6
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (Continued)
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.
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 exclusively of
finished goods.
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,
---------------
1998 1997
---- ----
<S> <C> <C>
Leasehold improvements..................................$ 126 $ 167
Office and computer equipment........................... 3,257 3,230
------ ------
3,383 3,397
Less -- accumulated depreciation and amortization....... 2,311 2,007
------ ------
$1,072 $1,390
====== ======
</TABLE>
F-7
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (Continued)
GOODWILL Goodwill is amortized on a straight-line basis over a period of 40
years. Accumulated amortization was $1,858,000 and $1,701,000 at December 31,
1998 and 1997. 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,
----------------
1998 1997
---- ----
<S> <C> <C>
Payroll and related benefits..............................$1,011 $ 550
Insurance reserves........................................ 397 544
Business disposition obligations.......................... 2,117 1,974
Other..................................................... 1,055 1,767
------ ------
$4,580 $4,835
====== ======
</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 8.
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.
ADVERTISING The Company expenses advertising costs as incurred.
Advertising costs charged to expense were approximately $217,000 in 1998,
$329,000 in 1997, and $138,000 in 1996.
NET INCOME (LOSS) PER SHARE Basic net earnings (loss) per share is computed
by dividing net earnings (loss) by the weighted average number of outstanding
common shares. Diluted net earnings (loss) per share is computed by dividing
net earnings (loss) by the weighted average number of outstanding common shares
and common share equivalents relating to stock options, when dilutive. Options
to purchase 291,750 and 90,750 shares of common stock with weighted average
exercise prices of $7.87 and $8.97 were outstanding during 1998 and 1997, but
were excluded from the computation of common share equivalents because they were
antidultive.
F-8
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (Continued)
For 1996, net income (loss) per share was computed based on the weighted
average number of shares of North Star common stock outstanding (9,927,000).
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 The American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is
effective for the Company beginning in 1999. SOP 98-1 should not have a
material effect on the financial position, results of operations, or cash flows
of the Company when adopted.
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, 1998, and
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 at an average share price of $6.25.
In March of 1998, the Company's Board of Directors authorized the repurchase of
up to 350,000 shares of common stock. During 1998, the Company purchased
290,266 shares for approximately $1,875,000.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - NON-CASH ITEMS During
1998, in connection with the sale of the Midwest division of Enstar Networking
to Vicom in a non-cash transaction, the company sold net operating assets of
$1,486,000 to Vicom for 1,350,000 shares of Vicom stock and a $750,000
note receivable. Corvel periodically has transactions in its own capital stock
(stock repurchases and the issuance of additional shares due to stock option
exercises) that affect the Company's investment in unconsolidated subsidiary.
As a result of these transactions, the Company has experienced a reduction in
its investment in unconsolidated subsidiary of $938,000, $2,349,000 and $337,000
during 1998, 1997 and 1996. These transactions, net of tax, are also reflected
as a reduction in the Company's additional paid-in capital of $640,000,
$1,434,000, and $170,000 for 1998, 1997, and 1996.
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 10.
F-9
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (Continued)
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 1997 and 1996 amounts have been reclassified to
conform to the 1998 presentation.
NOTE 3 - DISCONTINUED OPERATIONS
On December 10, 1998, ENStar sold all of Transition's common stock to
Communications Systems, a telecommunications company, for approximately
$9 million which was received in cash. Transition designs, manufactures, and
markets connectivity devices and network applications. 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 in discontinued
operations in the accompanying consolidated statement of operations. Operating
results of Transition through the date of sale were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues..............................$21,134 $15,720 $15,456
======= ======= =======
Income (loss) before income taxes.....$ 1,546 $ (299) $ (132)
Income tax provision (benefit)........ 600 (100) (50)
------- ------- -------
Net income (loss) from
discontinued operations.............$ 946 $ (199) $ (82)
======= ======= =======
</TABLE
F-10
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 - DISCONTINUED OPERATIONS (Continued)
At December 31, 1997, the net asset of discontinued operations consist of
the following (in thousands):
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Working capital.......................$ 2,665
Property and equipment................ 774
Other assets.......................... 31
Long term debt........................ (175)
-------
$ 3,295
=======
</TABLE>
NOTE 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
as if this transaction had occurred as of January 1, 1998 (in thousands):
<TABLE>
<CAPTION>
1998
----
<S> <C>
Revenues..............................$33,546
Loss from continuing operations....... (1,050)
Basic and diluted loss per share
from continuing operations..........$ (.33)
</TABLE>
NOTE 5 -- 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
and of March 31. Vicom is a telecommunications company with a December 31,
F-11
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES (Continued)
year end. For the year ended December 31, 1997, Vicom had total assets of
approximately $4,418,000 and net earnings of $56,000 on revenues of $6,639,000.
The Vicom financial information for the year ended December 31, 1998, is not yet
available. The following is unaudited summarized balance sheet and income
statement information for CorVel as of, and for the twelve month period ended
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
CorVel
------
<S> <C>
Current assets.......................$ 40,329
Total assets......................... 64,538
Current liabilities.................. 11,466
Noncurrent liabilities............... 2,649
Revenues............................. 159,500
Gross profit......................... 28,331
Net income (loss).................... 10,087
</TABLE>
At December 31, 1998, shareholders' equity includes approximately $4.8
million of unremitted earnings related to the Company's investment in CorVel.
At December 31, 1998, the fair value of the Company's investments in CorVel,
based on the closing market price, was approximately $36.1 million. As the
Vicom stock is not widely traded on the local over-the-counter market, the
market value of the Company's investment in Vicom was determined in a
non-cash transaction to be approximately $600,000 based upon the net fair value
of the assets sold, less the proceeds received from Vicom and the costs
related to the transaction.
NOTE 6 -- NOTES PAYABLE AND LONG-TERM DEBT
Americable and Enstar Networking maintained a revolving line of credit
facility which provided borrowings up to $4 million during the year ended
December 31, 1998 and is due in October 1999. Borrowings under this facility
were based on eligible accounts receivable and inventory with interest at prime
(7.75% at December 31, 1998). At December 31, 1998, there were outstanding
borrowings of $1,680,000, and approximately $1.3 million of available
borrowings. The note contains certain restrictive covenants, the most
significant of which are capital expenditure limitations and limitations on
operating losses. Under the terms of the 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, 1998, the company was in compliance with all
covenants under this agreement.
F-12
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- NOTES PAYABLE AND LONG-TERM DEBT (Continued)
During 1998, ENStar provided an aggregate of approximately $2.5 million
in cash to Americable pursuant to the terms of the credit agreement.
Additional cash investments from ENStar may be required in 1999 to fund
operations and capital expenditures of Americable and Enstar Networking.
Effective January 1, 1999, this agreement was amended to provide a maximum
lending limit of $3 million based upon a borrowing base of eligible accounts
receivable, with an effective interest rate of prime plus 1% (8.75% at January
1, 1999). The Company believes it will be able to renew or obtain new
agreements at substantially the same terms and conditions.
The carrying value of long-term debt, which approximates fair value,
consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Subordinated debentures...............$19,003 $16,127
Less current maturities............... 4,899 134
------- -------
$14,104 $15,993
======= =======
</TABLE>
During 1997, the Company registered with the Securities and Exchange
Commission $25 million of debentures, of which approximately $6 million remain
unissued at December 31, 1998. Subordinated debentures are unsecured and due in
varying monthly installments through 2003 with a weighted average interest rates
of 9.60% and 9.62% at December 31, 1998 and 1997.
F-13
<PAGE>
Aggregate minimum annual principal payments of long-term debt are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999..................................$ 4,899
2000.................................. 647
2001.................................. 44
2002.................................. 5,936
2003.................................. 989
Thereafter............................ 6,488
-------
$19,003
=======
</TABLE>
NOTE 7 -- INCOME TAXES
The activity of the Company through February 1997, was included in the
income tax return of North Star. For financial reporting purposes, the Company
has been allocated a provision for income taxes in an amount generally
equivalent to the provision that would have resulted had the Company filed
separate income tax returns. The provision for income taxes from continuing
operations consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current
Federal..............................$ -- $ -- $ (8)
State................................ 5 -- (1)
------- ------- -------
5 -- (9)
------- ------- -------
Deferred
Federal.............................. (1,617) (1,812) 30
State................................ (238) (266) 4
------- ------- -------
(1,855) (2,078) 34
------- ------- -------
$(1,850) $(2,078) $ 25
======= ======= =======
</TABLE>
F-14
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES (Continued)
The following is a reconciliation of the income tax provision (benefit)
at the federal statutory rate to the effective rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate.................. (34.0)% (34.0)% (34.0)%
State income taxes...................... (4.6) (4.9) 2.4
Goodwill amortization................... 1.1 1.0 43.2
Other................................... 0.7 -- 8.4
------ ------ ------
(36.8)% (37.9)% 20.0%
====== ====== ======
</TABLE>
The tax effects of the cumulative temporary differences resulting in the
net deferred tax asset (liability) are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
---- ----
<S> <C> <C>
Investment in CorVel...................$(4,801) $(4,187)
Accrued expenses not
deductible until paid................ 1,789 1,634
Net operating loss carryforwards....... 1,898 3,158
Other.................................. (425) (571)
------- -------
(1,539) 34
Valuation allowance.................... -- (34)
------- -------
$(1,539) $ --
======= =======
</TABLE>
F-15
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES (Continued)
To the extent the Company's financial reporting basis in its investment in
its unconsolidated subsidiary exceeds its tax basis, and is not expected to be
realized in a tax-free manner, the Company records a deferred tax liability.
The Company's deferred tax liability includes, among other things, the initial
tax effect of $1.8 million for the difference in the financial reporting and tax
basis of the Company's investment in CorVel following the initial public
offering along with the income taxes recorded on the equity in earnings of
CorVel of $1,008,000 in 1998, $897,000 in 1997, and $869,000 in 1996.
In 1997, 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,
Inc. The tax benefit of a portion of these available carryforwards $2,532,000
was treated as additional capital invested by North Star and the Company's
deferred tax liability was reduced by a like amount. In 1998, the net operating
loss previously allocated was adjusted to agree with the final tax return filed
by North Star for the period ending February 28, 1997 (the date of the merger).
The $610,000 tax effect of the correction was treated as a reduction in
additional paid-in capital and an increase in the Company's deferred tax
liability. At December 31, 1998, the entire remaining Federal operating loss
carryforward of $3,974,000 was available to the Company. These loss
carryforwards begin to expire in 2009.
NOTE 8 -- 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 2001 are $408,000 in 1999,
$277,000 in 2000 and $99,000 in 2001.
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 $654,000 in 1998, $782,000 in 1997, and $795,000 in 1996.
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
agreement 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
F-16
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
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 9 -- 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 $208,000, $205,000, and $138,000, were
charged to operations in the years ended December 31, 1998, 1997 and 1996.
NOTE 10 -- 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. The ENStar and Americable plans were approved by the respective
Company's Board of Directors in 1996. The ENStar plan reserved 300,000 shares
for issuance while Americable's plan reserved 600,000 shares. In 1998, the
ENStar shareholders approved an additional 200,000 shares for issuance related
to the ENStar stock option plan raising the total available shares to 500,000.
The Enstar Networking plan was approved in 1998 and reserved 600,000 shares.
Options granted under these plans have an exercise price equal to the fair
market value on the date of the grant, generally have a ten year term, vest
ratably over four years and provide that the options shall expire at the end of
such period.
Option transactions under these plans since adoption are summarized as
follows:
[CAPTION]
<TABLE>
ENStar Americable Enstar Networking
---------------- ---------------- -----------------
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............ 89,250 9.00 345,000 0.82 -- --
------------------------------------------------------
<PAGE>
Outstanding at
December 31, 1996 89,250 9.00 345,000 0.82 -- --
Granted............270,000 7.38 45,000 0.82 -- --
Cancelled.......... -- -- (240,000) 0.82 -- --
------------------------------------------------------
Outstanding at
December 31, 1997.....359,250 7.78 150,000 0.82 -- --
Granted............ 53,000 7.33 83,000 1.25 435,000 1.00
Cancelled.......... -- -- (125,000) 0.82 (143,000) 1.00
------------------------------------------------------
Outstanding at
December 31, 1998.....412,250 $7.72 108,000 $1.23 292,000 $1.00
======================================================
Options exercisable
at December 31:
1996............... -- $ -- 101,000 $0.82 -- $ --
======================================================
1997............... 31,313 $9.00 40,000 $0.82 -- $ --
======================================================
1998...............118,125 $8.07 5,000 $1.15 -- $ --
======================================================
</TABLE>
F-17
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCK OPTION PLANS (Continued)
The following table summarizes information concerning currently outstanding
options:
[CAPTION]
<TABLE>
OPTIONS OUTSTANDING
Weighted average
Number remaining Weighted average
of shares contractual life and exercise price
----------------------------------------------------
<S> <C> <C> <C>
ENStar................. 3,000 9.5 years $6.50
320,000 9.1 years 7.38
89,250 7.2 years 9.00
-------
412,250
=======
Americable............. 25,000 8.5 years $1.15
83,000 9.2 years 1.25
-------
108,000
=======
Enstar Networking...... 292,000 9.1 years $1.00
=======
</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 additional expense of $190,000, or 4 cents per
share in 1998, $69,000, or 1 cent per share in 1997, and $73,000, or
2 cents per share in 1996.
F-18
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCK OPTION PLANS (Continued)
The following represents the weighted average fair value of options
granted for the respective entities and the weighted average assumptions
used in the Black-Scholes option pricing model:
[CAPTION]
<TABLE> Enstar
ENStar Americable Networking
--------------------- --------------------- -------------
1998 1997 1996 1998 1997 1996 1998
--------------------- --------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fair value of
options granted.$2.82 $2.76 $3.89 $0.48 $0.41 $0.52 $0.38
Assumptions used:
Dividends......$ -- $ -- $ -- $ -- -- $ -- $ --
Volatility..... 50.0% 49.6% 57.5% 50.0% 70.0% 98.0% 50.0%
Risk-free
interest rate. 5.1% 5.5% 5.5% 5.1% 5.9% 5.9% 5.1%
Expected option
term..........3 years 3 years 3 years 3 years 3 years 3 years 3 years
</TABLE>
NOTE 11 - BUSINESS SEGMENTS
ENStar consists of two operating segments: Americable and Enstar
Networking (Enstar Networking's assets and balance sheet activity for
1996 were included within Americable as it was formerly a division of
Americable). The operating results of Enstar Networking are segregated
with respect to the Midwest operations sold to Vicom (see Note 4)
("ENC - business disposition").
The Company identifies its segments based on the Company's organizational
structure, which is by operating company (see Note 1 for a description of the
businesses). Operating profit represents earnings before interest expense,
interest income, income taxes, and equity in earnings of unconsolidated
subsidiary. Intersegment sales are made at market prices. Corporate allocates
costs of certain general and administrative expenses to the various segments
based primarily upon the percentage of services performed, which approximates
the costs associated with each segment.
F-19
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 - BUSINESS SEGMENTS (Continued)
Certain financial information on the Company's segments is as follows:
<TABLE>
<CAPTION> YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues - external
Americable................................$17,673 $15,264 $18,935
Enstar Networking......................... 14,271 7,331 5,933
------- ------- -------
31,944 22,595 24,868
ENC - business disposition................ 11,414 16,037 23,799
------- ------- -------
Total Revenues - external..............$43,358 $38,632 $48,667
======= ======= =======
Revenues - intersegment
Americable................................$ 1,602 $ 3,430 $ 3,403
ENC - business disposition................ 146 -- --
------- ------- -------
Total Revenues - intersegment..........$ 1,748 $ 3,430 $ 3,403
======= ======= =======
Operating Income (Loss)
Americable................................$ 489 $ 379 $ 1,514
Enstar Networking......................... (2,147) (1,980) (867)
Corporate................................. (1,018) (1,305) (1,127)
------- ------- -------
(2,676) (2,906) (480)
ENC - business disposition................ (1,013) (1,861) 524
------- ------- -------
Total Operating Income (Loss)..........$(3,689) $(4,767) $ 44
======= ======= =======
Interest Expense
Americable................................$ 111 $ 135 $ 184
Enstar Networking......................... 123 -- --
Corporate................................. 1,102 587 (15)
------- ------- -------
Total Interest Expense.................$ 1,336 $ 722 $ 169
======= ======= =======
F-20
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 - BUSINESS SEGMENTS (Continued)
Assets -
Americable................................$11,633 $ 9,130 $14,547
Enstar Networking......................... 2,101 5,115 --
Corporate................................. 29,839 26,861 18,771
------- -------- -------
Total Assets...........................$43,573 $41,106 $33,318
======= ======= =======
Depreciation and Amortization -
Americable................................$ 574 $ 747 $ 669
Enstar Networking......................... 612 52 --
Corporate................................. 18 16 14
------- ------- -------
Total Depreciation and Amortization....$ 1,204 $ 815 $ 683
======= ======= =======
Capital Expenditures -
Americable................................$ 311 $ 150 $ 556
Enstar Networking......................... 517 992 --
Corporate................................. 4 3 71
------- ------- -------
Total Capital Expenditures.............$ 832 $ 1,145 $ 627
======= ======= =======
</TABLE>
NOTE 12 - SUBSEQUENT EVENT
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 have preliminarily
proposed that the shares not controlled by them be acquired for a cash price of
$10.00 per share, however, the proposal is subject to change based on a
number of factors including determination of the structure of the transaction.
The Special Committee will evaluate the fairness of any proposed transaction to
all shareholders of the Company, and will engage counsel and financial advisors
in connection with its role. The majority shareholders and their controlled
entities own approximately 1,920,000 shares, or 65%, of the Company's common
stock.
F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
ENStar Inc.
We have audited the accompanying consolidated balance sheets of ENStar Inc.
and subsidiaries, as of December 31, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998, 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, 1998. 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 19, 1999 (except
for Note 12 as to which
the date is March 8, 1999)
F-22
<PAGE>
ENSTAR INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGES
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS- AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(1) PERIOD
----------- ---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
1996............... 297 92 -- (42) 347
1997............... 347 106 -- (164) 289
1998............... 289 127 -- (42) 374
</TABLE>
- --------------------------
(1) Write off of accounts deemed uncollectible.
F-23
<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, 1998 and 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1999. 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, 1998 and 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended March 31, 1999, 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 10, 1999, except for Notes J
and L, as to which the date is
May 24, 1999
S-1
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31,
---------------------
1997 1998 1999
---- ---- ----
REVENUES $121,704,000 $141,709,000 $165,457,000
COSTS AND EXPENSES
Cost of revenues 99,323,000 115,553,000 136,082,000
General and administrative 8,645,000 11,029,000 12,596,000
------------ ------------ ------------
107,968,000 126,582,000 148,678,000
------------ ------------ ------------
Income before income taxes 13,736,000 15,127,000 16,779,000
Income tax provision 5,220,000 5,670,000 6,376,000
------------ ------------ ------------
NET INCOME $ 8,516,000 $ 9,457,000 $ 10,403,000
============ ============ ============
Net income per share:
Basic $ 0.93 $ 1.13 $ 1.28
============ ============ ============
Diluted $ 0.91 $ 1.10 $ 1.26
============ ============ ============
Shares used in computing
net income per share:
Basic 9,170,000 8,386,000 8,155,000
Diluted 9,370,000 8,572,000 8,261,000
See accompanying notes to consolidated financial statements.
S-2
<PAGE>
CORVEL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31,
---------
1998 1999
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 8,430,000 $ 9,052,000
Accounts receivable (less allowance
for doubtful accounts of $2,082,000
in 1998 and 3,015,000 in 1999) 25,633,000 31,562,000
Prepaid expenses and taxes 736,000 856,000
Deferred income taxes 2,376,000 3,223,000
----------- -----------
Total current assets 37,175,000 44,693,000
----------- -----------
Property and equipment, net 16,542,000 17,145,000
Other assets 6,774,000 6,899,000
----------- -----------
$60,491,000 $68,737,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable $ 6,078,000 $ 6,468,000
Accrued liabilities 6,371,000 6,525,000
----------- -----------
Total current liabilities $12,449,000 $12,993,000
----------- -----------
Deferred income taxes 2,271,000 2,530,000
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.0001 par value:
20,000,000 shares authorized; 9,706,944 and
9,885,576 shares issued and outstanding in 1998
and 1999, respectively
Paid-in Capital 30,615,000 32,918,000
Treasury Stock, at cost (1,461,200 shares
in 1998, 1,747,280 shares in 1999) (21,727,000) (26,990,000)
Retained Earnings 36,883,000 47,286,000
----------- -----------
Total stockholders' equity 45,771,000 53,214,000
----------- -----------
$60,491,000 $68,737,000
=========== ===========
See accompanying notes to consolidated financial statements.
S-3
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1997, 1998, and 1999
Common stock
Common and paid in Treasury
stock-shares capital shares
-----------------------------------------
Balance - March 31, 1996 9,187,350 $ 26,401,000 --
Stock issued under employee
stock purchase plan 46,078 536,000 --
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased 162,278 1,185,000 --
Purchase of common stock -- -- (714,000)
Net income -- -- --
-----------------------------------------
Balance - March 31, 1997 9,395,706 28,122,000 (714,000)
-----------------------------------------
Stock issued under employee
stock purchase plan 41,040 540,000 --
Stock issued and income tax
benefits under stock option plan,
net of shares repurchased 270,198 1,953,000 --
Purchase of common stock -- -- (747,200)
Net income -- -- --
-----------------------------------------
Balance - March 31, 1998 9,706,944 30,615,000 (1,461,200)
-----------------------------------------
Stock issued under employee
stock purchase plan 34,428 541,000 --
Stock issued and income tax
benefits under stock option plan,
net of shares repurchased 144,204 1,762,000 --
Purchase of common stock -- -- (286,080)
Net income -- -- --
-----------------------------------------
Balance - March 31, 1999 9,885,576 $32,918,000 (1,747,280)
=========================================
See accompanying notes to consolidated financial statements.
S-4
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1997, 1998, and 1999
Total
Treasury Retained shareholder's
shares-cost earnings equity
------------------------------------------------
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, net of shares repurchased -- -- 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 -- -- 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
------------------------------------------------
Stock issued under employee
stock purchase plan -- -- 541,000
Stock issued and income
tax benefits under stock
option plan, net of shares
repurchased -- -- 1,762,000
Purchase of common stock (5,263,000) -- (5,263,000)
Net income -- 10,403,000 10,403,000
------------------------------------------------
Balance - March 31, 1999 $(26,990,000) $47,286,000 $53,214,000
================================================
See accompanying notes to consolidated financial statements.
S-5
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
--------------------------------------
1997 1998 1999
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,516,000 $ 9,457,000 $10,403,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 4,215,000 5,349,000 6,344,000
Deferred income taxes 420,000 137,000 (588,000)
Loss on write down and disposal
of property and equipment 96,000 124,000 37,000
Changes in operating assets
and liabilities:
Accounts receivable (3,900,000) (3,339,000) (5,929,000)
Prepaid taxes and expenses 421,000 (612,000) (120,000)
Accounts and taxes payable 3,546,000 (525,000) 390,000
Accrued liabilities 384,000 1,741,000 154,000
Other assets (1,607,000) (1,069,000) (482,000)
--------------------------------------
Net cash provided by
operating activities 12,091,000 11,263,000 10,209,000
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,799,000) (8,725,000) (6,627,000)
--------------------------------------
Net cash used in investing activities (5,799,000) (8,725,000) (6,627,000)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds and tax benefits from
exercise of stock options 1,721,000 2,493,000 2,303,000
Purchase of common stock (9,461,000) (12,266,000) (5,263,000)
--------------------------------------
Net cash used in financing activities (7,740,000) (9,773,000) (2,960,000)
--------------------------------------
Net increase (decrease) in cash
and cash equivalents (1,448,000) (7,235,000) 622,000
Cash and cash equivalents
at beginning of year 17,113,000 15,665,000 8,430,000
--------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $15,665,000 $ 8,430,000 $ 9,052,000
======================================
See accompanying notes to consolidated financial statements.
S-6
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1999
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 workers' 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, 1998 and 1999.
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 $1,582,000 and $1,979,000 of unbilled receivables at March 31, 1998
and 1999, respectively. No one customer accounted for more than 10% of
consolidated revenues during the years ended March 31, 1997, 1998 and 1999.
PROPERTY AND EQUIPMENT: Additions to property and equipment are recorded
at cost. Depreciation and amortization are provided using the straight-line
and accelerated methods over the estimated useful lives of the related assets
which range from three to seven years.
LONG-LIVED ASSETS: The carrying amount of all long-lived assets is
evaluated periodically to determine if adjustment to the depreciation and
amortization period or to the unamortized balance is warranted. Such
evaluation is based principally on the expected utilization of the long-lived
assets and the projected, undiscounted cash flows of the operations in which
the long-lived assets are deployed.
S-7
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1999
Note A - Summary of Significant Accounting Policies (continued)
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 $5,546,000 (net of
accumulated amortization of $1,088,000) at March 31, 1998 and 5,869,000 (net
of accumulated amortization of $1,237,000) at March 31, 1999.
CONCENTRATIONS OF CREDIT RISK: The Company performs periodic credit
evaluations of its customers' financial condition and does not require
collateral. One customer accounted for 13% of the Company's accounts
receivable balance in 1999. No other customer accounted for 10% of accounts
receivable in 1998 or 1999. Receivables are generally due within 60 days.
Credit losses relating to customers in the workers' compensation insurance
industry consistently have been within management's expectations.
INCOME TAXES: The consolidated financial statements reflect the
application of Statement of Financial Accounting Standards No. 109 -
"Accounting for Income Taxes".
EARNINGS PER SHARE: Earnings per common share-basic is based on the
weighted average number of common shares outstanding during the period.
Earnings per common shares-diluted is based on the weighted average number of
common shares and common share equivalents outstanding during the period. In
calculating earnings per share, earnings are the same for the basic and
diluted calculations. Weighted average shares outstanding increased for
diluted earnings due to the effect of stock options.
STOCK OPTION PLANS: The Company applies the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 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.
RECENT ACCOUNTING PRONOUNCEMENTS: In 1998, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). The Company has determined
it currently operates in one reportable segment as defined in SFAS No. 131.
Each of the Company's products and services have similar long-term financial
performance and have similar economic characteristics. All of the Company's
products and services relate to programs that provide the Company's customers
with a single source for all of their managed care needs, providing
comprehensive, cost-effective and innovative solutions.
S-8
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1999
Note A - Summary of Significant Accounting Policies (continued)
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. Specifically, certain internal payroll and payroll related costs
should be capitalized during the application development stage of a project
and depreciated over the computer software's useful life. The Company will
implement SOP 98-1 as of April 1, 1999 and does not believe that
implementation will have a material impact on its financial statements.
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's net income or stockholders' equity.
Note B - Property and Equipment
Property and equipment consists of the following at March 31:
1998 1999
-------- --------
Office equipment and computers $24,930,000 $29,618,000
Computer software 7,808,000 9,434,000
Leasehold improvements 1,154,000 1,349,000
-------------------------
33,892,000 40,401,000
Less: accumulated depreciation and amortization 17,350,000 23,256,000
-------------------------
$16,542,000 $17,145,000
=========================
Note C - Accrued Liabilities
Accrued liabilities consists of the following at March 31:
1998 1999
----------------------
Payroll and related benefits $ 3,303,000 $ 4,630,000
Self-insurance reserves 650,000 645,000
Other 2,418,000 1,250,000
-------------------------
$ 6,371,000 $ 6,525,000
=========================
S-9
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statement
March 31, 1999
Note D - Income Taxes
The income tax provision consists of the following for the three years
ended March 31:
1997 1998 1999
-------- -------- --------
Current - Federal $ 4,212,000 $ 4,955,000 $ 6,337,000
Current - State 588,000 346,000 627,000
---------------------------------------
Subtotal 4,800,000 5,301,000 6,964,000
---------------------------------------
Deferred - Federal 368,000 345,000 (537,000)
Deferred - State 52,000 24,000 (51,000)
---------------------------------------
Subtotal 420,000 369,000 (588,000)
---------------------------------------
$ 5,220,000 $ 5,670,000 $ 6,376,000
=======================================
Income tax benefits associated with the exercise of stock options were
$228,000, $1,212,000 and $289,000 for fiscal 1997, 1998, and 1999,
respectively.
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:
1997 1998 1999
-------- -------- --------
Income taxes at federal statutory rate $4,808,000 $5,294,000 $5,873,000
State income taxes,
net of federal benefit 423,000 453,000 471,000
Goodwill amortization 40,000 42,000 45,000
Other (51,000) (119,000) (13,000)
----------------------------------
$5,220,000 $5,670,000 $6,376,000
==================================
Income taxes paid totaled $1,683,000, $5,690,000 and $4,787,000 for the
years ended March 31, 1997, 1998, and 1999, respectively.
S-10
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1999
Note D - Income Taxes (continued)
Deferred taxes at March 31, 1998 and 1999 are:
1998 1999
-------------------------
Deferred tax assets:
Accrued liabilities not currently deductible $ 1,427,000 $ 1,756,000
Allowance for doubtful accounts 814,000 1,371,000
Other 135,000 96,000
-------------------------
Deferred assets 2,376,000 3,223,000
Deferred tax liabilities:
Excess of tax under book basis of fixed assets (2,271,000) (2,530,000)
-------------------------
Deferred liability (2,271,000) (2,530,000)
-------------------------
Net deferred tax asset $ 105,000 $ 693,000
=========================
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 3,470,000 shares of the Company's common
stock may be granted to key employees, non-employee 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.
S-11
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1999
Note E - Stock Option Plans (continued)
In addition to the aforementioned Plan, the Company's President was
issued an option to purchase 1,500,000 shares of common stock at an exercise
price of $.0001 per share in January 1988. As of March 31, 1999, all of these
options have vested and have been exercised. Summarized information for all
stock options for the past three fiscal years follows:
1997 1998 1999
------- -------- --------
Options outstanding at the
beginning of the year 846,822 911,664 761,932
Options granted 252,900 205,500 219,100
Options exercised (162,278) (317,874) (149,554)
Options cancelled (25,780) (37,358) (35,072)
---------------------------------
Options outstanding at the end
of the year 911,664 761,932 796,406
=================================
During the year, weighted average
price of options:
Granted $14.24 $16.16 $18.09
Exercised $ 5.86 $ 5.14 $10.55
Cancelled $11.40 $13.82 $15.20
At the end of the year:
Price range of outstanding options $.0001- $ 5.38- $ 8.50-
$15.75 $18.88 $18.88
Weighted average price per share $ 9.89 $13.38 $15.13
Options available for future grants 577,768 809,626 625,598
Exercisable options 489,762 335,790 333,764
S-12
<PAGE>
CorVel Corporation
Note to Consolidated Financial Statements
March 31, 1999
Note E - Stock Option Plans (continued)
The following table summarizes the status of stock options outstanding
and exercisable at March 31, 1999:
Outstanding Exercisable
Weighted Options- Exercisable Options-
Average Weighted Options- Weighted
Range of Number of Remaining Average Number of Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices Options Life Price Options Price
$ 8.50-$13.25 199,882 1.83 years $11.38 174,310 $11.24
13.38- 14.81 205,192 3.52 years 14.18 95,176 14.51
15.31- 17.81 194,832 4.24 years 16.72 49,336 15.98
18.00- 18.88 196,500 4.67 years 18.36 14,942 18.82
-------------------------------------------------------------
Total 796,406 3.56 years $15.13 333,764 $13.21
=============================================================
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, net income, net
income per share-basic and net income per share-diluted would have been for the
three fiscal years ending March 31, 1999:
1997 1998 1999
------- ------- -------
Net income - adjusted $8,315,000 $9,185,000 $9,971,000
Net income per share - basic $0.91 $1.10 $1.22
Net income per share - diluted $0.89 $1.07 $1.21
The weighted average fair values at date of grant for options during
fiscal 1997, 1998, and 1999 were $4.34, $4.65, and $6.28, respectively.
The fair value of each plan is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted average assumptions
were used for fiscal years ending March 31:
1997 1998 1999
------- ------- -------
Expected volatility .41 .34 .28
Risk free interest rate 6.4% 5.5% 5.7%
The assumptions for all three years reflect no dividend yield and a
weighted average option life of 4.7 years.
S-13
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1999
Note E - Stock Option Plans (continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective 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. 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 500,000 shares has been authorized for issuance under
the plan, as amended. As of March 31, 1999, 304,000 shares had been issued
pursuant to the plan. Summarized plan information is as follows:
1997 1998 1999
------- ------- -------
Employee contributions $536,000 $540,000 $541,000
Shares acquired 46,078 41,040 34,428
Average purchase price $11.63 $13.16 $15.71
Note G - Treasury Stock
The Company's Board of Directors has approved a plan to repurchase up to
2,200,000 shares of the Company's outstanding common stock. Purchases may be
made from time to time depending on market conditions and other relevant
factors. The share repurchases for fiscal years ending March 31, 1997, 1998
and 1999 are as follows:
1997 1998 1999 Cumulative
------- ------- ------- ----------
Shares repurchased 714,000 747,200 286,080 1,747,280
Cost $9,461,000 $12,266,000 $ 5,263,000 $26,990,000
Average price $13.25 $16.42 $18.40 $15.45
S-14
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1999
Note G - Treasury Stock (continued)
The repurchased shares were recorded as treasury stock, at cost, and are
available for general corporate purposes. The repurchases were financed from
cash generated from operations.
Note H - Commitments and Contingencies
The Company leases office facilities under noncancelable operating
leases. Future minimum rental commitments under operating leases at March 31,
1999 are $5,772,000 in fiscal 2000, $4,705,000 in fiscal 2001, $3,736,000 in
fiscal 2002, $2,168,000 in fiscal 2003, $813,000 in fiscal 2004, and $123,000
thereafter. Total rental expense of $4,573,000, $4,683,000, and $6,064,000
was charged to operations for the years ended March 31, 1997, 1998, and 1999,
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 $135,000, $143,000, and
$155,000 were charged to operations for the years ended March 31, 1997, 1998
and 1999, 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 $62.50 per Right, as adjusted
for the 2-for-1 stock split in the form of a 100% stock dividend, paid on June
14, 1999, and subject to subsequent adjustment. Initially, the Rights will
trade with the company's common stock, and will not be exercisable until the
occurrence of certain takeover-related events. The issuance of the Rights has
no dilutive effect on the Company's earnings per share.
S-15
<PAGE>
CorVel Corporation
Notes to Consolidated Financial Statements
March 31, 1999
Note K - Quarterly Results
The following is a summary of unaudited results of operations for the two
years ended March 31, 1998 and 1999:
Net income Net income
per basic per diluted
Fiscal Year Ended Gross Net common common
March 31, 1998: Revenues Margin income share share
-------- ------ ------ ----- -----
First Quarter $34,024,000 $6,467,000 $2,275,000 $.27 $.26
Second Quarter 34,683,000 6,475,000 2,381,000 .28 .27
Third Quarter 35,558,000 6,595,000 2,395,000 .29 .28
Fourth Quarter 37,444,000 6,619,000 2,406,000 .29 .29
Fiscal Year Ended
March 31, 1999:
First Quarter $39,552,000 $7,210,000 $2,501,000 $.30 $.30
Second Quarter 40,474,000 7,148,000 2,556,000 .32 .31
Third Quarter 42,030,000 7,354,000 2,624,000 .33 .32
Fourth Quarter 43,401,000 7,663,000 2,722,000 .33 .33
Note L - Subsequent Event - Stock Split
On May 24, 1999, the Company announced that its Board of Directors
authorized a 2-for-1 common stock split in the form of a 100% stock dividend.
The additional shares were distributed on June 14, 1999 to stockholders of
record on May 31, 1999. Historical common share amounts, per share amounts
and stock option data for all periods presented have been restated to reflect
this change in the Company's capital structure.
S-16
<PAGE>
Schedule II
CORVEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to
Beginning Costs and Balance at
of Year Expenses Deductions End of Year
------- -------- ---------- -----------
Allowance for
doubtful accounts:
Year Ended March 31, 1997: 1,268,000 1,763,000 (1,345,000) 1,686,000
Year Ended March 31, 1998: 1,686,000 2,437,000 (2,041,000) 2,082,000
Year Ended March 31, 1999: $2,082,000 $2,085,000 $(1,152,000) $3,015,000
S-17
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- --------
23.1 Consent of Independent Auditors, Ernst & Young LLP
23.2 Consent of Grant Thornton LLP, Independent Public Accountants
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated May 10, 1999, (except
for Notes J and L, as to which the date is May 24, 1999), 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, 1998.
/s/ ERNST & YOUNG LLP
Orange County, California
June 28, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 19, 1999, (except for Note 12
as to which the date is March 8, 1999), accompanying the consolidated financial
statements and schedule of ENStar Inc. included in the Annual Report on
Form 10-K of ENStar Inc. for the year ended December 31, 1998. 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 29, 1999
