<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- -----------
Commission file number 0-29026
ENSTAR INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1831611
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7450 Flying Cloud Drive
Eden Prairie, Minnesota 55344
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (612) 942-3800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- --------
At August 5, 1999, 2,976,723 shares of common stock of the registrant were
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 12,564 $ 17,155
Accounts receivable, net 4,712 4,769
Finished goods inventories 2,206 1,734
Prepaid expenses and other current assets 265 161
--------------------------------
Total current assets 19,747 23,819
Property and equipment, net 695 1,072
Investment in unconsolidated subsidiaries 14,595 13,293
Goodwill, net 4,405 4,486
Other assets 878 903
--------------------------------
$ 40,320 $ 43,573
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 2,150 $ 1,680
Current portion of long-term debt 1,022 4,899
Accounts payable 2,302 3,186
Accrued expenses 4,255 4,580
--------------------------------
Total current liabilities 9,729 14,345
Long-term debt, net of current maturities 15,266 14,104
Deferred income taxes 2,054 1,539
Commitments and contingencies -- --
Shareholders' Equity
Common stock, $.01 par value 1,000,000,000
shares authorized, issued and outstanding
2,976,723 shares in 1999 and 1998 30 30
Additional paid-in-capital 13,764 13,839
Retained deficit (523) (284)
--------------------------------
Total shareholders' equity 13,271 13,585
--------------------------------
$ 40,320 $ 43,573
================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------
1999 1998 1999 1998
---------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 9,583 $11,639 $17,932 $21,473
Operating and product costs 7,317 9,337 13,641 17,189
---------------------------------------
Gross profit 2,266 2,302 4,291 4,284
Selling, general,
and administrative expenses 2,429 3,276 4,795 6,447
---------------------------------------
Operating loss (163) (974) (504) (2,163)
Interest expense, net (280) (338) (581) (611)
---------------------------------------
Loss before income taxes and equity in
earnings of unconsolidated subsidiaries (443) (1,312) (1,085) (2,774)
Income tax provision -- -- -- --
---------------------------------------
Loss before equity in earnings
of unconsolidated subsidiaries (443) (1,312) (1,085) (2,774)
Equity in earnings of
unconsolidated subsidiaries 442 390 847 735
---------------------------------------
Loss from continuing operations
Discontinued operations, net of taxes (1) (922) (238) (2,039)
Gain from operations -- 227 -- 32
---------------------------------------
Net loss $ (1) $ (695) $ (238) $(2,007)
=======================================
Basic and diluted loss per share:
Continuing operations $ (0.00) $ (0.28) $ (0.08) $ (0.63)
Discontinued operations -- 0.07 -- .01
---------------------------------------
Net loss $ (0.00) $ (0.21) $ (0.08) $ (0.62)
=======================================
Weighted average shares outstanding 2,977 3,246 2,977 3,256
=======================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
-------------------------------
<S> <C> <C>
Net cash used in operating activities $ (2,309) $ (1,502)
Cash flows from investing activities
Capital expenditures (61) (908)
Other 24 20
--------------------------------
Net cash used in investing activities (37) (888)
--------------------------------
Cash flow from financing activities
Proceeds from long-term debt 953 1,966
Payments on long-term debt (3,668) (14)
Proceeds from notes payable 21,758 30,755
Payments on notes payable (21,288) (30,645)
Purchase of Common Stock -- (210)
--------------------------------
Net cash provided by (used in)
financing activities (2,245) 1,852
--------------------------------
Net decrease in cash
and cash equivalents (4,591) (538)
Cash and cash equivalents
at beginning of period 17,155 12,609
--------------------------------
Cash and cash equivalents
at end of period $ 12,564 $ 12,071
==================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ENStar Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business --
ENStar Inc., a Minnesota corporation formed in 1995 ("ENStar" or the
"Company"), is a holding company. Its principal subsidiaries are Americable,
Inc. ("Americable") and Enstar Networking Corporation ("Enstar Networking").
Americable is a provider of value-added connectivity products and custom OEM
manufacturing solutions to the telecommunications, Category 5, and premise
wiring markets. Enstar Networking is a network security integrator providing
solutions to design, manage and secure corporate network infrastructures.
ENStar also owns 2,050,000 shares of common stock of CorVel Corporation
("CorVel"), or an approximate 25% interest in CorVel, a provider of cost
containment and managed care services designed to address the medical costs of
workers' compensation and 1,350,000 shares in Vicom Incorporated ("Vicom"), or
an approximate 38.5% interest in Vicom, a telecommunications company providing
services to integrate voice, data, and video solutions. These investments are
accounted for as unconsolidated subsidiaries using the equity method of
accounting.
On December 10, 1998, ENStar sold its subsidiary, Transition Networks,
Inc. ("Transition"), to Communications Systems, Inc. ("Communications Systems").
The transaction involved the sale of all of Transition's common stock and has
been shown as discontinued operations in these financial statements. See Note 3
for additional discussion of this transaction.
Effective December 31, 1998, ENStar sold the assets of the Midwest region
of Enstar Networking to Vicom. See Note 4 for additional discussion of this
transaction.
2. Basis of Presentation --
BASIS OF PRESENTATION The accompanying unaudited condensed consolidated
financial statements have been prepared by ENStar without audit, in accordance
with Regulation S-X pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished in the condensed consolidated
financial statements includes normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of such financial
statements. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's latest
annual report on Form 10-K.
Results for the six months ended June 30 may not necessarily be
indicative of the results to be expected for the full year.
<PAGE>
ENStar Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Discontinued Operations --
On December 10, 1998, ENStar sold all of its former subsidiary,
Transition's common stock to Communications Systems, a telecommunications
company, for approximately $9 million in cash. The gain on disposition was
approximately $2.5 million, net of income taxes of approximately $1.6 million.
Results of operations of Transition are reflected as discontinued
operations in the accompanying consolidated statement of operations. Operating
results of Transition for the three and six months ended June 30, 1998 were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
<S> <C> <C>
Revenues $ 5,459 $ 9,756
Operating income 246 61
Net income from
discontinued operations 227 32
</TABLE>
4. Sale of Assets --
Effective December 31, 1998, ENStar sold the assets of the Midwest region
of Enstar Networking to Vicom. The transaction involved the sale of
substantially all of the assets of the business in exchange for 1,350,000 shares
of Vicom common stock and a $750,000 promissory note to ENStar bearing interest
at an annual rate of 9%, interest payable quarterly, with the principal due on
or before December 2003. There was no gain or loss on this transaction. As a
result of this transaction, ENStar owns a 38.5% ownership interest in Vicom,
which is accounted for as an unconsolidated subsidiary using the equity method
of accounting.
The following sets forth the unaudited consolidated results of operations
for the three and six months ended June 30, 1998, as if this transaction had
occurred as of January 1, 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
<S> <C> <C>
Revenues $ 8,822 $16,092
Loss from continuing operations (680) (1,447)
Basic and diluted loss per
share from continuing operations (.21) (.44)
</TABLE>
<PAGE>
ENStar Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Net Loss Per Share --
The Company's basic and diluted net loss per share was computed by dividing
the net loss by the weighted average number of outstanding common shares, as all
common share equivalents relating to stock options were antidilutive during the
periods presented. Options to purchase 412,250 and 359,250 shares of common
stock with weighted average exercise prices of $7.72 and $7.78 were outstanding
during the three and six months ended June 30, 1999 and 1998, but were excluded
from the computation of common share equivalents because they were antidilutive.
6. Investment in Unconsolidated Subsidiaries --
The Company's unconsolidated subsidiaries consist of its investments in
CorVel and Vicom. Corvel is a health care services company with a fiscal
year end of March 31. Vicom is a telecommunications company with a December 31
year end. Vicom is a non-reporting public company and since the Company's
investment in Vicom is not considered to be material, summary financial
statement information has not been provided. The following is unaudited
summarized balance sheet and income statement information for CorVel as of,
and for the six month period ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets $46,449
Total assets 71,273
Current liabilities 11,764
Noncurrent liabilities 3,975
Revenues 89,106
Gross profit 15,914
Net income 5,599
</TABLE>
At June 30, 1999, the fair value of the Company's investment in CorVel
based on the closing market price was approximately $44.1 million. This amount
does not reflect the tax expense which would be incurred on the sale of these
shares.
7. Income Taxes --
Deferred income taxes arise from temporary differences between financial
and tax reporting. To the extent the Company's financial reporting basis in its
investment in unconsolidated subsidiary exceeds its tax basis, and is not
expected to be realized in a tax-free manner, the Company records a deferred tax
liability. At June 30, 1999, the deferred tax liability includes a cumulative
tax effect of approximately $5.3 million for the differences in the financial
reporting and tax basis of the Company's investment in CorVel. This deferred
tax liability is offset by deferred tax assets related to accrued expenses not
deductible until paid and net operating loss carryforwards. No tax benefit has
been recorded in either of the periods presented due to the additional
valuation allowance recorded against the net deferred tax asset generated in the
period.
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. Contingencies --
In connection with the merger of North Star and Michael Foods, ENStar,
through the operation of an indemnification agreement, is contingently liable
for any, and all, liabilities arising from the activities of North Star,
through, and including, the reorganization of North Star and Michael Foods.
Under the terms of the indemnification agreement, the Company is required to
maintain certain minimum levels of market capitalization or net worth for a
period of five years.
9. Use of Estimates --
In the preparation of the condensed consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and related revenues and expenses.
Actual results could differ from the estimates used by management.
10. Reclassification --
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. Business Segments --
ENStar consists of two operating segments, Americable and Enstar
Networking. The operating results of Enstar Networking are segregated with
respect to the Midwest operations sold to Vicom (see Note 4) ("ENC - business
disposition").
Certain financial information on the Company's segments is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
------------------ -----------------
<S> <C> <C> <C> <C>
Revenues - external
Americable $ 4,562 $ 4,815 $ 8,881 $ 8,951
Enstar Networking 5,021 4,007 9,051 7,141
------------------ -----------------
$ 9,583 $ 8,822 $17,932 $16,092
ENC - business disposition -- 2,817 -- 5,381
------------------ -----------------
Total Revenues - external $ 9,583 $11,639 $17,932 $21,473
================== =================
Revenues - intersegment
Americable $ 10 $ -- $ 34 $ --
ENC - business disposition -- 176 -- 602
================== =================
Total Revenues - intersegment $ 10 $ 176 $ 34 $ 602
================== =================
Operating Income (Loss)
Americable $ 39 $ 121 $ 98 $ 12
Enstar Networking 77 (611) (97) (1,106)
Corporate (279) (242) (505) (477)
------------------ -----------------
(163) (732) (504) (1,571)
ENC - business disposition -- (242) -- (592)
------------------ -----------------
Total Operating Loss $ (163) $ (974) $ (504) $(2,163)
================== =================
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. Proposed Transaction --
On March 8, 1999, the Company announced that it had established a Special
Committee to consider a proposal by the majority shareholders to acquire the
outstanding shares of ENStar common stock not already owned by them or certain
entities under their control. The majority shareholders preliminarily
proposed that the shares not controlled by them be acquired for a cash price
of $10.00 per share, however, the proposal was subject to change based on a
number of factors including determination of the structure of the transaction.
On August 13, 1999, the Company announced that it had signed an agreement
to be acquired by ENStar Acquisition, Inc., a corporation formed by James
Michael and Jeffrey Michael and certain related entities. As a result of the
agreement, shareholders of ENStar other than the Michaels (including certain
related entities and family members) will receive $12.50 in cash per share of
ENStar common stock. The agreement was approved by a Special Committee of the
Board of Directors and by the Board of Directors on August 13, 1999.
Closing of the transaction is expected in the fourth quarter of 1999, and
is subject to ENStar shareholder approval by a majority of the non-Michael
family shareholders, regulatory approval and customary closing conditions.
Additionally, the agreement provides that the transaction may be terminated by
the Special Committee if the dollar-weighted trading price of CorVel Corporation
stock during the 15 trading days prior to shareholder approval exceeds $26.00,
and by ENStar Acquisition, Inc. if that price is less than $20.00 during the
same period.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
Operations of the Company should be read in conjunction with the Condensed
Consolidated Financial Statements and the Notes thereto included elsewhere
in this report.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements which are made in
reliance upon the safe harbor provisions of the Securities Litigation Reform Act
of 1995. These statements include statements regarding intent, belief or
current expectations of the Company and its management. Shareholders and
prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve a number of risks and
uncertainties that may cause the Company's actual results to differ materially
from the results discussed in the forward-looking statements. Among the factors
that could cause actual results to differ materially from those indicated by
such forward-looking statements are general economic conditions, computer and
computer networking industry conditions, risks associated with the cost required
for the development and offering of new products and services that may not be
commercially successful, the rapid technological changes occurring in the
markets in which the Company operates, risks relating to "Year 2000" issues,
dependence on and the need to recruit and retain key personnel, the
concentration of the Company's revenues with certain customers, dependence on
key suppliers and product supply, the substantial competition in the markets in
which the Company operates and certain indemnification obligations relating to
the merger of North Star and Michael Foods. Each of these factors is more fully
discussed in Exhibit 99 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
GENERAL
ENStar is a holding company. Its principal subsidiaries are Americable,
Inc. and Enstar Networking Corporation. ENStar also owns 2,050,000 shares of
common stock of CorVel Corporation, or an approximate 25% interest. CorVel is
a provider of cost containment and managed care services designed to address the
medical costs of workers' compensation. ENStar's investment in CorVel is
accounted for as an unconsolidated subsidiary using the equity method of
accounting. The common stock of CorVel is included on the Nasdaq National
Market under the symbol CRVL. ENStar also owns 1,350,000 shares in Vicom
Incorporated, or an approximate 38.5% interest in Vicom, a telecommunications
Company providing services to integrate voice, data, and video solutions.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Historically, Enstar Networking operated in various regional locations in
the Southwest, Southeast, and Midwest, and has added and deleted locations on
the basis of business opportunities and operating performance of each location.
Following the sale of the Midwest region to Vicom on December 31, 1998, Enstar
Networking's business is focused on the Southwest region of the United States.
Prior to 1997, Enstar Networking operated as the network integration
business of Americable. Enstar Networking was organized in April 1997 to
distinctly focus the networking service activities from the traditional
distribution and manufacturing operations of Americable. Enstar Networking
was incorporated on January 1, 1998. The results of operations include an
allocation of general and administrative expenses for certain items such as
accounting, human resources and information systems along with facility related
expenses. Management believes these allocations are reasonable and present the
operations of Enstar Networking and Americable as though they had operated as
separate businesses.
Since its organization in 1997, Enstar Networking has made significant
investments in new sales, consulting, engineering and technical personnel as
part of its effort to build its network security integration business. As
part of this strategy in 1998, Enstar Networking has shifted its focus from
historical commodity-based networking and structured wiring product sales
towards more security integrated solutions. As part of this change, the company
experienced a significant increase in operating expenses resulting in operating
losses in 1997 and 1998. Enstar Networking expects to incur an operating loss
in 1999 as it continues to build its network security consulting practice.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The accompanying management discussion and analysis of results of operation
reflects pro forma operating results of Enstar Networking exclusive of the
Midwest region sold to Vicom ("ENC - business disposition"). In addition,
results of operations are restated to give effect to discontinued operations as
discussed in Note 3 to the Condensed Consolidated Financial Statements. The
following are summarized operating results for ENStar's operating subsidiaries
for the three and six months ended June 30 (in thousands):
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
------------------ -----------------
<S> <C> <C> <C> <C>
Revenues
Americable $ 4,572 $ 4,815 $ 8,915 $ 8,951
Enstar Networking 5,021 4,007 9,051 7,141
Eliminations (10) -- (34) --
------------------ -----------------
Pro Forma Revenues 9,583 8,822 17,932 16,092
ENC - business disposition -- 2,993 -- 5,983
Eliminations -- (176) -- (602)
------------------ -----------------
Total Revenues $ 9,583 $11,639 $17,932 $21,473
================== =================
Gross Profit
Americable $ 1,144 $ 1,060 $ 2,319 $ 1,906
Enstar Networking 1,122 606 1,972 1,224
------------------ -----------------
Pro Forma Gross Profit 2,266 1,666 4,291 3,130
ENC - business disposition -- 636 -- 1,154
------------------ -----------------
Total Gross Profit $ 2,266 $ 2,302 $ 4,291 $ 4,284
================== =================
Selling, General, and
Administrative Expenses
Americable $ 1,105 $ 939 $ 2,221 $ 1,894
Enstar Networking 1,045 1,217 2,069 2,330
Corporate 279 242 505 477
------------------ -----------------
Pro Forma S.G.&A. Expenses 2,429 2,398 4,795 4,701
ENC - business disposition -- 878 -- 1,746
------------------ -----------------
Total Selling, General,
and Administrative $ 2,429 $ 3,276 $ 4,795 $ 6,447
================== =================
Operating Income (Loss)
Americable $ 39 $ 121 $ 98 $ 12
Enstar Networking 77 (611) (97) (1,106)
Corporate (279) (242) (505) (477)
------------------ -----------------
Pro Forma Operating Loss (163) (732) (504) (1,571)
ENC - business disposition -- (242) -- (592)
------------------ -----------------
Total Operating Loss $ (163) $ (974) $ (504) $(2,163)
================== =================
</TABLE>
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 vs. THREE MONTHS ENDED JUNE 30, 1998
Consolidated pro forma revenues increased $761,000, or 8.6%, to
$9,583,000 from $8,822,000 in 1998.
Revenues at Americable decreased $243,000, or 5%, to $4,572,000. This
decrease reflects a reduction in sales of bulk cable in the quarter, offset by
growth in sales of networking products.
Revenues at Enstar Networking increased $1,014,000, or 25.3%, to
$5,021,000. During the quarter, sales of networking security products and
services increased $912,000, or 267%, due primarily to higher demand.
Offsetting this increase was approximately $733,000 of lower structured wiring
services and products due to a shift in focus to network integration and
security services.
Consolidated pro forma gross profit, as a percent of revenues, increased to
23.6% in 1999, as compared to 18.9% in 1998. Increased margins at Americable
from 22% to 25% are primarily due to higher margins on fiber optic products.
Margins at Enstar Networking increased to 22.3% from 15.1%, primarily due to a
shift in sales toward networking security products and services and away from
lower margin structured wiring business.
ENStar's consolidated pro forma selling, general, and administrative
expenses increased $31,000, or 1.3%, to $2,429,000 from $2,398,000 in 1998.
Operating expenses at Americable were $1,105,000, an increase of $166,000.
Included in this was an increase in selling expenses of approximately $120,000
due to the addition of sales and product support personnel. Enstar Networking's
operating expenses decreased to $1,045,000 from $1,217,000 in 1998. This
includes approximately $130,000 of decreased administrative expenses due
primarily to lower personnel costs and $42,000 of lower marketing costs.
Corporate expenses were $279,000, relatively unchanged between periods.
No tax benefit was recorded in either period due to the Company's recording
an additional valuation allowance against the net deferred tax asset generated
in the respective periods.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
SIX MONTHS ENDED JUNE 30, 1999 vs. SIX MONTHS ENDED JUNE 30, 1998
Consolidated pro forma revenues increased $1,840,000, or 11.4%, to
$17,932,000 from $16,092,000 in 1998.
Revenues at Americable were $8,881,000, relatively unchanged between
periods. Sales of networking products and connectivity products increased
approximately $568,000, or 20% primarily due to higher demand. This was
offset by a reduction in sales of bulk cable of approximately $636,000,
or 40%, primarily due to lower sales to contractors.
Revenues at Enstar Networking increased $1,910,000, or 26.7%, to
$9,051,000. Sales of networking security products and services increased
$1,698,000, or 225%, due primarily to higher demand. Offsetting this increase
was approximately $1,035,000 of lower structured wiring services and products
due to a shift in focus to network integration and security services.
Consolidated pro forma gross profit, as a percent of revenues, increased
to 23.9% in 1999, as compared to 19.5% in 1998. Increased margins at Americable
from 21.3% to 26% are primarily due to higher margins on connectivity products
and fiber optic products. Margins at Enstar Networking increased to 21.8% from
17.1%, primarily due to a shift in sales toward networking security products and
services and away from lower margin structured wiring business.
ENStar's consolidated pro forma selling, general, and administrative
expenses increased $94,000, or 2%, to $4,795,000 from $4,701,000 in 1998.
Operating expenses at Americable were $2,221,000, an increase of $327,000.
Included in this was an increase in selling expenses of approximately
$212,000 due to the addition of sales and product support personnel. Enstar
Networking's operating expenses decreased to $2,069,000 from $2,330,000 in 1998.
This includes approximately $259,000 of decreased administrative expenses due
primarily to lower personnel costs. Corporate expenses were $505,000,
relatively unchanged between periods.
No tax benefit was recorded in either period due to the Company's recording
an additional valuation allowance against the net deferred tax asset generated
in the respective periods.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
CAPITAL RESOURCES AND LIQUIDITY
ENStar has experienced cash flow deficits from operations due primarily to
the losses incurred at its operating companies. Cash used in operations was
$2,309,000 in 1999 versus $1,502,000 in 1998.
ENStar does not have the use of cash generated by CorVel. Since its
initial public offering in 1991, CorVel has not declared any dividends and has
indicated that it does not anticipate doing so for the foreseeable future.
ENStar may from time to time, depending on market conditions and other factors,
sell a portion of its CorVel holdings. The ability of ENStar to sell its CorVel
holdings is limited, however, to sales pursuant to Rule 144 of the Securities
Act of 1933 and the volume limitations thereof, and to private negotiated sales,
which may adversely affect the ability of ENStar to sell a large portion of the
CorVel holdings at a given time.
The Company maintains a program (the "Debenture Program") whereby it sells
subordinated debentures of various maturities to primarily individual investors.
The debentures are offered on a continuous basis at interest rates that change
from time to time depending on market conditions. At June 30, 1999, the
Company had $16,288,000 principal amount of subordinated debentures outstanding
with weighted average interest rate of 9.6%. Long-term debt proceeds includes
approximately $595,000 of new debentures sold and $358,000 of compounded
interest for the six months ended June 30, 1999. Approximately $4.9 million
of debentures are scheduled to mature during 1999, of which approximately
$3.7 million have been redeemed. As of June 30, 1999, the Company was not
offering debentures for sale due to the pending transaction by the majority
shareholder to purchase the outstanding minority shares. See note
12 for additional discussion on this transaction.
At June 30, 1999, the Company's subsidiaries, Americable and Enstar
Networking, had a revolving line of credit facility which provided
borrowings up to $4 million with interest at prime plus 1% (8.75% at
June 30, 1999). At June 30, 1999, there were outstanding borrowings of
$2,150,000 and the companies were in compliance with all covenants under
this agreement.
On July 19, 1999, Americable and Enstar Networking entered into a credit
agreement with a different bank that provides a revolving line of credit
facility of up to $4 million and a $1 million swing line loan, both of which
expire July 19, 2001, and carry an interest rate of prime plus .5%. Borrowings
under the line of credit facility are based upon the lesser of $4 million or a
defined borrowing base of eligible accounts receivable and inventory as defined
in the agreement. The agreement contains certain restrictive covenants, the
most significant of which are capital expenditure limitations and the
maintenance of certain levels of tangible net worth. This agreement is
collateralized by substantially all assets of the companies.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
In March 1998, the Company announced a stock repurchase plan pursuant to
which the Company could repurchase up to 350,000 shares of its common stock
from time-to-time in open market or privately negotiated transactions. Through
June 30, 1999, 290,266 shares had been repurchased at an average price of
$6.46 per share for an aggregate cost of approximately $1,875,000.
On March 8, 1999, the Company reported in a press release that its Board of
Directors had established a Special Committee consisting of one of its outside
directors to consider a proposal by James Michael and Jeffrey Michael to acquire
the shares of Common Stock of ENStar Inc. not already owned by members of the
Michael family and certain entities controlled by the Michael family. On
August 13, the Company reported the execution of a merger agreement in
connection with the proposed transaction. See Note 12 to the Condensed
Consolidated Financial Statements of ENStar.
ENStar expects to be able to fund its working capital and capital
expenditures along with any repurchases of common stock for 1999 with cash flow
from operations along with available cash and cash equivalents and amounts
available under the credit facilities of its operating companies. At August 5,
1999, ENStar had approximately $12.3 million of cash and cash equivalents,
excluding cash of its operating subsidiaries.
YEAR 2000 ISSUES
General. The Company has completed a preliminary assessment of Year
2000 compliance with respect to the holding company as well as its operating
subsidiaries and is currently modifying its systems to accommodate the Year
2000. The Year 2000 problem relates to the fact that many computer systems
and applications were developed to recognize the year as a two-digit number,
with the digits "00" being recognized as the year 1900. The Company
commenced its assessment of Year 2000 Compliance in January 1998, and expects
to complete its Year 2000 remediation efforts in the third quarter of 1999.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
YEAR 2000 ISSUES (CONTINUED)
Company Systems. The Company has determined that through normal recurring
system upgrades, the majority of the Company's computer hardware and software
systems covering its operations, including business processes and financial
systems, are currently, or will be by September 30, 1999, Year 2000 compliant.
Products. Americable sells products to customers under non-exclusive
agreements with its suppliers. Americable is not an agent for its
suppliers and cannot make representations regarding the Year 2000 compliance or
readiness of its suppliers.
Third Parties. The potential impact of Year 2000 issues will depend to
a large extent of the Year 2000 efforts of the Company's vendors, customers,
service providers, utilities, governmental agencies and other entities with
which the Company does business. The Company is communicating with certain of
these parties to determine their efforts to prepare for the Year 2000 and to
evaluate any likely impact on the Company. These communications are focused
on third parties that the Company believes could have the greatest impact on its
business and operations. This process will continue throughout 1999. The
efforts of third parties are not within the control of the Company and their
failure to remedy Year 2000 issues successfully could result in business
disruption, loss of revenue and increased operating cost for the Company.
Contingency Plans. The Company has not yet established contingency plans
in the event that it is unable to complete its remediation efforts by December
31, 1999. These contingency plans are expected to be developed by September 30,
1999.
Costs. The total cost to upgrade the Company's systems to Year 2000
compliance are expected to be approximately $35,000, of which approximately
$7,000 has been spent to date.
<PAGE>
ENStar Inc.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS
There were no material changes in the Company's market risk during the
six months ended June 30, 1999.
<PAGE>
PART II - OTHER INFORMATION
ENStar Inc. and Subsidiaries
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
See Note 12 to the ENStar Inc. Notes to Consolidated Financial
Statements included in Item 1 of this report, which is incorporated
by reference in this Item 5.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed with this report on
Form 10-Q.
Exhibit 2.1 Agreement and Plan of Merger dated August 13, 1999,
among ENStar Inc., ENStar Acquisition, Inc.,
Jeffrey J. Michael, James H. Michael, 4J2R1C Limited
Partnership, 3J2R Limited Partnership, and Jeffrey J.
Michael, as Trustee of the Michael Acquisition
Corporation Trust. ENStar Inc. agrees to furnish
supplementally a copy of omitted schedules to the
Commission upon request.
Exhibit 27.1 Financial Data Schedule
Exhibit 99.1 Press Release issued by ENStar Inc. on August 13, 1999.
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENSTAR INC.
--------------------------
(Registrant)
Date August 14, 1999 by /s/ Jeffrey J. Michael
--------------------------- ----------------------------
Jeffrey J. Michael
President and Chief Executive Officer
Date August 14, 1999 by /s/ Peter E. Flynn
--------------------------- ----------------------------
Peter E. Flynn
Executive Vice President
and Secretary (principal
financial and accounting officer)
<PAGE>
AGREEMENT AND PLAN OF MERGER
AMONG
ENSTAR INC.,
ENSTAR ACQUISITION, INC.,
AND, FOR CERTAIN PURPOSES SET FORTH HEREIN,
JEFFREY J. MICHAEL,
JAMES H. MICHAEL,
4J2R1C LIMITED PARTNERSHIP,
AND
3J2R LIMITED PARTNERSHIP.
AND, JEFFREY J. MICHAEL, AS TRUSTEE
OF THE
MICHAEL ACQUISITION CORPORATION TRUST
DATED AUGUST 13, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE I THE MERGER
1.01. The Merger 1
1.02. Effective Time; Closing 1
1.03 Effect of the Merger 2
1.04 Articles of Incorporation; By-laws 2
1.05 Directors and Officers 2
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
2.01. Conversion of Securities 2
2.02. Exchange of Certificates 3
2.03 Stock Transfer Books 4
2.04 Stock Options 5
2.05 Dissenting Shares 5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.01. Organization and Qualification; Subsidiaries 6
3.02. Articles of Incorporation and By-laws 6
3.03. Capitalization 6
3.04. Authority Relative to This Agreement 7
3.05. No Conflict; Required Filings and Consent 7
3.06. Permits; Compliance 8
3.07 SEC Filings; Financial Statements 8
3.08. Absence of Certain Changes or Events 9
3.09. Absence of Litigation 9
3.10. Employee Benefit Plans 9
3.11. Labor Matters 10
3.12. Intellectual Property 10
3.13. Taxes 10
3.14. Environmental Matters 11
3.15. Opinion of Financial Advisor 11
3.16. Vote Required 11
3.17. Brokers 11
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ACQUISITION CO.
4.01. Organization and Qualification; Subsidiaries 12
4.02. Articles of Incorporation and By-laws 12
4.03. Capitalization 12
4.04. Authority Relative to This Agreement 12
4.05. No Conflict; Required Filings and Consents 12
4.06. Absence of Litigation 13
4.07. Operations of Acquisition Co. 13
ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER
5.01. Conduct of Business by the Company
Pending the Merger 13
<PAGE>
ARTICLE VI ADDITIONAL AGREEMENTS
6.01. Proxy Statement; Schedule 13E-3 15
6.02. Stockholders' Meeting 16
6.03. Appropriate Action; Consents; Filings 16
6.04. No Solicitation of Transactions 17
6.05. Directors' and Officers' Indemnification
and Insurance 18
6.06. Further Assurances 19
6.07. Public Announcements 19
6.08. Employee Matters 19
6.09. Delivery of SEC Documents 20
6.10. Financing 20
6.11. Resignation of Directors 20
6.12. Access to Information 20
ARTICLE VII CONDITIONS TO THE MERGER
7.01. Conditions to the Obligations of Each Party 20
7.02. Conditions to the Obligations of
Acquisition Co. 21
7.03. Conditions to the Obligations of the Company 22
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER
8.01. Termination 23
8.02. Fees and Expenses 24
8.03. Amendment 24
8.04. Waiver 25
ARTICLE IX GENERAL PROVISIONS
9.01. Non-Survival of Representations, Warranties
and Agreements 25
9.02 Notices 25
9.03 Certain Definitions 26
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated August 13, 1999 (this "Agreement"),
among ENStar Inc., a Minnesota corporation ("Company"), ENStar Acquisition,
Inc., a Minnesota corporation ("Acquisition Co."), and, for certain purposes
expressly set forth herein Jeffrey J. Michael, James H. Michael, 4J2R1C
Limited Partnership, 3J2R Limited Partnership and Jeffrey J. Michael, as
Trustee of the Michael Acquisition Corporation Trust (collectively the
"Majority Shareholders").
WHEREAS, the Majority Shareholders own approximately sixty-five percent
(65%) of the issued and outstanding shares of common stock of the Company and
all of the outstanding shares of capital stock of Acquisition Co.;
WHEREAS, Acquisition Co. desires to acquire those issued and outstanding
shares of common stock of the Company that the Majority Shareholders do not
already own through a merger;
WHEREAS, Acquisition Co., upon the terms and subject to the conditions
of this Agreement and in accordance with the Minnesota Business Corporation
Act ("Minnesota Law"), will merge with and into the Company (the "Merger");
and
WHEREAS, a Special Committee of the Board of Directors of the Company
and the Board of Directors of the Company (with the interested directors
abstaining) each have (i) determined that the Merger is in the best interests
of the Company and its stockholders and approved and adopted this Agreement
and the transactions contemplated hereby and (ii) recommended approval and
adoption of this Agreement and approval of the Merger by the stockholders of
the Company.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Majority Shareholders, Acquisition Co. and the Company hereby agree
as follows:
ARTICLE I
THE MERGER
SECTION 1.01. The Merger. Upon the terms and subject to the conditions
set forth in Article VII, and in accordance with Minnesota Law, at the
Effective Time (as hereinafter defined), Acquisition Co. shall be merged with
and into the Company. As a result of the Merger, the separate corporate
existence of Acquisition Co. shall cease and the Company shall continue as
the surviving corporation of the Merger (the "Surviving Corporation").
<PAGE>
SECTION 1.02. Effective Time; Closing. As promptly as practicable and
in no event later than the first business day following the satisfaction of
or, if permissible, waiver of the conditions set forth in Article VII (or
such other date as may be agreed in writing by each of the parties hereto),
the parties hereto shall cause the Merger to be consummated by filing
articles of merger (the "Articles of Merger") with the Secretary of State of
the State of Minnesota in such form as is required by, and executed in
accordance with the relevant provisions of, Minnesota Law. The term
"Effective Time" means the date and time of the filing of the Articles of
Merger with the Secretary of State of the State of Minnesota (or such later
time as may be agreed in writing by each of the parties hereto and specified
in the Articles of Merger). Immediately prior to the filing of the Articles
of Merger, a closing will be held at the offices of Hinshaw & Culbertson, 222
South Ninth Street, Suite 3100, Minneapolis, Minnesota 55402 (or such other
place as the parties may agree).
SECTION 1.03. Effect of the Merger. At the Effective Time, the effect
of the Merger shall be as provided in the applicable provisions of Minnesota
Law. Without limiting the generality of the foregoing, and subject thereto,
at the Effective Time all the property, rights, privileges, powers and
franchises of the Company and Acquisition Co. shall vest in the Surviving
Corporation, and all debts, liabilities, obligations, restrictions,
disabilities and duties of each of the Company and Acquisition Co. shall
become the debts, liabilities, obligations, restrictions, disabilities and
duties of the Surviving Corporation.
SECTION 1.04. Articles of Incorporation; By-laws. (a) At the Effective
Time, the Articles of Incorporation of the Company, as in effect immediately
prior to the Effective Time, shall be the Articles of Incorporation of the
Surviving Corporation until thereafter amended as provided by law and such
Articles of Incorporation.
(b) At the Effective Time, the By-laws of the Company, as in effect
immediately prior to the Effective Time, shall be the By-laws of the
Surviving Corporation until thereafter amended as provided by law, the
Articles of Incorporation of the Surviving Corporation and such By-laws.
SECTION 1.05. Directors and Officers. The directors of Acquisition Co.
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and By-laws of the Surviving Corporation, and the officers of
the Company immediately prior to the Effective Time shall be the initial
officers of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. Conversion of Securities. At the Effective Time, by
virtue of the Merger and without any action on the part of Acquisition Co.,
the Company, the Surviving Corporation or the holders of any of the following
securities:
<PAGE>
(a) Each share of common stock, par value $.01 per share, of the
Company ("Company Common Stock") (all issued and outstanding shares of
Company Common Stock being hereinafter collectively referred to as the
"Shares") issued and outstanding immediately prior to the Effective Time
(other than any Shares to be cancelled pursuant to Section 2.01(b) and
Dissenting Shares (as hereinafter defined)) shall be converted, subject to
Section 2.02(e), into the right to receive $12.50 in net cash per Share
without any interest thereon (such payment being the "Merger Consideration").
(b) Each Share owned by the Majority Shareholders (listed on Schedule
2.01(b)) immediately prior to the Effective Time shall be cancelled and
extinguished without any conversion thereof and no payment shall be made with
respect thereto.
(c) Each share of common stock of Acquisition Co. issued and
outstanding immediately prior to the Effective Time shall be exchanged by
conversion into one validly issued fully paid and nonassessable share of
common stock of the Surviving Corporation with the same rights, powers and
privileges as the shares so converted.
SECTION 2.02. Exchange of Certificates.
(a) Exchange Agent. At the Effective Time, Acquisition Co. shall, as
may be directed by the Company or the Surviving Corporation, cause to be
deposited (for the account of Surviving Corporation) with Norwest Bank
Minnesota, National Association, or such other bank or trust company that
may be designated by Acquisition Co. and is reasonably satisfactory to the
Company (the "Exchange Agent"), for the benefit of the holders of Shares for
exchange in accordance with this Article II ("Exchanging Shareholders")
through the Exchange Agent, cash representing the aggregate Merger
Consideration pursuant to Section 2.01, as of the Effective Time, (such cash
being hereinafter referred to as the "Exchange Fund"), in exchange for
outstanding Shares. The Exchange Agent shall, pursuant to irrevocable
instructions, deliver the Merger Consideration contemplated to be paid
pursuant to Section 2.01 out of the Exchange Fund. Except as contemplated by
Section 2.02(c) hereof, the Exchange Fund shall not be used for any other
purpose.
(b) Exchange Procedures. As promptly as practicable after the
Effective Time, Acquisition Co. shall cause the Exchange Agent to mail to
each Exchanging Shareholder which is a holder of a certificate or
certificates which immediately prior to the Effective Time represents
outstanding Shares (the "Certificates") (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent and shall be in customary form) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for cash
pursuant to Section 2.01. Upon surrender to the Exchange Agent of a
Certificate for cancellation, together with such letter of transmittal, duly
executed and completed in accordance with the instructions thereto, and such
other documents as may be reasonably required pursuant to such instructions,
<PAGE>
the holder of such Certificate shall be entitled to receive in exchange
therefor such cash to which such holder is entitled pursuant to Section
2.02(a), and the Certificate so surrendered shall forthwith be cancelled. In
the event of a transfer of ownership of Shares which is not registered in the
transfer records of the Company, cash to which such holder is entitled
pursuant to Section 2.02(a) may be paid to a transferee if the Certificate
representing such Shares is presented to the Exchange Agent, accompanied by
all documents required to evidence and effect such transfer and by evidence
that any applicable stock transfer taxes have been paid. Until surrendered
as contemplated by this Section 2.02, each Certificate shall be deemed at any
time after the Effective Time to represent only the right to receive upon
such surrender the cash to which such holder is entitled pursuant to Section
2.02(a) and the holders of such Certificates shall cease to have any rights
with respect to such Shares except as otherwise provided herein or by law.
To the extent not immediately required for payment on surrendered Shares,
proceeds in the Exchange Fund shall be invested by the Exchange Agent, as
directed by the Surviving Corporation (as long as such directions do not
impair the rights of holders of Shares), in direct obligations of the United
States of America, obligations for which the faith and credit of the United
States of America is pledged to provide for the payment of principal and
interest, commercial paper rated of the highest quality by Moody's Investors
Service, Inc. or Standard & Poor's Ratings Group, or certificates of deposit
issued by a commercial bank having at least $5 billion in assets, and any net
earnings with respect thereto shall be paid to the Surviving Corporation as
and when requested by the Surviving Corporation.
(c) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the Exchanging Shareholders twelve (12) months
after the Effective Time shall be delivered to Surviving Corporation, upon
demand, and any holders of such Shares who have not theretofore complied with
this Article II shall thereafter look only to Surviving Corporation for the
cash to which they are entitled pursuant to Section 2.02(a). Any portion of
the Exchange Fund remaining unclaimed by holders of such Shares as of a date
which is immediately prior to such time as such amounts would otherwise
escheat to or become property of any government entity shall, to the extent
permitted by applicable law, become the property of Surviving Corporation
free and clear of any claims or interest of any person previously entitled
thereto.
(d) No Liability. Neither Acquisition Co. nor the Surviving
Corporation shall be liable to any holder of Shares for any such Shares (or
dividends or distributions with respect thereto), or cash delivered to a
public official pursuant to any abandoned property, escheat or similar Law.
(e) Withholding Rights. The Surviving Corporation shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to
this Agreement to any holder of Shares such amounts as it is required to
deduct and withhold with respect to the making of such payment under the
Internal Revenue Code of 1986, as amended (the "Code"), or any provision of
state, local or foreign tax law. To the extent that amounts are so withheld
<PAGE>
by Surviving Corporation such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the Shares
in respect of which such deduction and withholding was made by Surviving
Corporation.
(f) Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Surviving Corporation, the posting by such person of a bond
in such reasonable amount as the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen
or destroyed Certificate the cash to which they are entitled pursuant to
Section 2.02(a).
SECTION 2.03. Stock Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed and there shall be no further
registration of transfers of Shares thereafter on the records of the Company.
From and after the Effective Time, the holders of certificates representing
Shares outstanding immediately prior to the Effective Time shall cease to
have any rights with respect to such Shares except as otherwise provided
herein or by law. On or after the Effective Time, any Certificates presented
to the Exchange Agent, the Surviving Corporation or Majority Shareholders for
any reason shall be converted into cash to which the holders thereof are
entitled pursuant to Section 2.02(a).
SECTION 2.04. Stock Options. (a) All options to purchase Company
Common Stock (the "Company Options") outstanding, whether or not exercisable,
whether or not vested, and whether or not performance-based, under the
Company's 1996 Stock Incentive Plan (the "Company Stock Option Plan") which
are held by the Majority Shareholders shall be cancelled by the Company at
the Effective Time. All other Company Options outstanding, whether or not
exercisable, whether or not vested and whether or not performance based,
under the Company Stock Option Plan, shall at or immediately prior to the
Effective Time, be converted into the right to receive cash (subject to any
required withholding of taxes) in an amount equal to the difference, if
positive, between $12.50 per share and the option exercise price per share
specified in the applicable option agreement without any interest thereon.
(b) Prior to the Effective Time, the Company shall use its reasonable
best efforts (i) to obtain any consents of holders of Company Options and
(ii) to make any amendments to the terms of such stock option or compensation
plans or arrangements that are necessary to give effect to the transactions
contemplated by Section 2.04(a).
SECTION 2.05. Dissenting Shares. (a) Notwithstanding any provision of
this Agreement to the contrary, Shares that are outstanding immediately prior
to the Effective Time and which are held by stockholders who shall have not
voted in favor of the Merger and who shall have demanded properly in writing
and perfected his or her demand for the fair value for such Shares in
<PAGE>
accordance with Sections 302A.471 and 302A.473 of Minnesota Law and as of the
Effective Time has neither effectively withdrawn nor lost his or her right to
such appraisal (collectively, the "Dissenting Shares") shall not be converted
into or represent the right to receive the Merger Consideration. Such
stockholders shall be entitled to receive payment of the fair value of such
Shares held by them in accordance with the provisions of such Section
302A.473, except that all Dissenting Shares held by stockholders who shall
have failed to perfect or who effectively shall have withdrawn or lost their
rights to appraisal of such Shares under such Section 302A.473 shall
thereupon be deemed to have been converted into and to have become
exchangeable for, as of the Effective Time, the right to receive the Merger
Consideration, without any interest thereon, upon surrender, in the manner
provided in Section 2.02, of the Certificate or Certificates that formerly
evidenced such Shares.
(b) The Company shall give Acquisition Co. (i) prompt notice of any
demand for fair value of Shares, or notice of intent to demand fair value of
Shares, received by the Company and withdrawals of such demand and (ii) the
opportunity to participate in all negotiations and proceedings with respect
to demands for fair value under Minnesota Law. The Company shall not, except
with the prior written consent of Acquisition Co., make any payment (except
to the extent that any such payment is made pursuant to a final, non-
appealable court order) with respect to any demands for the fair value of
Shares or offer to settle or settle any such demands.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as disclosed in the Company SEC Reports (as defined below) filed
prior to the date hereof, the Company hereby represents and warrants to
Acquisition Co. that:
SECTION 3.01. Organization and Qualification; Subsidiaries. The
Company and each subsidiary of the Company (a "Company Subsidiary") is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has the requisite power and
authority and all necessary governmental approvals to own, lease and operate
its properties and to carry on its business as it is now being conducted,
except where the failure to be so organized, existing or in good standing or
to have such power, authority and governmental approvals would not,
individually or in the aggregate, have a material adverse effect on the
business, results of operations or financial condition of the Company and the
Company Subsidiaries taken as a whole (a "Material Adverse Effect"). The
Company and each Company Subsidiary is duly qualified or licensed as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of the properties owned, leased or operated
by it or the nature of its business makes such qualification or licensing
necessary, except for such failures to be so qualified or licensed and in
<PAGE>
good standing that would not, individually or in the aggregate, have a
Material Adverse Effect. As of the date hereof, a true and complete list of
all Company Subsidiaries, together with the jurisdiction of incorporation of
each Company Subsidiary and the approximate percentage of the outstanding
capital stock of each Company Subsidiary owned by the Company and each other
Company Subsidiary, is set forth in Section 3.01 of the Company Disclosure
Schedule.
SECTION 3.02. Articles of Incorporation and By-laws. The Company has
heretofore furnished or made available to Acquisition Co. a complete and
correct copy of the Articles of Incorporation and the By-laws or equivalent
organizational documents, each as amended to date, of the Company and each
Company Subsidiary other than those Company Subsidiaries, that individually
or in the aggregate, are not material to the business, results of operations
or financial condition of the Company and the Company Subsidiaries taken as a
whole.
SECTION 3.03. Capitalization. The authorized capital stock of the
Company consists of 80,000,000 Shares and 20,000,000 shares of preferred
stock, par value $.01 per share. As of the date of this Agreement (a)
2,976,723 Shares were issued and outstanding, all of which are validly
issued, fully paid and nonassessable, (b) no Shares were held by the Company
Subsidiaries, (c) 412,250 Shares were reserved for future issuance pursuant
to outstanding employee stock options granted pursuant to the Company Stock
Option Plan, (d) no shares were reserved for future issuance pursuant to
outstanding warrants and no shares of preferred stock were issued and
outstanding. Except as set forth in this Section 3.03 and Section 3.03 of
the Company Disclosure Schedule, as of the date of this Agreement, there are
no options, warrants or other rights, agreements, arrangements or commitments
of any character relating to the issued or unissued capital stock of the
Company or any Company Subsidiary obligating the Company or any Company
Subsidiary to issue or sell any shares of capital stock of, or other equity
interests in, the Company or any Company Subsidiary. All Shares subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable. There are no outstanding
contractual obligations of the Company or any Company Subsidiary to
repurchase, redeem or otherwise acquire any Shares or any capital stock of,
or any equity interests in, any Company Subsidiary. Each outstanding share of
capital stock of each Company Subsidiary is duly authorized, validly issued,
fully paid and nonassessable and each such share owned by the Company or
another Company Subsidiary is free and clear of all security interests,
liens, claims, pledges, options, rights of first refusal, agreements,
limitations on the Company's or such other Company Subsidiary's voting
rights, charges and other encumbrances of any nature whatsoever.
SECTION 3.04. Authority Relative to This Agreement. The Company has
all necessary power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the Merger. The
execution and delivery of this Agreement by the Company and the consummation
by the Company of the Merger have been duly and validly authorized by all
<PAGE>
necessary corporate action, except the approval of the Merger by the
Company's stockholders. This Agreement has been duly and validly executed
and delivered by the Company and, assuming the due authorization, execution
and delivery by Majority Shareholders and Acquisition Co., constitutes a
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights
and general principles of equity.
SECTION 3.05. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by the Company do
not, and the performance of this Agreement by the Company will not, (i)
conflict with or violate the Articles of Incorporation or By-laws or
equivalent organizational documents of the Company or any Company Subsidiary,
(ii) except as disclosed in Section 3.05(a)(ii) of the Company's Disclosure
Schedule, conflict with or violate any domestic (federal, state or local) or
foreign law, rule, regulation, order, judgment or decree (collectively,
"Laws") applicable to the Company or any Company Subsidiary or by which any
property or asset of the Company or any Company Subsidiary is bound or
affected, or (iii) except as specified in Section 3.05(a)(iii) of the Company
Disclosure Schedule, result in any breach of or constitute a default (or an
event which with notice or lapse of time or both would become a default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other encumbrance on
any property or asset of the Company or any Company Subsidiary pursuant to,
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company or
any Company Subsidiary is a party or by which the Company or any Company
Subsidiary or any property or asset of the Company or any Company Subsidiary
is bound or affected.
(b) The execution and delivery of this Agreement by the Company do
not, and the performance of this Agreement by the Company will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, domestic, foreign
or supranational, except (i) for applicable requirements, if any, of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Securities Act of 1933, as amended (the "Securities Act"), state securities
or "blue sky" laws ("Blue Sky Laws") and state takeover laws, and filing and
recordation of appropriate merger documents as required by Minnesota Law,
(ii) as specified in Section 3.05(b) of the Company Disclosure Schedule and
(iii) where failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, would not prevent or delay
consummation of the Merger, or otherwise prevent the Company from performing
its obligations under this Agreement, and would not, individually or in the
aggregate, have a Material Adverse Effect.
<PAGE>
SECTION 3.06. Permits; Compliance. Each of the Company and the Company
Subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exceptions, consents, certificates,
approvals and orders of any Governmental Authority necessary for the Company
or any Company Subsidiary to own, lease and operate its properties or to
carry on its business as it is now being conducted (the "Company Permits"),
except where the failure to have, or the suspension or cancellation of, any
of the Company Permits would not, individually or in the aggregate, have a
Material Adverse Effect, and, as of the date hereof, no suspension or
cancellation of any of the Company Permits is pending or, to the actual
knowledge of the executive officers of the Company, threatened.
SECTION 3.07. SEC Filings; Financial Statements.
(a) The Company has filed all forms, reports and documents required to
be filed by it with the Securities and Exchange Commission ("SEC") and has
heretofore made available to Majority Shareholders, in the form filed with
the SEC, all such forms, reports and other registration statements filed by
the Company with the SEC since December 31, 1997 (the forms, reports and
other documents referred to herein, collectively, as the "Company SEC
Reports"). The Company SEC Reports, including all Company SEC Reports filed
after the date hereof and prior to the Effective Time, (i) were (in the case
of Company SEC Reports filed before the date hereof) or will be prepared in
accordance with the requirements of the Securities Act, and the Exchange Act,
as the case may be, and the rules and regulations thereunder and (ii) did not
(in the case of Company SEC Reports filed before the date hereof) at the time
they were filed, or will not at the time they are filed, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
the light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any notes thereto) contained in the Company SEC Reports, including all
Company SEC Reports filed after the date hereof and prior to the Effective
Time, was (in the case of Company SEC Reports filed before the date hereof)
or will be prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods indicated
(except as may be indicated in the notes thereto) and each fairly presented
(in the case of Company SEC Reports filed before the date hereof) in all
material respects or will fairly present in all material respects the
consolidated financial position, results of operations and cash flows of the
Company and the consolidated Company Subsidiaries as at the respective dates
thereof and for the respective periods indicated therein in accordance with
generally accepted accounting principles (subject, in the case of unaudited
statements, to normal and recurring year-end adjustments which would not,
individually or in the aggregate, have a Material Adverse Effect).
SECTION 3.08. Absence of Certain Changes or Events. Since December 31,
1998, except as contemplated by, or disclosed pursuant to, this Agreement
<PAGE>
including Section 3.08 of the Company Disclosure Schedule or disclosed in
writing by the Company to Majority Shareholders or Acquisition Co. on or
prior to the date hereof, or disclosed in any Company SEC Report filed since
December 31, 1998 and prior to the date of this Agreement, the Company and
the Company Subsidiaries have conducted their businesses only in the ordinary
course and in a manner consistent with past practice and, since December 31,
1998, there has not been (a) any event or events, individually or in the
aggregate, having a Material Adverse Effect, (b) any material change by the
Company in its accounting methods, principles or practices, (c) any entry by
the Company or any Company Subsidiary into any commitment or transaction
material to the Company and the Company Subsidiaries taken as a whole, except
in the ordinary course of business and consistent with past practice, (d) any
declaration, setting aside or payment of any dividend or distribution in
respect of any capital stock of the Company or any redemption, purchase or
other acquisition of any of its securities, or (e) other than pursuant to the
Plans (as defined in Section 3.10), any increase in or establishment of any
bonus, insurance, severance, deferred compensation, pension, retirement,
profit sharing, stock option, stock purchase or other employee benefit plan,
except in the ordinary course of business consistent with past practice.
SECTION 3.09. Absence of Litigation. Except as disclosed in Section
3.09 of the Company Disclosure Schedule or the Company SEC Reports filed
prior to the date of this Agreement, as of the date hereof, there is no
claim, action, proceeding or investigation pending or, to the actual
knowledge of the executive officers of the Company, threatened against the
Company or any Company Subsidiary, before any court, arbitrator or
Governmental Authority (as hereinafter defined), which (a) individually or in
the aggregate, would reasonably be expected to have a Material Adverse Effect
or (b) seeks to delay or prevent the consummation of the Merger. As of the
date hereof, neither the Company nor any Company Subsidiary nor any property
or asset of the Company or any Company Subsidiary is in violation of any
order, writ, judgment, injunction, decree, determination or award.
SECTION 3.10. Employee Benefit Plans. For purposes of this Section
3.10, the term "Plans" means all employee benefit plans, programs and
arrangements maintained for the benefit of any current or former employee,
officer or director of the Company or any Subsidiary and the term "Company
Employment Contracts" means all written contracts and agreements relating to
employment which provide for annual base compensation in excess of $125,000
and all severance agreements providing for payment of more than $125,000,
with any of the directors, officers or employees of the Company or the
Company Subsidiaries (other than, in each case, any such contract or
agreement that is terminable by the Company or any Company Subsidiary at will
without penalty or other adverse consequence). Section 3.10 of the Company
Disclosure Schedule defines each of the Plans and each of the Company
Employment Contracts. The Company has made available to Majority
Shareholders or Acquisition Co. a copy of each Plan and has made available
upon request each material document prepared in connection with each Plan and
each Company Employment Contract. Each Plan intended to be qualified under
<PAGE>
Section 401(a) of the Code has received a favorable determination letter from
the Internal Revenue Service that it is so qualified and nothing has occurred
since the date of such letter to affect the qualified status of such Plan.
Each Plan has been operated in accordance with its terms and the requirements
of applicable law except where the failure to so operate would not have a
Material Adverse Effect. Neither the Company nor any Company Subsidiary has
incurred any direct or indirect liability under, arising out of or by
operation of Title IV of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), in connection with the termination of, or withdrawal
from, any Plan or other retirement plan or arrangement, and, as of the date
hereof, no fact exists or event has occurred that would reasonably be
expected to give rise to any such liability. No Plan is or has been covered
by Title IV of ERlSA or Section 412 of the Code. The Company and the Company
Subsidiaries have not incurred any liability under, and have complied in all
respects with, the Worker Adjustment Retraining Notification Act, and no fact
or event exists that could give rise to liability under such act.
SECTION 3.11. Labor Matters Neither the Company nor any Company
Subsidiary is a party to any collective bargaining agreement or other labor
union contract applicable to persons employed by the Company or any Company
Subsidiary.
SECTION 3.12. Intellectual Property. "Company Intellectual Property"
means all trademarks, trademark rights, trade names, trade name rights,
patents, patent rights, industrial models, inventions, copyrights,
servicemarks, trade secrets, applications for trademarks and for
servicemarks, know-how and other proprietary rights and information used or
held for use in connection with the business of the Company and the Company
Subsidiaries as currently conducted, together with all applications currently
pending for any of the foregoing. The Company and Company Subsidiaries own
or possess adequate licenses or other rights to use all Company Intellectual
Property necessary to conduct the business now operated by them, except where
the failure to own or possess such licenses or rights would not be reasonably
likely to have a Material Adverse Effect. To the knowledge of the Company,
the Company Intellectual Property does not conflict with or infringe upon any
Intellectual Property Rights of others to the extent that, if sustained, such
conflict or infringement has had and would be reasonably likely to have a
Material Adverse Effect.
SECTION 3.13. Taxes. The Company and each of the Company Subsidiaries
have (i) filed all federal, state, local and foreign tax returns required to
be filed by them prior to the date of this Agreement (taking into account
extensions), (ii) paid or accrued all taxes shown to be due on such returns
and have paid all applicable ad valorem and value added taxes as are due, and
(iii) paid or accrued all taxes for which a notice of assessment or
collection has been received (other than amounts being contested in good
faith by appropriate proceedings), except in the case of clause (i), (ii) or
(iii) for any such filings, payments or accruals which would not,
individually or in the aggregate, have a Material Adverse Effect. Except as
<PAGE>
set forth on Section 3.13 of the Company Disclosure Schedule, neither the
Internal Revenue Service nor any other taxing authority has asserted any
claim for taxes, or to the actual knowledge of the executive officers of the
Company, is threatening to assert any claims for taxes, which claims,
individually or in the aggregate, would have a Material Adverse Effect. The
Company has open years for federal, state and local income tax returns only
as set forth in the Section 3.13 of Company Disclosure Schedule. The Company
and each Company Subsidiary have withheld or collected and paid over to the
appropriate governmental authorities (or are properly holding for such
payment) all taxes required by law to be withheld or collected, except for
amounts which would not, individually or in the aggregate, have a Material
Adverse Effect. Neither the Company nor any Company Subsidiary has made an
election under Section 341(f) of the Code.
SECTION 3.14. Environmental Matters. As of the date hereof: (i)
neither the Company nor any Company Subsidiary has received any notice of
noncompliance with, violation of, or liability or potential liability under,
any Laws relating to pollution and the discharge of hazardous materials into
the environment ("Environmental Laws"); (ii) neither the Company nor any
Company Subsidiary has entered into or agreed to any consent decree or order,
nor is subject to any judgment, decree or judicial order, under any
Environmental Laws or relating to the cleanup of any hazardous materials
contamination and (iii) neither the Company nor any Company Subsidiary has
agreed to undertake, or has undertaken, any other cleanup of hazardous
materials contamination, whether with respect to each of the foregoing, such
matter related to properties owned or leased by the Company or any Company
Subsidiary or to any off-site location.
SECTION 3.15. Opinion of Financial Advisor. The Company has received
the written opinion of Goldsmith, Agio, Helms and Company on the date of this
Agreement, to the effect that, as of the date of this Agreement, the Merger
Consideration is fair to the Minority Shareholders (as hereinafter defined)
from a financial point of view and the Company will promptly, after the date
of this Agreement, deliver a copy of such opinion to Acquisition Co.
SECTION 3.16. Vote Required. The affirmative vote of (i) the holders
of a majority of the outstanding shares of Company Common Stock and (ii) the
holders of a majority of the outstanding shares of Company Common Stock not
held by the Majority Shareholders ("Minority Shareholders"), are the only
votes of the holders of any class or series of capital stock of the Company
necessary to approve the Merger.
SECTION 3.17. Brokers. No broker, finder or investment banker (other
than Goldsmith, Agio, Helms and Company) is entitled to any brokerage,
finder's or other fee or commission in connection with the Merger based upon
arrangements made by or on behalf of the Company. The Company has heretofore
furnished to Majority Shareholders a correct copy of all agreements between
the Company and Goldsmith, Agio, Helms and Company pursuant to which such
firm would be entitled to any payment relating to the Merger.
<PAGE>
SECTION 3.18. Inapplicability of Certain Restrictions. No "fair
price", "moratorium", "business combination", "control share acquisition", or
other form of anti-takeover statute or regulation under Minnesota law limits,
prevents, contravenes or is breached by the Merger, the execution and
performance of this Agreement or the consummation of any other transaction
contemplated hereby. Prior to the execution hereof, the Merger, the
execution and performance of this Agreement and the consummation of the
transactions contemplated hereby was approved by a committee consisting of
all "disinterested" directors as defined in Minnesota Statutes, Section
302A.673 subd. 1(d)(3).
SECTION 3.19. Rights Plan. The Company has not entered into, and its
Board of Directors has not adopted or authorized the adoption of, a
shareholder rights plan or similar agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ACQUISITION CO.
Acquisition Co. hereby represents and warrants to the Company that:
SECTION 4.01. Organization and Qualification; Subsidiaries.
Acquisition Co. is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
requisite power and authority and all necessary governmental approvals to
own, lease and operate its properties and to carry on its business as it is
now being conducted. Acquisition Co. is not qualified or licensed as a
foreign corporation to do business in any jurisdiction.
SECTION 4.02. Articles of Incorporation and By-laws. Acquisition Co.
has heretofore furnished or made available to the Company a complete and
correct copy of the Articles of Incorporation and the By-laws, each as
amended to date, of Acquisition Co..
SECTION 4.03. Capitalization. As of the date of this Agreement, the
authorized capital stock of Acquisition Co. consists of 80,000,000 shares of
Acquisition Co. common stock, having no par value, of which, 1,929,556 shares
are issued and outstanding and held by the Majority Shareholders.
SECTION 4.04. Authority Relative to This Agreement. Acquisition Co. has
all necessary corporate and other power and authority to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the
Merger. The execution and delivery of this Agreement by Acquisition Co. and
the consummation by Acquisition Co. of the Merger have been duly and validly
authorized by all necessary corporate action (other than, with respect to the
Merger, the filing and recordation of appropriate merger documents as
required by Minnesota Law). This Agreement has been duly and validly
executed and delivered by Acquisition Co. and, assuming the due
authorization, execution and delivery by the Company, constitutes a legal,
valid and binding obligation of Acquisition Co. enforceable against
Acquisition Co. in accordance with its terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
<PAGE>
SECTION 4.05. No Conflict; Required Filings and Consents. (a) The
execution and delivery of this Agreement by Acquisition Co. do not, and the
performance of this Agreement by Acquisition Co. will not, (i) conflict with
or violate the Articles of Incorporation or By-laws of Acquisition Co., (ii)
conflict with or violate any Law applicable to Acquisition Co. or by which
any of its property or assets is bound or affected, or (iii) result in any
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or other encumbrance on any property or asset of
Acquisition Co. pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or
obligation to which Acquisition Co. is a party or by which Acquisition Co. or
any of its property or assets is bound or affected, except for any such
breaches, defaults or other occurrences which would not, individually or in
the aggregate, have a Material Adverse Effect.
(b) The execution and delivery of this Agreement by Acquisition Co. do
not, and the performance of this Agreement by Acquisition Co. will not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, domestic, foreign
or supranational, except for applicable requirements, if any, of the Exchange
Act, the Securities Act, Blue Sky Laws and state takeover laws, and filing
and recordation of appropriate merger documents as required by Minnesota Law.
SECTION 4.06. Absence of Litigation. As of the date hereof there is no
claim, action, proceeding or investigation pending or, to the actual
knowledge of the executive officers of Acquisition Co., threatened against
Majority Shareholders or Acquisition Co. before any court, arbitrator or
Governmental Authority which (a), individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect or (b) seeks to
delay or prevent the consummation of the Merger. As of the date hereof,
neither Majority Shareholders nor Acquisition Co. nor any property or asset
of Majority Shareholders or Acquisition Co. is in violation of any order,
writ, judgment, injunction, decree, determination or award.
SECTION 4.07. Operations of Acquisition Co. Acquisition Co. is wholly
owned by the Majority Shareholders and its assets, as of immediately prior to
the Effective Time, shall consist substantially of the Merger Consideration.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.01. Conduct of Business by the Company Pending the Merger.
The Company covenants and agrees that, between the date of this Agreement and
the Effective Time, except as contemplated by any other provision of this
Agreement, unless Acquisition Co. shall otherwise agree in writing, (1) the
businesses of the Company and the Company Subsidiaries shall be conducted
only in, and the Company and the Company Subsidiaries shall not take any
action except in, the ordinary course of business and in a manner
substantially consistent with past practice, (2) Company shall use its
<PAGE>
reasonable best efforts to preserve substantially intact its business
organization, to keep available the services of the current officers,
employees and consultants of the Company and the Company Subsidiaries and to
preserve the current relationships of the Company and the Company
Subsidiaries with customers, suppliers and other persons with which the
Company or any Company Subsidiary has significant business relations and (3)
the Company shall not:
(a) amend or otherwise change its Articles of Incorporation or By-laws
or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant, encumber, or authorize the
issuance, sale, pledge, disposition, grant or encumbrance of, (i) any shares
of capital stock of the Company or any Company Subsidiary of any class, or
any options, warrants, convertible securities or other rights of any kind to
acquire any shares of such capital stock, or any other ownership interest
(including, without limitation, any phantom interest), of the Company or any
Company Subsidiary (except for the issuance of shares of capital stock
issuable pursuant to currently outstanding Company Options) or (ii) any of
the Company's or the Company Subsidiaries' assets, except for sales in the
ordinary course of business and in a manner consistent with past practice;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to
any of its capital stock;
(d) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(e) (i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any interest in any
corporation, partnership, other business organization or any division thereof
or any assets, other than the acquisition of assets in the ordinary course of
business consistent with past practice; (ii) incur any indebtedness for
borrowed money or issue any debt securities or assume, guarantee or endorse,
or otherwise as an accommodation become responsible for, the obligations of
any person, or make any loans or advances, except for indebtedness incurred
in the ordinary course of business and consistent with past practice; (iii)
enter into any contract or agreement material to the business, results of
operations or financial condition of the Company and the Company Subsidiaries
taken as a whole other than in the ordinary course of business, consistent
with past practice; (iv) authorize any capital expenditure, other than
capital expenditures reflected in the capital expenditure budget for the
fiscal year ending December 31, 1999 previously provided to Majority
Shareholders or Acquisition Co.; or (v) enter into or amend any contract,
agreement, commitment or arrangement with respect to any matter set forth in
this subsection (e);
<PAGE>
(f) except in the ordinary course of business consistent with past
practice and except in the case of officers for annual increases in
compensation payable or to become payable to any officer of the Company
consistent with past practices of the Company, (i) increase the compensation
payable or to become payable to any director, officer or other employee, or
grant any bonus, to, or grant any severance or termination pay to, or enter
into any employment or severance agreement with any director, officer or
other employee of the Company or any Company Subsidiary or enter into or
amend any collective bargaining agreement, or (ii) establish, adopt, enter
into or amend any bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation or other plan,
trust or fund for the benefit of any director, officer or class of employees;
or
(g) settle or compromise any pending or threatened litigation which is
material or which relates to the transactions contemplated hereby, provided
that nothing in this Section 5.01(g) will prohibit the Company's Board of
Directors from settling or compromising any such litigation if, after
consultation with independent counsel, the Company's Board of Directors
believes that such action is necessary to comply with its fiduciary duties.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. Proxy Statement; Schedule 13E-3.
(a) As promptly as practicable after the execution of this Agreement,
(i) Company, with the good faith assistance of Acquisition Co., shall prepare
and file with the SEC a preliminary proxy statement relating to the meeting
of the Company's stockholders to be held in connection with the Merger
(together with any amendments thereof or supplements thereto, the "Proxy
Statement") and use its reasonable best efforts to obtain and furnish the
information required to be included by the SEC in the Proxy Statement and,
after consultation with the Majority Shareholders, to respond promptly to any
comments made by the SEC with respect to the Proxy Statement; provided that
Acquisition Co. and its counsel shall be given an opportunity to review and
comment on the Proxy Statement (and any amendment or supplement thereto)
prior to its being filed with the SEC and (ii) Company shall prepare and file
with the SEC a transaction statement on Schedule 13E-3 (together with all
amendments thereto, the "Transaction Statement") in which the Proxy Statement
shall be included, in connection with the going private transaction under the
Securities Exchange Act pursuant to the Merger. As promptly as practicable,
the Company shall mail the definitive Proxy Statement to its stockholders.
The Proxy Statement shall include the recommendation of the Special Committee
of the Board of Directors of the Company and the Board of Directors of the
Company that shareholders of the Company vote in favor of the Merger and the
adoption of this Agreement, unless otherwise necessary due to the applicable
fiduciary duties of the directors of the Company as provided in Section 6.04.
<PAGE>
(b) The information supplied by Acquisition Co. regarding Acquisition
Co. and the information supplied by the Majority Shareholders regarding the
Majority Shareholders for inclusion in the Transaction Statement and the
Proxy Statement shall not, at (i) the time the Transaction Statement is filed
with the SEC, (ii) the time the Proxy Statement (or any amendment thereof or
supplement thereto) is first mailed to the stockholders of the Company, (iii)
the time of the Stockholders' Meeting (as hereinafter defined), and (iv) the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading. If at any time prior to the
Effective Time any event or circumstance relating to the Majority
Shareholders, Acquisition Co., or Acquisition Co.'s officers or directors,
should be discovered by the Majority Shareholders or Acquisition Co. which
should be set forth in an amendment or a supplement to the Transaction
Statement or Proxy Statement, the Majority Shareholders or Acquisition Co.,
as the case may be, shall promptly inform the Company. All documents that
the Company is responsible for filing with the SEC in connection with the
transactions contemplated herein will comply as to form and substance in all
material aspects with the applicable requirements of the Securities Act and
the rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(c) The Proxy Statement and the information supplied by the Company
for inclusion in the Transaction Statement shall not, at (i) the time the
Transaction Statement is filed with the SEC, (ii) the time the Proxy
Statement (or any amendment thereof or supplement thereto) is first mailed to
the stockholders of the Company, (iii) the time of the Stockholders' Meeting,
and (iv) the Effective Time, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein not misleading. If at any time prior
to the Effective Time any event or circumstance relating to the Company or
any Company Subsidiary, or their respective officers or directors, should be
discovered by the Company which should be set forth in an amendment or a
supplement to the Transaction Statement or Proxy Statement, the Company shall
promptly inform Acquisition Co. All documents that Majority Shareholders or
Acquisition Co. are responsible for filing with the SEC in connection with
the transactions contemplated herein will comply as to form and substance in
all material respects with the applicable requirements of the Securities Act
and the rules and regulations thereunder and the Exchange Act and the rules
and regulations thereunder.
SECTION 6.02. Stockholders' Meeting. The Company shall call and hold a
meeting of its stockholders (the "Stockholders' Meeting") as promptly as
practicable for the purpose of voting upon the approval of the Merger.
Company shall use its reasonable best efforts to solicit from the Minority
Shareholders proxies in favor of the approval of the Merger, and shall take
all other action necessary or advisable to secure the vote or consent of
stockholders required by Minnesota Law, to obtain such approvals, unless
otherwise necessary under the applicable fiduciary duties of the directors of
the Company as provided in Section 6.04. The Majority Shareholders shall
vote all of the shares of Company Common Stock beneficially owned by them in
favor of the Merger.
<PAGE>
SECTION 6.03. Appropriate Action; Consents; Filings. (a) The Company
and Acquisition Co. shall use their best efforts to (i) take, or cause to be
taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable under applicable Law or required to be taken
by any Governmental Authority or otherwise to consummate and make effective
the Merger as promptly as practicable, (ii) obtain from any Governmental
Authorities any consents, licenses, permits, waivers, approvals,
authorizations or orders required to be obtained or made by Acquisition Co.
or the Company or any of their subsidiaries in connection with the
authorization, execution and delivery of this Agreement and the consummation
of the Merger, and (iii) as promptly as practicable, make all necessary
filings, and thereafter make any other required submissions, with respect to
this Agreement and the Merger required under (A) the Securities Act and the
Exchange Act, and any other applicable federal or state securities Laws, and
(B) any other applicable Law; provided that Acquisition Co. and the Company
shall cooperate with each other in connection with the making of all such
filings, including providing copies of all such documents to the non-filing
party and its advisors prior to filing and, if requested, to accept all
reasonable additions, deletions or changes suggested in connection therewith.
The Company and Acquisition Co. shall use reasonable best efforts to furnish
to each other all information required for any application or other filing to
be made pursuant to the rules and regulations of any applicable Law
(including all information required to be included in the Proxy Statement and
the Transaction Statement) in connection with the transactions contemplated
by this Agreement.
(b) (i) Each of Acquisition Co. and the Company shall give (or shall
cause their respective subsidiaries to give) any notices to third parties,
and use, and cause their respective subsidiaries to use, their reasonable
best efforts to obtain any third party consents, (A) necessary to consummate
the Merger, (B) disclosed or required to be disclosed in the Company
Disclosure Schedule or (C) required to prevent a Material Adverse Effect from
occurring prior to or after the Effective Time.
(ii) In the event that Acquisition Co. or the Company shall fail
to obtain any third party consent described in subsection (b)(i) above, it
shall use its reasonable best efforts, and shall take any such actions
reasonably requested by the other party, to minimize any adverse effect upon
the Company and Acquisition Co., their respective subsidiaries, and their
respective businesses resulting, or which could reasonably be expected to
result after the Effective Time, from the failure to obtain such consent.
(c) From the date of this Agreement until the Effective Time, each
party shall promptly notify the other party of any pending or, to the actual
knowledge of the executive officers of the first party, threatened action,
proceeding or investigation by any Governmental Authority or any other person
(i) challenging or seeking material damages in connection with the Merger or
the conversion of the Company Common Stock into the Merger Consideration
pursuant to the Merger or (ii) seeking to restrain or prohibit the
consummation of the Merger or otherwise limit the right of Acquisition Co. to
own or operate all or any portion of the businesses or assets of the Company
or the Company Subsidiaries.
<PAGE>
SECTION 6.04. No Solicitation of Transactions. Neither the Company nor
any Company Subsidiary shall, and each of them shall direct and use its best
efforts to cause its respective officers, directors, employees, agents and
representatives (including, without limitation, any investment banker,
attorney or accountant retained by it or any Company Subsidiary) not to,
directly or indirectly, initiate, solicit or knowingly encourage (including
by way of furnishing non-public information or assistance), or take any other
action to facilitate knowingly, any inquiries or the making of any proposal
that constitutes, or may reasonably be expected to lead to, any Competing
Transaction (as defined below), or enter into or continue discussions or
negotiations with any person or entity in furtherance of such inquiries or to
obtain a Competing Transaction, or agree to or endorse any Competing
Transaction, or authorize any of the officers, directors or employees of the
Company or any Company Subsidiary or any investment banker, financial
advisor, attorney, accountant or other representative retained by the Company
or any Company Subsidiary to take any such action, and the Company shall
notify Acquisition Co. promptly of all inquiries or proposals which the
Company or any Company Subsidiary may receive relating to any of such matters
and if such inquiry or proposal is in writing, the Company shall deliver to
Majority Shareholders a copy of such inquiry or proposal; provided, however,
that nothing contained in this Section 6.04 or in any other provision of this
Agreement shall prohibit the Special Committee of the Board of Directors of
the Company or the Board of Directors of the Company from (i) furnishing
information to, or entering into discussions or negotiations with, any person
or entity that makes an unsolicited, bona fide proposal that constitutes, or
may reasonably be expected to lead to, any Competing Transaction (as defined
below), if, and only to the extent that, (A) the Special Committee of the
Board of Directors of the Company or the Board of Directors of the Company,
after consultation with its independent legal counsel (who may be the
Company's regularly engaged independent legal counsel), determines in good
faith that such action is necessary for the Special Committee of the Board of
Directors of the Company or the Board of Directors of the Company to comply
with its fiduciary duties to the Minority Stockholders under applicable law
and (B) prior to furnishing such information to, or entering into discussions
or negotiations with, such person or entity, the Company (x) provides prompt
written notice to Majority Shareholders to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such
person or entity, (y) receives from such person or entity an executed
agreement to the effect that such person or entity will not disclose any
confidential information of the Company and the Company Subsidiaries and (z)
keeps Majority Shareholders informed of the status (but not the terms) of any
such discussions or negotiations, (ii) complying with Rule 14e-2 promulgated
under the Exchange Act with regard to a tender or exchange offer or (iii)
failing to make or withdrawing or modifying recommendation referred to in
Section 6.01(a) or modifying or halting the solicitation of proxies referred
to in Section 6.02 following the making of a proposal that constitutes a
Competing Transaction if the Special Committee of the Board of Directors of
the Company or the Board of Directors of the Company, after consultation with
<PAGE>
its independent legal counsel (who may be the Company's regularly engaged
independent legal counsel), determines in good faith that such action is
necessary for the Special Committee of the Board of Directors of the Company
or the Board of Directors of the Company to comply with its fiduciary duties
to the Minority Stockholders under applicable law. In the event of receipt
of a proposal for a Competing Transaction, the Company shall notify
Acquisition Co. of the material terms and conditions of such Competing
Transaction, and shall afford Acquisition Co. the opportunity, for a period
of five (5) business days after Acquisition Co.'s receipt of such notice, to
make a revised offer for consideration by the Special Committee of the Board
of Directors of the Company and during such five (5) business days shall not
enter into a written agreement with respect to such Competing Transaction.
For purposes of this Agreement, "Competing Transaction" shall mean any bona
fide, unsolicited written proposal to engage in any of the following
transactions, and that the Special Committee of the Board of Directors of the
Company determines, in good faith, after consultation with its financial and
legal advisors, and taking into account all the terms and conditions, is more
favorable to the Minority Stockholders than the Merger and for which
financing to the extent required is then fully committed or reasonably
determined to be available by the Special Committee (considering such factors
as the Special Committee shall deem reasonably appropriate including, without
limitation, the financial strength and creditworthiness of the party making
such written proposal) (1) any merger, consolidation, share exchange,
business combination, or other similar transaction involving the Company
(other than the Merger contemplated hereby or such sale transactions
involving any Company Subsidiary that are prohibited pursuant to Section
5.01); (2) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 25% or more of the assets of the Company and the Company
Subsidiaries, taken as a whole, in a single transaction or series of
transactions; (3) any tender offer or exchange offer for 25% or more of the
Shares or the filing of a registration statement under the Securities Act in
connection therewith; (4) any person having acquired beneficial ownership or
the right to acquire beneficial ownership of, or any "group" (as such term is
defined under Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) having been formed which beneficially owns or has the
right to acquire beneficial ownership of, 25% or more of the Shares (other
than through arbitrage transactions); or (5) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
SECTION 6.05. Directors' and Officers' Indemnification and Insurance.
(a) Acquisition Co. shall cause the Surviving Corporation to keep in
effect the provisions in its Articles of Incorporation and By-Laws containing
the provisions with respect to exculpation of director and officer liability
and indemnification set forth in the Articles of Incorporation and By-Laws of
the Company on the date of this Agreement to the fullest extent permitted
under Minnesota Law, which provisions shall not be amended, repealed or
<PAGE>
otherwise modified except as required by applicable Law or except to make
changes permitted by Law that would enlarge the exculpation or rights of
indemnification thereunder. Acquisition Co. acknowledges that the Company
has entered into certain indemnification agreements including, without
limitation, an agreement to indemnify members of the Special Committee of the
Company's Board of Directors. Acquisition Co. hereby consents that such
agreements shall remain enforceable obligations of the Surviving Corporation
after the Effective Time.
(b) From and after the Effective Time, Acquisition Co. hereby agrees
to guarantee and to cause the Surviving Corporation to perform all of its
obligations under the Articles of Incorporation and By-laws of the Company
with respect to indemnification and under any indemnification agreements
currently in effect between the Company and any officer or director of the
Company.
(c) The Surviving Corporation shall maintain in effect for six years
from the Effective Time directors' and officers' liability insurance covering
the persons who are currently covered in their capacities as such directors
and officers by the Company's existing directors' and officers' policies and
on terms substantially no less advantageous than such existing insurance
coverage; provided however, that in no event shall the Surviving Corporation
be required to expend pursuant to this Section 6.05 more than an amount per
year equal to 200% of the current annual premiums (which premium the Company
represents and warrants to be approximately $46,000 in the aggregate) paid by
the Company for such existing insurance coverage (the "Cap"); provided
further, however, that if equivalent coverage cannot be obtained, or can be
obtained only by paying an annual premium in excess of the Cap, the Surviving
Corporation shall only be required to obtain as much coverage as can be
obtained by paying an annual premium equal to the Cap.
(d) The rights under this Section 6.05 shall be in addition to any
other rights under Minnesota law or otherwise. This Section 6.05 shall
survive the consummation of the Merger.
SECTION 6.06. Further Assurances. Acquisition Co. shall, and the
Majority Shareholders shall undertake reasonable best efforts to cause
Acquisition Co. to, take all action necessary to perform Acquisition Co.'s
obligations under this Agreement.
SECTION 6.07. Public Announcements. Acquisition Co. and the Company
shall consult with each other before issuing any press release or otherwise
making any public statements with respect to this Agreement or the Merger and
shall not issue any such press release or make any such public statement
prior to such consultation, except as may be required by Law or any listing
agreement with the National Association of Securities Dealers, Inc. or any
national securities exchange to which the Company is a party. The parties
have agreed on the text of a joint press release by which Acquisition Co. and
the Company will announce the execution of this Agreement.
<PAGE>
SECTION 6.08. Employee Matters. Acquisition Co. agrees that, for the
period from the Effective Time to December 31, 1999, subject to applicable
law, the Surviving Corporation and its subsidiaries will provide benefits to
its employees which will, in the aggregate, be comparable to those currently
provided by the Company and Company Subsidiaries to their employees (other
than any stock option or other equity based incentive plan currently provided
by the Company). Notwithstanding the foregoing, nothing herein shall
otherwise limit the Surviving Corporation's right to amend, modify or
terminate any Plan (as defined in Section 3.10 hereof.).
SECTION 6.09. Delivery of SEC Documents. Each of the Company and
Acquisition Co. shall promptly deliver to the other true and correct copies,
of any report, statement or schedule filed with the SEC subsequent to the
date of this Agreement.
SECTION 6.10. Financing. A written commitment letter from a lending
institution has been obtained which will provide financing sufficient in
amount to allow Acquisition Co. to transfer to the Surviving Corporation the
aggregate Merger Consideration at the Effective Time as provided in Article
II. Prior to the Effective Time, the Majority Shareholders and Acquisition
Co. shall use their reasonable best efforts to cause Acquisition Co. and/or
the Majority Shareholders to enter into a binding credit facility or loan
agreement with respect to a financing to allow Acquisition Co. to transfer to
the Surviving Corporation the aggregate Merger Considerations.
SECTION 6.11. Resignation of Directors. Prior to the Effective Time,
the Company shall deliver to Acquisition Co. evidence satisfactory to
Acquisition Co. of the resignation of all directors of the Company (except as
requested by Acquisition Co.) effective at the Effective Time.
SECTION 6.12. Access to Information. From the date hereof until the
Effective Time, the Company will give Acquisition Co., its counsel, financial
advisors, auditors and other authorized representatives reasonable access to
the offices, properties, books and records of the Company and Company
Subsidiaries, will furnish to Acquisition Co., its counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information as such persons may reasonably request
and will instruct the Company's employees, counsel and financial advisors to
cooperate with Acquisition Co., in its investigation of the business of the
Company and Company Subsidiaries; provided that no investigation pursuant to
this Section 6.11 shall affect any representation or warranty given by the
Company to Acquisition Co. hereunder.
ARTICLE VII
CONDITIONS TO THE MERGER
SECTION 7.01. Conditions to the Obligations of Each Party. The
obligations of the Company and Acquisition Co. to consummate the Merger are
subject to the satisfaction of the following conditions:
<PAGE>
(a) this Agreement and the Merger contemplated hereby shall have been
approved and adopted by (i) the affirmative vote of a majority of the shares
of Company Common Stock held by the Minority Shareholders and (ii) the
affirmative vote of a majority of all of the outstanding shares of Company
Common Stock in accordance with Minnesota Law and the Company's Articles of
Incorporation;
(b) no Governmental Authority or federal or state court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
order, executive order, stay, decree, judgment or injunction (each an
"Order") or statute, rule, regulation which is in effect and which has the
effect of making the Merger illegal or otherwise prohibiting consummation of
the Merger; and
(c) all actions by or in respect of or filings with any Governmental
Authority required to permit the consummation of the Merger shall have been
completed or obtained.
SECTION 7.02. Conditions to the Obligations of Acquisition Co.. The
obligations of Acquisition Co. to consummate the Merger are subject to the
satisfaction of the following further conditions:
(a) (i) the Company shall have performed in all material respects
all of its obligations hereunder required to be performed by it at or prior
to the Effective Time, (ii) except to the extent expressly permitted under
this Agreement, the representations and warranties of the Company contained
in this Agreement and in any certificate or other writing delivered by the
Company pursuant hereto (x) that are qualified by materiality or Material
Adverse Effect shall be true at and as of the Effective Time as if made at
and as of such time, and (y) that are not qualified by materiality or
Material Adverse Effect shall be true in all material respects at and as of
the Effective Time as if made and as of such time and (iii) Acquisition Co.
shall have received a certificate signed by an executive officer of the
Company to the foregoing effect;
(b) the Dollar Weighted Trading Price (as hereinafter defined) of
CorVel, Inc. ("CorVel") common stock shall not be less than $20.00. For
purposes of this Agreement, "Dollar Weighted Trading Price" shall mean the
quotient of (A) the product of (i) the total number of shares of CorVel
traded during the fifteen (15) trading days immediately prior to the date of
the Stockholder's Meeting, multiplied by (ii) the price paid per share,
divided by (B) the total number of shares of CorVel traded during such
fifteen (15) day period;
(c) holders of no more than five percent (5%) of the outstanding
Company Common Stock shall have exercised dissenters' rights; and
<PAGE>
(d) there shall not be instituted or pending any action or proceeding
by any government or Governmental Authority that has a reasonable likelihood
of success, before any court or Governmental Authority, (i) challenging or
seeking to make illegal, to delay materially or otherwise directly or
indirectly to restrain or prohibit the consummation of the Merger or seeking
to obtain material damages or otherwise directly or indirectly relating to
the transactions contemplated by this Agreement, (ii) seeking to restrain or
prohibit the Surviving Corporation's (including it subsidiaries and
affiliates) ownership or operation of all or any material portion of the
business or assets of the Company and Company Subsidiaries, taken as a whole,
or to compel the Surviving Corporation or any of its subsidiaries or
affiliates to dispose of or hold separate all or any material portion of the
business or assets of the Company and Company Subsidiaries, taken as a whole,
(iii) seeking to impose or confirm material limitations on the ability of the
Surviving Corporation or any of its subsidiaries or affiliates to effectively
control the business or operations of the Company and Company Subsidiaries,
taken as a whole, or the ability of the Majority Shareholders effectively to
exercise full rights of ownership of any shares of the Surviving Corporation
or any of its subsidiaries or affiliates prior to the Effective Time on all
matters properly presented to the Surviving Corporation's stockholders, or
(iv) seeking to require divestiture by the Majority Shareholders of any
shares of the Surviving Corporation, and no court, arbitrator or governmental
body, agency or official shall have issued any judgment, order, decree or
injunction, and there shall not be any statute, rule regulation proposed,
adopted or enacted, that, in the sole judgment of Acquisition Co. is likely,
directly or indirectly, to result in any of the consequences referred to in
the preceding clauses (i) through (iv);
(e) Acquisition Co. shall have received all documents it may
reasonably request relating to the existence of the Company and Company
Subsidiaries and the authority of the Company for this Agreement, all in form
and substance satisfactory to Acquisition Co.; and
(f) funds in an amount sufficient to make the deposit required
pursuant to Section 2.02(a), as contemplated in Section 6.10, shall have been
transferred by Acquisition Co. to or in the manner directed by Company or the
Surviving Corporation for the account of the Surviving Corporation or
Acquisition Co. shall have otherwise demonstrated to the sole satisfaction of
the Special Committee of the Board of Directors that it has immediate access
to sufficient funds to enable performance of the obligations of Acquisition
Co. hereunder, provided, however, that failure of satisfaction of this
condition shall not waive or diminish the obligations of Acquisition Co. and
the Majority Shareholders under Section 6.06 and 6.10.
(g) Acquisition Co. shall have received such documents as it may
reasonably request that evidence that the modifications to the Company
Options held by holders (other than the Majority Shareholders) described in
Section 2.04(a) have been duly approved by the Company and that the holders
of such Company Options have duly consented to, and approved such
modifications.
<PAGE>
SECTION 7.03. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the Merger are subject to the
satisfaction of the following further conditions:
(a) (i) Acquisition Co. shall have performed in all material
respects all of its obligations hereunder required to be performed by it at
or prior to the Effective Time, (ii) except to the extent expressly permitted
under this Agreement, the representations and warranties of Acquisition Co.
contained in this Agreement and in any certificate or other writing delivered
by Acquisition Co. pursuant hereto shall be true in all material respects at
and as of the Effective Time as if made at and as of such time and (iii) the
Company shall have received a certificate signed by an executive officer of
Acquisition Co. to the foregoing effect;
(b) The Dollar Weighted Trading Price of CorVel common stock shall not
be greater than $26.00 per share.
(c) Acquisition Co. shall have entered into the binding credit
facility or loan agreement referred to in Section 6.10 and such facility or
agreement shall be in full force and effect or otherwise demonstrated to the
sole satisfaction of the Special Committee of the Board of Directors
immediate access to sufficient funds to enable performance of the obligations
of Acquisition Co. hereunder.
(d) Company shall have received a certificate signed, on behalf of the
Company, by Jeffrey J. Michael, the Chief Executive Officer of Company, to
the effect that, to the best of his knowledge, all the representations and
warranties made by the Company in this Agreement are true, correct and
complete in all material respects as of the Effective Time.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time,
notwithstanding any requisite approval and adoption of this Agreement and the
transactions contemplated hereby as follows:
(a) by-mutual written consent duly authorized by the Boards of
Directors of each of Acquisition Co., the Company, and the Special Committee
of the Board of Directors of the Company;
(b) by either Acquisition Co. or the Company, if the Effective Time
shall not have occurred on or before December 15, 1999, provided that the
party seeking to exercise such right is not then in breach in any material
respect of any of its obligations under this Agreement;
<PAGE>
(c) by either the Company or Acquisition Co., if there shall be any
law or regulation that makes consummation of the Merger illegal or otherwise
prohibited or if any judgment, injunction, order or decree enjoining
Acquisition Co. or the Company from consummating the Merger is entered and
such judgment, injunction, order or decree shall become final and
nonappealable;
(d) by Acquisition Co. if the Special Committee of the Board of
Directors of the Company shall have (i) withdrawn or modified or amended in a
manner adverse to Acquisition Co., its approval or recommendation of this
Agreement and the Merger or its recommendation that stockholders of the
Company adopt and approve this Agreement and the Merger or (ii) approved,
recommended or endorsed any proposal for a Competing Transaction or (iii) if
the Company has failed to mail notice of a special meeting of the Company's
stockholders or failed to mail the Proxy Statement to its stockholders within
20 days after being cleared by the SEC or failed to include in such statement
the recommendation referred to above;
(e) by the Company, if in the exercise of its good faith judgment
(after consultation with legal counsel) as to its fiduciary duties to the
Minority Stockholders under applicable law, subject to compliance with the
terms of Section 6.04, the Special Committee of the Board of Directors of the
Company, or the Board of Directors of the Company determines that such
termination is required by such fiduciary duties by reason of a proposal for
a Competing Transaction;
(f) by either Acquisition Co. or the Company, if a majority of the
Minority Shareholders of the Company shall have failed to approve and adopt
this Agreement and the Merger at a meeting duly convened therefor;
(g) by Acquisition Co., upon a breach of any material representation,
warranty, covenant or agreement on the part of the Company set forth in this
Agreement, or if any material representation or warranty of the Company shall
have become untrue, in either case such that the conditions set forth in
Section 7.02(a) would not be satisfied (a "Terminating Company Breach");
provided, however, that, if such Terminating Company Breach is curable by the
Company in the reasonable opinion of Acquisition Co. within thirty (30) days
through the exercise of its best efforts and for so long as the Company
continues to exercise such best efforts, Acquisition Co. may not terminate
this Agreement under this Section 8.01(g);
(h) by the Company, upon breach of any material representations,
warranty, covenant or agreement on the part of Acquisition Co. set forth in
this Agreement, or if any material representation or warranty of Acquisition
Co. shall have become untrue, in either case such that the conditions set
forth in Section 7.03(a) would not be satisfied ("Terminating Breach");
provided, however, that, if such Terminating Breach is curable by Acquisition
Co. in the reasonable opinion of the Company within thirty (30) days through
best efforts and for so long as Acquisition Co. continues to exercise such
best efforts, the Company may not terminate this Agreement under this Section
8.01(h);
<PAGE>
(i) by the Company if the Dollar Weighted Trading Price of CorVel
common stock is greater than $26.00 per share;
(j) by Acquisition Co., if the Dollar Weighted Trading Price of CorVel
common stock is less than $20.00 per share;
(k) by Acquisition Co., if the holders of more than five percent (5%)
of the outstanding Company Common Stock shall have exercised dissenters'
rights.
SECTION 8.02. Fees and Expenses. Except as set forth in this Section,
all costs and expenses incurred in connection with this Agreement and the
Merger shall be paid by the party incurring such expenses, whether or not any
Merger is consummated.
SECTION 8.03. Amendment. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of
Directors at any time prior to the Effective Time; provided, however, that,
after the approval and adoption of this Agreement and the transactions
contemplated hereby by the stockholders of the Company, no amendment may be
made which would reduce the amount or change the type of consideration into
which each Share shall be converted upon consummation of the Merger. This
Agreement may not be amended except by an instrument in writing signed by the
parties hereto.
SECTION 8.04. Waiver. At any time prior to the Effective Time, any
party hereto may (a) extend the time for the performance of any obligation or
other act of any other party hereto, (b) waive any inaccuracy in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any agreement or condition
contained herein. Any such extension or waiver shall be valid if set forth
in an instrument in writing signed by the party or parties to be bound
thereby.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this Agreement
and any certificate delivered pursuant hereto by any person shall terminate
at the Effective Time, except that the agreements set forth in Articles I and
II and Sections 6.05 and 6.08 shall survive the Effective Time indefinitely.
SECTION 9.02. Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly given upon receipt) by delivery in person,
by cable, facsimile, telegram or telex or by registered or certified mail
(postage prepaid, return receipt requested) to the respective parties at the
following addresses (or at such other address for a party as shall be
specified in a notice given in accordance with this Section 9.02):
<PAGE>
if to Acquisition Co.:
ENStar Aquisition, Inc.
6479 City West Parkway
Eden Prairie, Minnesota 55344-3246
Attn: Jeffrey J. Michael
Facsimile: 612-947-8660
with a copy to:
Burton G. Ross, Esq.
Ross Rosenblatt, Ltd.
4100 Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Facsimile: 6112-338-1131
if to the Company:
ENStar Inc.
7450 Flying Cloud Drive
Eden Prairie, MN 55344
Attn: Peter Flynn
with a copy to:
Richard Braun
Special Committee of the Board of Directors
c/o MEDTOX Scientific, Inc.
402 West County Road D
St. Paul, MN 55112
Facsimile: 651-628-6102
and
Robert R. Ribeiro, Esq
Hinshaw & Culbertson
222 South Ninth Street, Suite 3100
Minneapolis, Minnesota 55402
Facsimile: 612-334-8888
<PAGE>
and
Patrick Courtemanche, Esq.
Dorsey & Whitney
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Facsimile: 612-340-8827
SECTION 9.03. Certain Definitions. For purposes of this Agreement, the
term:
(a) "affiliate" of a specified person means a person who directly or
indirectly through one or more intermediaries controls, is controlled by, or
is under common control with, such specified person;
(b) "beneficial owner" with respect to any shares means a person who
shall be deemed to be the beneficial owner of such shares (i) which such
person or any of its affiliates or associates (as such term is defined in
Rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly or
indirectly, (ii) which such person or any of its affiliates or associates
has, directly or indirectly, (A) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time), pursuant to
any agreement, arrangement or understanding or upon the exercise of
consideration rights, exchange rights, warrants or options, or otherwise, or
(B) the right to vote pursuant to any agreement, arrangement or understanding
or (iii) which are beneficially owned, directly or indirectly, by any other
persons with whom such person or any of its affiliates or associates or any
person with whom such person or any of its affiliates or associates has any
agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any such shares;
(c) "business day" means any day on which the principal offices of the
SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not
required or authorized to close in the City of Minneapolis;
(d) "Company Disclosure Schedule" means the disclosure schedule
provided by the Company pursuant to this Agreement;
(e) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, as
trustee or executor, by contract or credit arrangement or otherwise;
(f) "Governmental Authority" means any United States (federal, state
or local) or foreign government, or governmental, regulatory or
administrative authority, agency or commission;
<PAGE>
(g) "person" means an individual, corporation, partnership, limited
partnership, syndicate, person (including, without limitation, a "person" as
defined in Section 13(d)(3) of the Exchange Act), trust, association or
entity or government, political subdivision, agency or instrumentality of a
government; and
(h) "subsidiary" or "subsidiaries" of any person means any orporation,
partnership, joint venture or other legal entity of which such person (either
above or through or together with any other subsidiary), owns, directly or
indirectly, more than 50% of the stock or other equity interests the holders
of which are generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other legal entity.
SECTION 9.04. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
Law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the Merger is not affected in any manner materially
adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the Merger be consummated as originally
contemplated to the fullest extent possible.
SECTION 9.05. Assignment; Binding Effect; Benefit. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties. Subject
to the preceding sentence, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors
and assigns. Notwithstanding anything contained in this Agreement to the
contrary, except for the provisions of Article II and Sections 6.05 and 6.08
(collectively, the "Third Party Provisions"), nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the
parties hereto or their respective successors and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
The Third Party Provisions may be enforced by the beneficiaries thereof.
SECTION 9.06. Incorporation of Exhibits. The Company Disclosure
Schedule and all Exhibits attached hereto and referred to herein are hereby
incorporated herein and made a part hereof for all purposes as if fully set
forth herein.
SECTION 9.07. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties
shall be entitled to specific performance of the terms hereof, in addition to
any other remedy at law or equity.
<PAGE>
SECTION 9.08. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Minnesota applicable
to contracts executed in and to be performed in that State. All actions and
proceedings arising out of or relating to this Agreement shall be heard and
determined in any Minnesota state or federal court sitting in the County of
Hennepin, State of Minnesota.
SECTION 9.09. Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.
SECTION 9.10. Counterparts. This Agreement may be executed and
delivered (including by facsimile transmission) in one or more counterparts,
and by the different parties hereto in separate counterparts, each of which
when executed and delivered shall be deemed to be an original but all of
which taken together shall constitute one and the same agreement.
SECTION 9.11. Waiver of Jury Trial. Each of the Company and
Acquisition Co. hereby irrevocably waives all right to trial by jury in any
action, proceeding or counterclaim (whether based on contract, tort or
otherwise) arising out of or relating to this Agreement or the actions of the
Company or Acquisition Co. in the negotiation, administration, performance
and enforcement thereof.
SECTION 9.12. Entire Agreement. This Agreement, the Exhibits, the
Company Disclosure Schedule, and any documents delivered by the parties in
connection herewith constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings among the parties with respect thereto. No addition to or
modification of any provision of this Agreement shall be binding upon any
party hereto unless made in writing and signed by all parties hereto.
IN WITNESS WHEREOF, Majority Shareholders, Acquisition Co. and the
Company have caused this Agreement to be executed as of the date first
written above by their respective officers thereunto duly authorized.
ENSTAR INC.
By: /s/Peter E. Flynn
---------------------
Name: Peter E. Flynn
Title: Executive Vice President
<PAGE>
ENSTAR ACQUISITION, INC.
By: /s/Jeffrey J. Michael
-------------------------
Name: Jeffrey J. Michael
Title: President
JEFFREY J. MICHAEL
/s/Jeffrey J. Michael\
-----------------------
JAMES H. MICHAEL
/s/James H. Michael
-----------------------
4J2R1C LIMITED PARTNERSHIP
/s/James H. Michael
-----------------------
By: James H. Michael
Its: General Partner
3J2R LIMITED PARTNERSHIP
/s/Jeffrey J. Michael
-----------------------
By: Jeffrey J. Michael
Its: Managing General Partner
MICHAEL ACQUISITION CORPORATION TRUST
U/A DATED EFFECTIVE JULY 29, 1999
By: /s/Jeffrey J. Michael
--------------------------
Jeffrey J. Michael
Trustee
<PAGE>
PRESS RELEASE
Date: August 13, 1999
Contact: Peter E. Flynn
Executive Vice President
(612) 942-3887
FOR IMMEDIATE RELEASE
- ---------------------
ENSTAR INC. SIGNS DEFINITIVE MERGER AGREEMENT
MINNEAPOLIS, MN, August 13, 1999 - ENStar Inc. (NASDAQ: ENSR) announced today
that it has signed an agreement to be acquired by ENStar Acquisition, Inc., a
corporation formed by James Michael and Jeffrey Michael and certain related
entities. As a result of the agreement, shareholders of ENStar other than the
Michaels (including certain related entities and family members) will receive
$12.50 in cash per share of ENStar common stock. James Michael is a member of
the Board of Directors of the Company and Jeffrey Michael is the President and
Chief Executive Officer of the Company and a member of the Board of Directors.
The Michael family and its controlled entities own approximately 65% of the
outstanding shares of ENStar.
The agreement was approved by a Special Committee of the Board of Directors and
by the Board of Directors on August 13, 1999.
Closing of the transaction is expected in the fourth quarter of 1999, and is
subject to ENStar shareholder approval by a majority of the non-Michael family
shareholders, regulatory approval and customary closing conditions.
Additionally, the agreement provides that the transaction may be terminated by
the Special Committee if the dollar-weighted trading price of CorVel Corporation
stock during the 15 trading days prior to shareholder approval exceeds $26.00,
and by ENStar Acquisition, Inc. if that price is less than $20.00 during the
same period.
ENStar is a holding company. Its principal operating companies include
Americable, Inc. and Enstar Networking Corporation. Americable is a provider of
networking and connectivity products, cable assemblies and custom OEM
manufacturing solutions. Enstar Networking is a Network integrator providing
services that build, maintain and secure network infrastructures. ENStar also
owns 2,050,000 shares (25%) of the common stock of CorVel Corporation (NASDAQ:
CRVL). CorVel is an independent, nationwide provider of managed care services
to employers and insurers.
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