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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-29026
ENSTAR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
MINNESOTA 41-1831611
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6479 CITY WEST PARKWAY
EDEN PRAIRIE, MN 55344
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 941-3200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.25
PAR VALUE
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X . NO __ .
THE AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AT MARCH 12, 1999 WAS APPROXIMATELY $8.5 MILLION BASED ON THE
LAST SALE PRICE FOR THE COMMON STOCK AS REPORTED BY THE NATIONAL ASSOCIATION
OF SECURITIES DEALERS AUTOMATED QUOTATION SYSTEM ON THAT DATE.
AT MARCH 12, 1999, 2,976,723 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
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DOCUMENTS INCORPORATED BY REFERENCE:
CERTAIN PORTIONS OF THE DOCUMENTS LISTED BELOW HAVE BEEN INCORPORATED BY
REFERENCE INTO THE INDICATED PART OF THIS FORM 10-K.
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DOCUMENT INCORPORATED PART OF FORM 10-K
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PROXY STATEMENT FOR 1999 ANNUAL MEETING OF SHAREHOLDERS ITEMS 10, 11, 12 AND 13
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
THE COMPANY
ENStar Inc., a Minnesota corporation formed in 1995 ("ENStar" or the
"Company"), is a holding company. Its principal subsidiaries are Americable,
Inc. ("Americable") and Enstar Networking Corporation ("Enstar Networking").
Americable is a distributor of premise wiring, connectivity products and
low-end networking electronics. Enstar Networking is a network security
integrator providing solutions to design, manage and secure corporate
network infrastructures. ENStar also owns 1,025,000 shares of common stock of
CorVel Corporation ("CorVel"), or an approximate 25% interest in CorVel, a
provider of cost containment and managed care services designed to address the
medical costs of workers' compensation.
On December 10, 1998, ENStar sold Transition Networks, Inc. ("Transition")
to Communications Systems, Inc. ("Communications Systems"), a telecommunication
company, for approximately $9 million which was received in cash. The
transaction involved the sale of all of Transition's common stock. Transition
designs, manufactures, and markets connectivity devices and network
applications. The gain on disposition was approximately $2.5 million, net of
income taxes of approximately $1.6 million.
Effective December 31, 1998, ENStar sold the assets of the Midwest region
of Enstar Networking to Vicom, Incorporated ("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.
ENStar was formerly a wholly owned subsidiary of North Star Universal, Inc.
("NSU"). In connection with transactions (the "Reorganization Transactions")
consummated pursuant to a reorganization agreement entered into between NSU and
Michael Foods, Inc. ("Michael"), NSU transferred, on or prior to February 28,
1997, to ENStar certain of its assets, including its shares of common stock of
Americable and Transition and its shares of CorVel, and certain other assets.
Pursuant to the Reorganization Transactions, (i) NSU merged with Michael and
(ii) the outstanding common stock of ENStar was distributed to the shareholders
of NSU (the "Distribution"). As a result of the Distribution, ENStar ceased to
be a subsidiary of NSU and became a publicly owned company whose stock is quoted
on the Nasdaq National Market under the symbol "ENSR." In connection with the
Reorganization Transactions, ENStar agreed to indemnify Michael against certain
losses arising from the Reorganization Transactions and to assume certain
liabilities of Michael. See "-Reorganization Transactions."
The Company directly employed five management and administrative employees
as of March 12, 1999.
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UNCONSOLIDATED SUBSIDIARIES
CorVel. Since its initial public offering in June 1991, CorVel has been
operated as an independent company. As a less-than-majority-owned subsidiary of
ENStar, CorVel's operations have not been consolidated with ENStar, and ENStar's
investment in CorVel is accounted for under the equity method of accounting.
The following summary of CorVel's business has been prepared from information
reported by CorVel. Additional information regarding CorVel is available from
the reports and other documents prepared and filed by CorVel with the
Commission.
CorVel is an independent nationwide provider of medical cost containment
and managed care services designed to address escalating medical costs.
CorVel's services include preferred provider organizations, automated medical
fee auditing, medical case management, independent medical examinations,
utilization review and vocational rehabilitation services. Such services are
provided to insurance companies, third party administrators and employers to
assist them in managing the medical costs and monitoring the quality of care
associated with medical claims.
Since its initial public offering in June 1991, Jeffrey J. Michael and
Peter E. Flynn, officers of ENStar, have been members of the Board of Directors
of CorVel. Based on the past service of Messrs. Michael and Flynn on CorVel's
Board of Directors and the Company's position as a significant shareholder of
CorVel, the Company believes that Messrs. Michael and Flynn will continue to
serve as members of the CorVel Board of Directors and be nominated for
re-election to the CorVel Board at the next annual meeting of stockholders of
CorVel. There are no agreements, however, between ENStar and CorVel or any of
CorVel's stockholders requiring the nomination of Messrs. Michael and Flynn or
any designees of ENStar for election as directors of CorVel.
In connection with the Distribution, ENStar transferred all of its CorVel
Common Stock to Americable to satisfy certain federal income tax requirements
relating to the Reorganization Transactions. Neither ENStar nor Americable has
any agreement with CorVel requiring CorVel to register the shares of CorVel
Common Stock. In the absence of registration of its CorVel Common Stock, the
ability of ENStar to sell the holdings of CorVel Common Stock will be limited to
sales pursuant to Rule 144 of the Securities Act, and the volume limitations
thereof, and to private negotiated sales, which may adversely affect the ability
of ENStar to sell a large portion of holdings of CorVel Common Stock at a given
time.
Vicom. Vicom is a telecommunications company that provides services to
integrate voice, data and video solutions. As a less-than-majority-owned
subsidiary of ENStar, Vicom's operations have not been consolidated with ENStar,
and ENStar's investment in Vicom is accounted for under the equity method of
accounting. The Company's investment in Vicom accounts for approximately 1% of
its consolidated assets.
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Following the sale of the Midwest region of Enstar Networking to Vicom,
Peter Flynn, Officer of ENStar, was named to the Board of Directors of Vicom,
pursuant to the terms of the Asset Purchase Agreement. Per the Agreement, a
representative of ENStar will serve as a member of the Vicom Board of Directors
for so long as ENStar continues to hold not less than 10% of the Vicom
outstanding common stock.
OPERATING SUBSIDIARIES
GENERAL
Americable. Americable was organized as a Minnesota corporation in 1981
and was acquired by NSU in December 1986.
Americable is a provider of value-added connectivity products and custom
OEM manufacturing solutions to the telecommunications, Category 5, and premise
wiring markets. Americable manufactures a wide variety of copper and fiber
optic cable assemblies, subassemblies and specialty products for its customers.
Some of these products are manufactured to standard specifications for sale by
Americable and others are custom designed and manufactured by Americable to
customer specifications. These customer-designed products are manufactured for
both end-users and OEMs. Americable is also a value-added provider of premise
wiring, connectivity products, and low-end networking electronics. Americable
supplies a wide array of voice and data communication related products such as
cable (both copper and fiber optic), cable assemblies, components (blocks,
jacks, connectors, patch cords, patch panels) and networking hardware.
Americable's goal is to provide quality products, prompt reliable delivery of
such products and strong customer service both before and after the products are
sold. Americable sells to a wide range of customers throughout the United
States in the voice and data communications aftermarket, including contractors,
resellers, systems integrators, and OEMs.
Enstar Networking. Enstar Networking is a network security integrator
providing solutions to design, manage and secure corporate network
infrastructures. The company's mission is "to provide our clients with
technical services and solutions that improve the performance and integrity of
their networks." The company offers customized, integrated solutions through
two strategic business units:
Security Integration Group (SIG) is a team of consultants that provide
information security consulting services for customers using Internet,
extranet and intranetwork applications. These services include policy
development, architecture design, business impact analysis, access,
auditing, continuity and custom training services. Additionally, this
group provides network security awareness training as well as
certification training on security software products.
Network Integration Services (NIS) include a variety of customized,
integrated solutions to build, manage and maintain high performance local
area networks ("LAN") and wide area networks ("WAN"). These service
offerings include design services such as requirements definition and
project planning along with the implementation and support of a select
platform of networking hardware and software.
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Enstar Networking also provides a variety of solutions to remotely manage
and maintain LAN's and WAN's for its customers.
Enstar Networking previously operated as the network integration business
of Americable. As part of its business strategy since the early 1990's,
Americable had expanded the level of network integration services provided to
end-user customers such as network design, implementation, management and
maintenance. Enstar Networking was organized in April 1997 to distinctly focus
the networking service activities from the traditional distribution and
manufacturing operations of Americable.
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, and the
shutdown of certain other regional operations during 1998, Enstar Networking's
business is focused on the Southwest region of the United States.
For additional information regarding the Company's business segments, see
the Company's Consolidated Financial Statements and the Notes thereto included
in this report.
BUSINESS STRATEGY
Americable. Americable's objective is to be a leading provider of
value-added connectivity products and custom OEM manufacturing solutions
throughout the United States. To meet this goal, Americable believes it must
seek to maintain its current customer relationships and expand its customer base
in the regions in which it operates, develop strong relationships with its key
suppliers, and develop and enhance its value-added offerings.
During 1998, approximately 2,700 customers purchased products from
Americable. Management at Americable believes that preserving and enhancing
these relationships is a constant priority. Continuous quality improvement in
its operations along with expansion of its fiber optic product offerings are
some of the means that Americable utilizes to enhance its customer
relationships.
Management at Americable also believes that developing strong relationships
with the leading manufacturers allows Americable to offer its customers name
brand products that provide the best value in meeting their needs. Americable
believes that utilizing a select range of suppliers allows it to provide
superior customer service because its technical personnel are more familiar with
the products sold and because such high quality products are generally more
reliable. Further, such strong relationships result in greater continuity of
product supply.
Enstar Networking. Enstar Networking's objective is to be a leading
provider of information technology (IT) services to manage and secure corporate
networks. Its focus is on medium to large sized enterprises that deploy complex
network infrastructures involving public networks such as the Internet for
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critical business applications. Enstar Networking believes that its expertise
in the design and implementation of networks along with its specialized
understanding of security requirements uniquely positions it as a comprehensive
solutions provider for its customers. To achieve its objectives, the company is
pursuing the following strategies:
- Develop and market its comprehensive SecureForce Methodology
to a focused group of customers. The SecureForce Methodology
is a comprehensive approach to the complex world of enterprise
corporate security management. SecureForce includes services
from its consulting organization, products for the security
infrastructure and complete integration of the entire managed
solution.
- Build its consulting services organization. The company's Security
Integration Group was formed in April 1997 and currently provides
fee-based, on-site consulting services that can provide an
evaluation of existing network security systems, analyze potential
exposures to security breaches and suggest corrective action.
During 1999, the company plans to expand the number of SIG
consultants in order to service its customers' demand for security
services.
- Continue to build its support services organization through the 24x7
Technical Assistance Center (TAC) located at the corporate office in
Irving, Texas. The TAC services are centered around providing
organizations with both technical phone support and on-site support
to mission critical network security infrastructures.
- Develop and implement comprehensive Virtual Private Networking (VPN)
solutions to corporations and institutions who plan to use the
Internet and Web commerce in their business applications.
- Maintain strong relationships with the leading manufacturers in the
networking industry in order to offer its customers high quality
solutions. Enstar Networking has developed relationships with
Check Point Software Technologies, Ltd., Cisco Systems, Inc.,
Internet Security Systems, Inc., Security Dynamics, Inc.,
NetPartners, Inc., Finjan Inc. and Entrust, Inc.
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PRODUCTS AND SERVICES
Americable. The following is a summary of Americable's sales by principal
product group for 1998:
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AS A PERCENT OF SALES
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Fiber Optic Products.......................... 21%
Copper Products............................... 54%
Networking Products........................... 24%
Other Connectivity Products................... 1%
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Americable provides value-added connectivity products and custom OEM
manufacturing solutions to the telecommunications, Category 5 and premise
wiring markets. Americable designs and manufactures fiber optic and
copper cable management solutions differentiated by (i) measurable high
performance attributes, (ii) tested long-term reliability and (iii) cost
effective design. By partnering with leading manufactures of supporting
products, Americable maintains a balance between unique OEM custom specific
products and standard industry products.
Americable maintains a wide variety of high-quality products in its
inventory. Product inventory includes copper and fiber optic cable assemblies,
connectivity products, such as bulk cable, connectors, patch panels, racks and
other cable accessories. Americable generally inventories products from
multiple manufacturers. Principal manufacturers of connectivity products include
Amp Incorporated, Berk-Tek, Inc., General Cable Corp. and Leviton Manufacturing,
Inc.
Americable also maintains an integrated, real-time, on-line computerized
system for order entry, fulfillment and inventory control. This on-line
computer system allows sales personnel to advise customers over the phone of
product specifications, availability and order status. All orders are normally
shipped within 24 hours of receipt and, when necessary, can be shipped on a
"same-day" basis.
Americable seeks to add value for its customers by providing superior
customer service. All of Americable's sales representatives are trained to
assist customers in product selection. The sales representatives are supported
by technical personnel who have a broad range of expertise in various cabling
and networking technologies.
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Americable, working to its customers' specifications, can manufacture
custom designed products such as copper, fiber-optic, small computer system
interface (SCSI) and AS/400 cable assemblies and subassemblies. All Americable
manufactured products are subject to strict quality control standards to insure
that they are of the same high quality as other, vendor manufactured,
distributed products.
Enstar Networking. The following is a summary of the company's revenues by
principal business unit for 1998, excluding any amounts from the Midwest
region sold to Vicom:
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PERCENT
OF REVENUES
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Security Integration Group
Consulting and Training............ 4%
Products........................... 9%
Network Integration Services
Networking Products................ 61%
Services........................... 4%
Structured Wiring.................. 22%
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Set forth below is a description of each business unit's operations.
Security Integration Group
Enstar Networking has been involved in the network security market
since June 1996 when it became an authorized value-added reseller of Check
Point Software Technologies, Ltd.'s ("Check Point") FireWall-1-TM. During
1998, it expanded its network security operation through the creation
of the Enstar SecureForce comprehensive security program which offers the
following solutions including the combination of several software products:
Content Control - The increasing use of the Internet brings challenges
for management. Policies concerning Internet access must be created
and enforced.
Enstar Networking utilizes, WebSENSE, a software product designed to
promote professional use of the Internet by effectively allowing an
organization to monitor, report and manage internal Internet use.
WebSENSE gives users the flexibility to fine-tune Internet access
policy, allowing them to monitor, block or screen access, define and
enforce access privileges and preserve bandwidth and server space.
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In addition, Enstar Networking utilizes the software tool SurfinGate
offered by Finjan Software, Ltd. to minimize exposures to potentially
dangerous "content based applications." SurfinGate protects the
computer network from hostile Internet attacks carried out through
ActiveX, Java, JavaScript and other mobile code technologies,
preventing undetected costly attacks such as industrial espionage,
data modification, and denial of service intrusions.
Public Key Infrastructure (PKI) - Organizations are increasingly
relying on secure e-mail, electronic forms, intranets, extranets,
and virtual private networks (VPNs) to maximize their effectiveness
in a competitive global economy. Public-key cryptography is an
accepted mechanism to provide the foundation of network security
through encryption and digital signatures. Together, encryption and
digital signatures provide confidentiality, access control,
authentication, data integrity and non-repudiation.
The system required to deliver public-key cryptography capabilities is
referred to as a Public-Key Infrastructure (PKI). The purpose of a
PKI is to manage the keys and certificates required to enable
encryption and digital signature services across a variety of
applications and platforms. Enstar Networking supports the public-key
infrastructure solutions offered by Entrust Technologies and Security
Dynamics.
Access Control - Within enterprise network systems, access control
is an important part of the overall security program. User
authentication and identification provides accountability for
usage policies.
Enstar Networking offers authentication products manufactured by
Security Dynamics. Security Dynamics' ACE/Server and SecurID
solutions provide centralized, strong, two-factor authentication
services for enterprise networks and operating systems, ensuring
that only authorized users gain access to network files, applications
and communications.
Intrusion Detection - Once security controls have been identified
and documented in the security policy and standards, they must be
implemented and monitored. Enstar Networking uses several software
tools, two of which are described below:
Security Dynamics' Kane Security monitor software is a real-time
intrusion detection system that filters through security and audit
data to identify unauthorized activities, including compromised user
IDs, password cracking attempts, privileged ID abuse and curious
users.
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Internet Security Systems, Inc. (ISS), is the leading supplier of
adaptive security management systems, providing enterprise-wide
information protection software. The ISS SAFEsuite (R) family of
products allows organizations to proactively monitor, detect and
respond to the growing number of network vulnerabilities and threats
to enterprise information.
Network Integration Services
Enstar Networking offers the following customized networking services:
Network Design - Enstar Networking assists its customers with network
discovery programs including business requirements definition,
requirements design, detailed technology design, preparation of
request for proposal (RFP) specifications and materials acquisition
management. These services are designed to provide a customer with
an RFP including the documentation of user requirements, network
design and specific technology design alternatives. These services
are either offered as part of an overall project or arranged
separately as a billable service.
Network Architecture Discovery & Analysis - Enstar Networking can
assist its customers with detailed information regarding its existing
network. A detailed on-site survey by a systems engineer will
provide comprehensive network documentation and a current network
map to assist a customer in mapping the future direction of its
network. This program includes the inventorying and mapping of
current equipment along with identification of potential single
points of failure and bottlenecks.
Network Migration - Enstar Networking supplies, implements and
supports a select range of suppliers of electronics and software
platforms from manufacturers such as Cisco Systems Inc. Enstar
Networking's line of network products include concentrators, hubs,
switches and routers for both existing and emerging technologies such
as Ethernet, Token Ring, FDDI, Fast Ethernet and Asynchronous Transfer
Mode ("ATM"). Enstar Networking purchases a number of networking
products through large distributors such as Tech Data Corporation
and Ingram Micro, Inc.
Network Maintenance - Enstar Networking provides a broad line of
maintenance services including fixed fee network support, telephone
support, guaranteed response times, next business day on-site response
for problem resolution, "spare-in-the-air" hardware replacement and
cabling system diagnosis and repair. Through its Technical Assistance
Center (TAC), Enstar Networking can provide remote diagnostic
capabilities as part of its maintenance services. The TAC is capable
of receiving a customer call, remotely diagnosing the problem,
searching for an application solution and, if necessary, dispatching
an engineer to perform on-site troubleshooting.
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Remote Security Management - This program is designed to provide
customers with an outsourced firewall solution for their network.
From hardware to software configuration, Enstar Networking provides
its customers a solution to protect their corporate data via dial-up
connections and the Internet, without the capital and personnel costs
to maintain the firewall.
Structured Wiring Services ("SWS") - Enstar Networking provides
solutions to build network cabling infrastructure for voice and data
communications. Enstar Networking will oversee the design and
implementation of projects involving multiple LANs across a WAN,
consisting of multi-vendor hardware products and several thousand
nodes.
MARKETING AND CUSTOMERS
Americable. Americable sells products to a number of end users, OEMs,
contractors, and other system integrators. Customer relationships are developed
both face-to-face and via the telephone.
Americable currently employs 24 telemarketing and sales support
representatives. The sales force is currently supplemented by 3 technical
service and product managers. Americable sales representatives undergo regular
training and attend company-sponsored classes in order to enhance their
technical knowledge.
Americable uses direct mailings, brochures and catalogs in marketing the
products that it sells. Americable's catalog, which generally is
published every 18 to 24 months, is designed to provide its customers with not
only product specifications, but additional technical information to assist them
in connection with their system design.
During 1998 and 1997, Mayo Clinic accounted for 11% and 14%, respectively,
of Americable's sales. No other customers accounted for more than 10% of its
sales. In addition, in 1998 and 1997, Americable derived approximately 71% and
80% respectively, of its sales from its largest 100 customers.
Enstar Networking. Enstar Networking provides its products and services to
customers in various industries including health care, financial services,
legal, manufacturing and education. Customer relationships are generally
developed by its outside sales representatives within a 100 mile radius
of its regional service center and satellite locations. Marketing efforts
are generally focused on customers located in the states in which the company
has offices and are directed at Fortune 1000 and middle market corporations, and
institutional users such as hospitals and universities. Through its primary
regional service center, Enstar Networking provides its customers a full array
of services from each of its business units throughout its current locations in
Texas and Colorado. Enstar Networking adds and deletes locations on the basis
of business opportunities.
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Enstar Networking currently employs 16 outside sales representatives in
addition to 7 sales support representatives. The sales force is currently
supplemented by 14 regional systems engineers and consultants. Enstar
Networking sales representatives undergo continuous training and attend
company-sponsored classes in order to enhance their technical expertise and
marketing techniques. Many of Enstar Networking sales and technical
personnel also attend vendor-sponsored training and education programs mandated
by such vendors in order for the company to qualify as an authorized reseller
of their products.
During 1998 and 1997, Enstar Networking had sales to unrelated customers
who represented 13% and 11% of sales in the respective years. Enstar
Networking derived approximately 74% and 81%, respectively, of its sales from
its largest 25 customers.
MANUFACTURING
Americable. Americable's manufacturing operations consist of the
manufacture of custom or specialty cable assemblies including copper, fiber
optic, small computer system interface (SCSI) and AS/400 cable assemblies
and subassemblies.
Americable's assemblies are differentiated in the marketplace by their
measurable high-performance attributes, tested long-term product reliability,
and cost-effective design. Americable offers quick turnaround for both its
standard and custom assemblies.
Americable manufactures a wide variety of singlemode, multimode, and hybrid
fiber optic cable assemblies prepared by experienced fiber optic technicians.
All of the company's fiber optic assemblies can be terminated with a variety of
connector types.
In addition, Americable helps customers in the design and manufacturing of
custom fiber optic assemblies for telecommunications, data communications, and
other industrial applications. Americable's pre-terminated multifiber cable
assemblies, including outside plant, break-out, and distribution/IFC cable
assemblies, can minimize labor-intensive field terminations and improve overall
reeliability. Americable has the technical expertise to fabricate a solution
to meet a customer's specifications in a wide variety of applications and
configuration options.
Americable manufactures an extensive line of copper assemblies including
Category 5 and Enhanced Category 5 patch cords, 734 and 735 coaxial cable
assemblies, and small computer systems interface (SCSI) cables. Americable's
copper cable assemblies are 100 percent electrically tested for continuity,
shorts and configuration.
COMPETITION
Americable. Americable faces substantial competition from a large number
of companies, some of which are larger, have greater financial resources,
broader name recognition and, in many cases, lower product and operating costs
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than Americable. Significant competitors include Anicom, Inc., Anixter
International, Inc., Graybar, Inc., Kent Electronics Corporation, and a number
of smaller domestic companies, as well as product manufacturers outside the
United States. The principal competitive factors in the manufacturing
industry include price, quality and responsive service. Americable believes
that it can compete favorably in the marketplace to which it sells.
Enstar Networking. Enstar Networking faces substantial competition from a
large number of companies, some of which are larger, have greater financial
resources, broader name recognition and, in many cases, lower product and
operating costs than Enstar Networking. Enstar Networking faces competition
from large system integrators and consulting firms such as Electronic Data
Systems, Ernst and Young, GE Capital Information Technology Services, Inacom
Corporation and a significant number of smaller regional network integrators.
REORGANIZATION TRANSACTIONS
Pursuant to the Reorganization Transactions, NSU merged with Michael and
the outstanding ENStar Common Stock was distributed to the shareholders of NSU
in the Distribution. As a result of the Distribution, ENStar ceased to be a
subsidiary of NSU and became a publicly owned company.
In connection with the Reorganization Transactions, Michael paid in full
all Michael Assumed Indebtedness within six months of consummation of the
Reorganization Transactions. Michael also agreed to pay, perform and discharge
all liabilities of NSU arising at any time prior to February 28, 1997 (the
effective date of the Reorganization Transactions (the "Effective Date"), other
than the following liabilities retained by NSU: (i) liabilities arising from the
assertion of dissenters rights by NSU shareholders in connection with the
Reorganization Transactions, and (ii) obligations under certain agreements
entered into in connection with the Reorganization Transactions.
In connection with the Reorganization Transactions, ENStar agreed to
indemnify Michael and any subsidiaries of Michael against certain liabilities
including: (i) all liabilities (other than the liabilities assumed by Michael)
of NSU or any NSU subsidiary, arising out of: (a) the liabilities transferred to
ENStar by NSU and (b) the transactions contemplated by the agreement governing
the Distribution (the "Distribution"), including the Distribution and any taxes
resulting from the Distribution; (ii) all liabilities arising from any claim
made by any shareholder of ENStar or by any shareholder or former shareholder of
NSU prior to the Effective Date relating to any act or omission of NSU on or
prior to the Effective Date in connection with the Reorganization Transactions;
(iii) all liabilities assumed by ENStar relating to the employee benefit plans
of NSU; (iv) any breach of the Distribution Agreement by ENStar; and (v)
damages, costs, and expenses including attorney's fees incurred in defending and
settling claims for such liabilities. As of December 31, 1998, the Company has
received no notification of indemnification related to this transaction.
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In connection with the Reorganization Transactions, Michael agreed to
indemnify ENStar against: (i) all liabilities of NSU, Michael or any subsidiary
of NSU or Michael arising out of transactions or events entered into or
occurring after the Effective Date, or any action or inaction, including but not
limited to, contracts, commitments and litigation, with respect to, entered into
or based upon transactions or events occurring after the Effective Date with
respect to NSU, Michael, any subsidiary of NSU after the Effective Date or any
subsidiary of Michael, other than any liability arising out of liabilities
transferred to ENStar by NSU; (ii) all liabilities assumed by Michael; (iii) all
liabilities of Michael or any subsidiary of Michael; (iv) all liabilities
arising from any claim made by any current or former Michael stockholder or
shareholder of NSU after the Effective Date who was a Michael stockholder or NSU
shareholder immediately prior to the Effective Date relating to any act or
omission of Michael in connection with the Reorganization Transactions; (v) any
breach of the Distribution Agreement by NSU; and (vi) damages, costs and
expenses including attorney's fees incurred in defending and settling claims for
such obligations, expenses or liabilities.
PROPOSED TRANSACTION
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. 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
1,919,556 shares of the Company's Common Stock, or approximately 65% of the
outstanding shares.
The structure of the proposed transaction is expected to be determined
through negotiations between the Michael family and the Special Committee of
the Board of Directors. The Michael family has preliminarily proposed that the
shares of the non-Michael family shareholders be acquired for a cash price of
$10.00 per share, however, the proposal is subject to change based on a number
of factors including determination of the structure of the transaction.
The Special Committee will evaluate the fairness of any proposed
transaction to all shareholders of the Company, and will engage counsel and
financial advisors in connection with its role.
ENStar Inc. does not anticipate making further announcements regarding the
proposed transaction until such time as an agreement has been reached regarding
the definitive terms of the proposed transaction or until negotiations are
terminated.
-13-
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey J. Michael...... 42 President and Chief Executive Officer
Peter E. Flynn.......... 39 Executive Vice President
Thomas S. Wargolet...... 35 Chief Financial Officer and Secretary
Ronald D. Newman........ 34 President and Chief Operating Officer, Enstar
Networking
</TABLE>
Mr. Jeffrey J. Michael has served as President and Chief Executive Officer
of the Company since March 1996. Prior to such time, Mr. Michael served as
President and Chief Executive Officer of NSU since December 1990. Mr. Michael
served as Vice President-Finance from April 1989 to December 1990. Prior to
April 1989, Mr. Michael was employed by NSU in various capacities. Jeffrey J.
Michael is the son of James H. Michael (Chairman of the Board of ENStar). Mr.
Michael is also a director of Michael and CorVel.
Mr. Peter E. Flynn has served as Executive Vice President of the Company
since March 1996. In addition, Mr. Flynn has served as President of Americable
since June 1997. Prior to such time, Mr. Flynn served as Executive Vice
President, Chief Financial Officer and Secretary of NSU. Prior to joining NSU
in 1989, Mr. Flynn was an Audit Manager with Arthur Andersen & Co. Mr. Flynn
also serves as a director of CorVel and as a director of Vicom.
Mr. Thomas S. Wargolet has served as Chief Financial Officer and Secretary
of the Company since March 1996. Prior to such time, Mr. Wargolet served as
Controller of NSU since September 1989. Mr. Wargolet was also the Director of
Finance of Americable from September 1991 until January 1995 and Vice President
of Finance and Operations from January 1995 to September 1997. Since September
1997, Mr. Wargolet has been the Vice President of Finance and Operations of
Enstar Networking. Prior to joining NSU in 1989, Mr. Wargolet was an Audit
Senior with Arthur Andersen & Co. Effective March 31, 1999, Mr. Wargolet is
expected to discontinue employment with the Company and to be employed by
Vicom.
Mr. Ronald D. Newman has served as President of Enstar Networking since
September 1997 and as Chief Operating Officer of Enstar Networking since March
1997. Mr. Newman was the Regional Manager - Southwest Operations from March
1993 to February 1997 and prior to that served in various sales capacities for
Americable.
Officers of the Company are elected annually by the Board of Directors.
The current officers of the Company are expected to be re-elected to serve in
the same positions for the coming year.
-14-
<PAGE>
ITEM 2. PROPERTIES.
Americable. Americable's principal sales and manufacturing operations are
located in Minneapolis, Minnesota (39,000 square feet). This facility includes
office, warehouse and manufacturing space. Americable also has facilities in
Raleigh, North Carolina and Rochester, Minnesota.
Enstar Networking. Enstar Networking has its corporate headquarters in
Irving, Texas, (11,000 square feet), along with satellite offices in Austin
and Houston, Texas.
All of the Company's facilities are leased. ENStar believes that the
leased facilities of its operating companies are adequate for their intended
use.
ITEM 3. LEGAL PROCEEDINGS.
The Company is engaged in routine litigation incidental to its business,
which management believes will not have a material adverse effect upon its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-15-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
ENStar Inc.'s common stock began trading on the Nasdaq National Market
under the symbol ENSR effective March 3, 1997. The following stock prices were
obtained from Nasdaq reports:
<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
BY QUARTER
1998
First..............................$5 15/16 $7 3/4
Second............................. 6 3/8 7 5/8
Third.............................. 5 7/8 8 7/16
Fourth............................. 6 13/16 9 1/4
1997
First..............................$6 $9
Second............................. 4 3/4 6 1/2
Third.............................. 6 9 3/8
Fourth............................. 7 3/8 9
</TABLE>
The last sale price on March 12, 1998 was $9 3/16. The number of common
shareholders of record as of March 12, 1999 was 158.
Management does not anticipate that cash dividends will be paid on ENStar's
common stock in the foreseeable future.
-16-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA (1)
Revenues........................$43,358 $38,632 $48,667 $42,159 $36,940
Operating income (loss)......... (3,689) (4,767) 44 110 (1,053)
Interest expense, net........... (1,336) (722) (169) (232) (337)
Income (loss) before income
taxes and equity in earnings
of unconsolidated subsidiary.. (5,025) (5,489) (125) (122) (1,390)
Income (loss) from:
Continuing operations......... (1,663) (2,062) 1,154 1,024 86
Discontinued operations....... 3,436 (199) (82) 548 200
------- ------- ------- ------- -------
Net income (loss)...............$ 1,773 $(2,261) $ 1,072 $ 1,572 $ 286
======= ======= ======= ======= =======
Basic and diluted net income
(loss) per share(2)
Income (loss) from:
Continuing operations.....$ (0.53) $ (0.63) $ 0.34 $ 0.32 $ 0.03
Discontinued operations... 1.09 (0.06) (0.02) 0.17 0.06
------- ------- ------- ------- -------
Net income (loss) per share.....$ 0.56 $ (0.69) $ 0.32 $ 0.49 $ 0.09
======= ======== ======== ======= =======
Basic and diluted weighted
average common and
common equivalent
shares outstanding (2)........ 3,152 3,289 3,309 3,217 3,235
CONSOLIDATED BALANCE SHEET DATA (1) (END OF PERIOD)
Total assets....................$43,573 $41,106 $32,817 $33,603 $30,520
Long-term debt, including
current maturities............ 19,003 16,127 944 1,071 3,607
Shareholders' equity............ 13,585 14,937 20,947 19,694 18,176
</TABLE>
- ---------------------------
(1) Amounts are restated for discontinued operations as discussed in
Note 3 to Consolidated Financial Statements.
(2) Basic and diluted net income (loss) per share for 1994 to 1996 was
computed using the weighted average number of outstanding shares of NSU
Common Stock during each period presented adjusted for the Distribution
of one share of ENStar Common Stock for every three shares of NSU
Common Stock outstanding.
-17-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this report.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are made in reliance under the
safe harbor provisions of the Securities Litigation Reform Act of 1995. These
statements include statements regarding intent, belief or current expectations
of the Company and its management. Shareholders and prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Among the factors that could cause actual results
to differ materially from those indicated by such forward-looking statements
are general economic conditions, computer and computer networking industry
conditions, the rapid technological changes occurring in the markets in which
the Company operates, failure to successfully execute Enstar Networking's
service strategy, dependence on and the need to recruit and retain key
personnel, the concentration of the Company's revenues with certain customers,
dependence on key suppliers and product supply, the substantial competition in
the markets in which the Company operates and certain indemnification
obligations relating to the Reorganization Transactions. Each of these factors
is more fully discussed in Exhibit 99 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
GENERAL
ENStar is a holding company. Its principal subsidiaries are Americable
and Enstar Networking. ENStar also owns 1,025,000 shares of common
stock of CorVel, 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's financial condition and results of operation have been
significantly affected by the following transactions:
On December 10, 1998, ENStar sold Transition to Communications Systems for
approximately $9 million which was received in cash. The transaction involved
the sale of all of Transition's common stock. Transition designs, manufactures,
and markets connectivity devices and network applications. The gain on
disposition was approximately $2.5 million, net of income taxes of approximately
$1.6 million.
-18-
<PAGE>
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. There was no
gain or loss on this transaction. As a result of this transaction, ENStar owns
a 38.5% interest in Vicom, which is accounted for as an unconsolidated
subsidiary using the equity method of accounting.
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 separate results of operations for
Enstar Networking have been prepared from the books and records of Americable
for all periods presented. The results of operations include an allocation of
general and administrative expenses for certain items such as accounting, human
resources and information systems along with facility related expenses.
Management believes these allocations are reasonable and present the operations
of Enstar Networking and Americable as though they had operated as separate
businesses.
Since its organization in 1997, Enstar Networking has made significant
investments in new sales, consulting, engineering and technical personnel as
part of an 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.
As described in Note 2 to the Consolidated Financial Statements of ENStar,
the Consolidated Statements of Operations of ENStar include an allocation of
general and administrative costs incurred by NSU prior to the consummation of
the Reorganization Transactions in the management of the operating companies,
investment holding and other assets of ENStar. Management believes these
allocations are reasonable and present the operations of ENStar as though it has
been operated on a stand alone basis prior to the consummation of the
Reorganization Transactions.
-19-
<PAGE>
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 Consolidated Financial Statements. The following
are summarized operating results for ENStar's operating subsidiaries for the
years ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION> YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues
Americable................................$19,275 $18,694 $22,338
Enstar Networking......................... 14,271 7,331 5,933
------- ------- -------
33,546 26,025 28,271
ENC - business disposition................ 11,560 16,037 23,799
Eliminations.............................. (1,748) (3,430) (3,403)
------- ------- -------
$43,358 $38,632 $48,667
======= ======= =======
Gross Profit
Americable................................$ 4,596 $ 3,964 $ 4,779
Enstar Networking......................... 2,317 1,331 1,286
------- ------- -------
6,913 5,295 6,065
ENC - business disposition................ 2,129 3,222 4,935
------- ------- -------
$ 9,042 $ 8,517 $11,000
======= ======= =======
Selling, General and Administrative Expenses
Americable................................$ 4,107 $ 3,585 $ 3,265
Enstar Networking......................... 4,464 3,311 2,153
Corporate................................. 1,018 1,305 1,127
------- ------- -------
9,589 8,201 6,545
ENC - business disposition................ 3,142 5,083 4,411
------- ------- -------
$12,731 $13,284 $10,956
======= ======= =======
Operating Income (Loss)
Americable................................$ 489 $ 379 $ 1,514
Enstar Networking......................... (2,147) (1,980) (867)
Corporate................................. (1,018) (1,305) (1,127)
------- ------- -------
(2,676) (2,906) (480)
ENC - business disposition................ (1,013) (1,861) 524
------- ------- -------
$(3,689) $(4,767) $ 44
======= ======= =======
Interest Expense (Income)
Americable................................$ 111 $ 135 $ 184
Enstar Networking.......................... 123 -- --
Corporate................................. 1,102 587 (15)
------- ------- -------
$ 1,336 $ 722 $ 169
======= ======= =======
</TABLE> -20-
<PAGE>
RESULTS OF OPERATIONS
1998 VERSUS 1997
Revenues at Americable increased $581,000, or 3.1%, in 1998, to
approximately $19.3 million from $18.7 million in 1997. Sales of fiber optic
products increased approximately $1.2 million due to increased focus and
expansion of its fiber optic manufacturing operation along with higher demand.
This was offset by decreased sales of networking products of approximately
$270,000, due to lower demand and decreased sales of copper and other
connectivity products of approximately $350,000, due primarily to lower volume
of sales to commercial accounts.
Revenues at Enstar Networking increased approximately $7 million, or
95%, in 1998, to $14.3 million from $7.3 million in 1997. This includes
increased revenues of $5.7 million resulting from higher demand for networking
products and services. Of this amount, approximately $2.9 million of sales were
attributable to three large network installation projects. The increase in
revenue at Enstar Networking also includes approximately $1.2 million of higher
volume of network security revenues due to increased focus on services, the
addition of consulting personnel and higher demand. Enstar Networking expects
its revenue growth in 1999 will be adversely impacted by a decreased focus on
structured wiring services in certain regional locations. Accordingly, the
company does not expect that the revenue growth experienced during 1998 is
reflective of growth to be experienced in the future.
Consolidated pro forma gross profit, as a percent of revenues, increased
slightly to 20.6% in 1998 as compared to 20.3% in 1997. Increased margins at
Americable are primarily attributable to an increased volume of higher margin
fiber optic products. Margins at Enstar Networking decreased to 16.2% in
1998 compared to 18.2% in 1997, which is primarily due to unfavorable labor
variances on certain installation projects during the year. ENStar anticipates
its gross profit margins may continue to decline in 1999 due to expected
competitive pricing pressures on products and services sold by each of its
operating companies.
ENStar's pro forma selling, general and administrative expenses increased
approximately $1.4 million, or 17%, to $9.6 million from $8.2 million in 1997.
Operating expenses at Americable increased $522,000, or 14.6%, in 1998, compared
to $4.1 million in 1997, which is primarily attributable to the addition of
product engineering and sales support personnel associated with the expansion of
its fiber optic operations.
The increase in operating expenses of approximately $1.2 million, or 35%,
at Enstar Networking in 1998 compared to 1997, reflects increased selling
expenses of approximately $660,000 due to higher sales salaries, commissions and
related expenses and approximately $250,000 of higher expenses due to the
addition of consulting and engineering personnel. In addition, this increase
includes approximately $240,000 of higher facility related and other expenses
associated with the increased level of personnel.
-21-
<PAGE>
Corporate expenses decreased $287,000, or 22%, primarily due to lower
costs associated with the Company's debenture program.
Net interest expense increased by $614,000 to approximately $1.3 million
from $722,000 in 1997, due primarily to the higher level of ENStar
subordinated debentures in addition to additional borrowings under the
Americable credit facility.
The income tax benefit in 1998 and 1997 reflects ENStar's effective annual
income tax rate. See Note 7 to the Consolidated Financial Statements of ENStar.
Equity in earnings of the Company's unconsolidated subsidiary increased
$163,000 to approximately $1.5 million, which is a result of higher earnings
at CorVel. CorVel's net earnings for the twelve months ended December 31, 1998
were approximately $10.1 million, an increase of approximately $800,000, or 9%,
from the previous year. Further information with respect to the results
of operations of CorVel is contained in the Management's Discussion and Analysis
of Financial Condition and Results of Operations section of its Annual and
Quarterly reports as filed on Forms 10-K and 10-Q with the Securities and
Exchange Commission.
Discontinued operations include the results of operations and a disposition
gain associated with the sale of Transition. For the eleven months prior to
disposition in 1998, Transition recorded net income from operations of $946,000,
net of an income tax provision of $600,000, as compared with a net loss of
$199,000, net of an income tax benefit of $100,000 in 1997. The gain on
disposition of approximately $2.5 million is net of income taxes of
approximately $1.6 million and reflects approximately $600,000 of estimated
costs associated with the transaction.
1997 VERSUS 1996
Revenues at Americable decreased approximately $3.6 million, or 16.3%, to
approximately $18.7 million. This includes approximately $2 million of
decreased sales of networking products due primarily to lower demand from one
customer. In addition, sales of bulk cable and other connectivity products
decreased approximately $1.2 million, due primarily to lower volume to
contractors and resellers. Sales of cable assemblies decreased approximately
$400,000, due primarily to lower demand of custom OEM assemblies.
Revenues at Enstar Networking increased approximately $1.4 million, or
23.5%, to $7.3 million. This includes approximately $1.2 million of increased
revenues from network integration products and services along with approximately
$600,000 of revenue from network security products due to higher demand. This
was offset by decreased sales of structured wiring products of approximately
$400,000 which reflects the company's shift from a distribution/reseller of
products, towards more service oriented solutions.
-22-
<PAGE>
Consolidated pro forma gross profit, as a percent of revenues, decreased
to 20.3% in 1997 as compared to 21.4% in 1996. Decreased margins at
Americable, are primarily due to unfavorable labor variances resulting from the
expansion of its fiber optic manufacturing operation. Margins at Enstar
Networking decreased to 18.2% from 21.7%, primarily due to increased
competition for structured wiring and network hardware products.
ENStar's pro forma selling, general and administrative expenses increased
approximately $1.6 million or 25.3%, to $8.2 million from $6.5 million in
1996. The increase in operating expenses at Americable reflects increased
expenses of approximately $170,000 primarily due to the addition of sales,
purchasing and product management personnel along with higher catalog and
marketing related expenses. In addition, there was approximately $150,000
of higher rent, depreciation and other related expenses associated with its
facility remodeling.
Enstar Networking had increased operating expenses of approximately
$1.2 million, or 53.8%. This includes approximately $540,000 of increased
salaries, benefits, training and other related expenses due to the addition
of new sales, consulting and engineering personnel. The company also had
approximately $205,000 of increased expenses due to marketing related costs
associated with the introduction of Enstar Networking and approximately $210,000
of higher costs related to the reorganization of its branch operations. In
addition, this increase includes approximately $260,000 of higher facility
related and other general and administrative expenses associated with the
increased level of personnel.
Corporate expenses increased $178,000, or 15.8% primarily due to higher
professional fees.
Net interest expense increased $553,000 to $722,000 from $169,000 in 1996,
due primarily to the higher level of ENStar subordinated debentures in addition
to higher borrowings under the Americable credit facility.
The income tax provision (benefit) in 1997 and 1996 reflects ENStar's
estimated effective annual tax rate. See Note 7 to Consolidated Financial
Statements of ENStar.
Equity in earnings of unconsolidated subsidiary increased $45,000 to
approximately $1.3 million, which is a result of higher earnings at CorVel
offset slightly by the effect of a lower ownership interest during the first
half of 1997. CorVel's net earnings for the twelve months ended December 31,
1997 were approximately $9.3 million, an increase of approximately $1 million
or 12% from the previous year.
The loss from discontinued operations in 1997 and 1996, reflect the
operating losses of Transition.
-23-
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
ENStar has experienced cash flow deficits from operations due primarily to
the losses incurred at its operating companies. In addition, ENStar has
experienced fluctuations in its working capital, which are primarily
attributable to the increase in receivables associated with growth in sales.
Cash used in operations was approximately $3.8 million in 1998 versus $1.7
million in 1997.
ENStar does not have the use of cash generated by CorVel. Also, since its
initial public offering in 1991, CorVel has not declared any dividends and has
indicated that it does not anticipate doing so for the foreseeable future.
ENStar may from time to time, depending on market conditions and other factors,
sell a portion of its CorVel holdings. The ability of ENStar to sell its CorVel
holdings is limited, however, to sales pursuant to Rule 144 of the Securities
Act of 1933 and the volume limitations thereof, and to private negotiated sales,
which may adversely affect the ability of ENStar to sell a large portion of the
CorVel holdings at a given time.
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 December 31, 1998, the
Company had approximately $19 million principal amount of subordinated
debentures outstanding with weighted average interest rate of 9.6%. Long-term
debt proceeds includes approximately $2.4 million of new debentures sold and
$600,000 of compounded interest for the year ended December 31, 1998.
Approximately $4.9 million of debentures are scheduled to mature during 1999.
Americable and Enstar Networking maintained a revolving line of credit
facility which provided borrowings up to $4 million during the year ended
December 31, 1998 and is due in October 1999. Borrowings under this facility
were based on eligible accounts receivable and inventory with interest at prime
(7.75% at December 31, 1998). At December 31, 1998, there were outstanding
borrowings of $1,680,000, and approximately $1.3 million of available
borrowings. The note contains certain restrictive covenants, the most
significant of which are capital expenditure limitations and limitations on
operating losses. Under the terms of the credit agreement, ENStar is required
to make capital contributions to Americable to the extent Americable (including
Enstar Networking) incurs pretax losses in excess of specified levels. At
December 31, 1998, the companies were in compliance with all covenants under
this agreement.
During 1998, ENStar provided an aggregate of approximately $2.5 million
in cash Enstar Networking pursuant to the terms of the amended credit agreement.
Additional cash investments from ENStar are expected in 1999 to fund anticipated
operating losses at Enstar Networking and capital expenditures.
Effective January 1, 1999, this agreement was amended to provide a maximum
lending limit of $3 million based upon a borrowing base of eligible accounts
receivable, with an effective interest rate of prime plus 1% (8.75% at January
1, 1999). The Company believes it will be able to renew or obtain new
agreements at substantially the same terms and conditions.
-24-
<PAGE>
In June 1997, the Company commenced a modified "Dutch Auction" self tender
offer for the repurchase of shares of its common stock. This tender offer,
which expired in July 1997, resulted in the Company's purchase and retirement of
37,290 shares of its common stock at $6.25 per share or an aggregate cost of
approximately $233,000.
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
December 31, 1998, 290,266 shares had been repurchased at an average price of
$6.46 per share or 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. See Note
12 to the 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 March 12,
1999, ENStar had approximately $16.6 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.
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.
-25-
<PAGE>
Third Parties. The potential impact of Year 2000 issues will depend
to a large extent on 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 $4,000 has been spent to date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS
The Company's operations are subject to certain market risk changes,
primarily relating to fluctuations in interest rates. The Company's interest
income and expense is affected by changes in the general level of U.S. interest
rates. Changes in interest rates affect the interest earned on the Company's
cash equivalents and the interest paid on its debt. The Company maintains
significantly all of its debt with a fixed rate of interest. The Company does
not anticipate exposure to interest rate market risk will have a material impact
on the Company's future earnings, cash flow, or fair value of debt instruments.
The market risk on cash equivalents related to interest income, as well as the
fair value of cash equivalents, is not expected to have a material impact on the
Company. The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments, derivative commodity instruments
or other such financial instruments.
-26-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company listed in the index
under Item 14(a)(1) and (2) hereof are filed as part of this Annual Report on
Form 10-K and are incorporated by reference in this Item 8. See also "Index to
Financial Statements" on page F-1 hereof. Certain quarterly financial data is
set forth below.
<TABLE>
<CAPTION> UNAUDITED
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Revenues.............................$ 9,834 $11,639 $10,887 $10,998
Gross profit......................... 1,982 2,302 2,109 2,649
Interest expense, net................ (273) (338) (369) (356)
Income (loss) from -
Continuing operations.............. (1,117) (922) (408) 784
Discontinued operations............ (195) 227 543 2,861
------- ------- ------- -------
Net income (loss).............$(1,312) $ (695) $ 135 $ 3,645
======= ======= ======= =======
Basic and diluted income
(loss) per share
Continuing operations..............$ (.34) $ (.28) $ (.13) $ .26
Discontinued operations............ (.06) .07 .17 .96
------- ------- ------- -------
Net income (loss) per share...$ (.40) $ (.21) $ .04 $ 1.22
======= ======= ======= =======
1997
Revenues.............................$ 8,382 $ 9,555 $11,906 $ 8,789
Gross profit......................... 2,046 2,081 2,472 1,918
Interest expense, net................ (62) (152) (232) (276)
Income (loss) from -
Continuing operations.............. (447) (701) (364) (550)
Discontinued operations............ (135) 99 8 (171)
------- ------- ------- -------
Net income (loss).............$ (582) $ (602) $ (356) $ (721)
======= ======= ======= =======
Basic and diluted income
(loss) per share
Continuing operations..............$ (.14) $ (.22) $ (.12) $ (.17)
Discontinued operations............ (.04) .03 .01 (.05)
------- ------- ------- -------
Net income (loss)per share....$ (.18) $ (.19) $ (.11) $ (.22)
======= ======= ======= =======
</TABLE>
-27-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3), except for the information relating
to the executive officers of the Company set forth in Part I of this report, the
information called for by Items 10, 11, 12 and 13 is incorporated herein by
reference to the information contained in the Company's Proxy Statement for its
1999 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A
with the Securities and Exchange Commission on or prior to April 30, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<S> <S> <C>
(a)l. CONSOLIDATED FINANCIAL STATEMENTS
ENStar Inc.
Consolidated Statements of Operations....................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Shareholders' Equity............. F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements..................F-6 to F-21
Report of Independent Certified Public Accountants.......... F-22
Schedule II -- Valuation and Qualifying Accounts............ F-23
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(i) CorVel Corporation
Report of Independent Auditors.............................. S-1
Consolidated Statements of Income........................... S-2
Consolidated Balance Sheets................................. S-3
Consolidated Statements of Stockholders' Equity............. S-4
Consolidated Statements of Cash Flows....................... S-6
Notes to Consolidated Financial Statements..................S-7 to S-18
Schedule II -- Valuation and Qualifying Accounts............ S-19
</TABLE>
-28-
<PAGE>
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
3. EXHIBITS
<TABLE>
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of December
21, 1995, by and among North Star Universal, Inc., Michael
Foods, Inc. and NSU Merger Co. (filed as Exhibit 2 to the
Company's Registration Statement on Form S-4, Registration
No. 333-1925 and incorporated herein by reference (schedules
omitted -- the Company agrees to furnish a copy of any
schedule to the Commission upon request)).
2.2 Asset Purchase Agreement, dated as of December 31, 1998
by and between Vicom, Inc. and Enstar Networking
Corporation.
2.3 Stock Purchase & Registration Rights Agreement, dated as of
December 31, 1998, by and between Americable, Inc.,
and Vicom, Inc.
2.4 Stock Purchase Agreement dated December 10, 1998, between
Communications Systems, Inc., Ameriable, Inc., and ENStar Inc.
(filed as Exhibit 2.1 to the Company's current report on
Form 8-K, filed December 22, 1998, and incorporated herein by
reference).
3.1 Articles of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Registration Statement on Form S-4,
Registration No. 333-1925 and incorporated herein by
reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-4, Registration No. 333-1925
and incorporated herein by reference).
4.1 Indenture, dated as of November 7, 1996, between the Company
and National City Bank of Minneapolis, as trustee (filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-24007 and incorporated herein by
reference).
4.2 Form of Supplemental Indenture, dated as of November 7, 1996,
between the Company and National City Bank of Minneapolis, as
trustee (filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-1, Registration No. 333-24007 and
incorporated herein by reference).
+10.1 1996 Stock Incentive Plan, including forms of option
agreements (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-4, Registration No.
333-1925, and incorporated herein by reference).
10.2 Amended and Restated Loan and Security Agreement, dated
June 1, 1993, among Americable, Inc., Transition Networks, Inc.,
Cable Distribution Systems, Inc., and First Bank National
Association (filed as exhibit 10.31 to the Quarterly Report on
Form 10-Q of North Star Universal, Inc. for the quarter ended
June 30, 1993, and incorporated herein by reference).
-29-
<PAGE>
10.3 First Amendment to the Amended and Restated Loan and Security
Agreement, dated November 29, 1993, among Americable, Inc.,
Transition Networks, Inc., Cable Distribution Systems, Inc.,
and First Bank National Association (filed as exhibit 10.26 to
the Annual Report on Form 10-K of North Star Universal, Inc.
for the year ended December 31, 1994, and incorporated herein
by reference).
10.4 Waiver and Second Amendment to the Amended and Restated Loan
and Security Agreement, dated March 3, 1995, among Americable, Inc.,
Transition Networks, Inc., Cable Distribution Systems, Inc., and
First Bank National Association (filed as exhibit 10.27 to the
Annual Report on Form 10-K of North Star Universal, Inc. for the
year ended December 31, 1994, and incorporated herein by reference).
10.5 Amendment to Supplement A to Amended and Restated Loan and Security
Agreement dated as of June 1, 1993 among Americable, Inc., Transition
Networks, Inc., Cable Distribution Systems, Inc. and First Bank
National Association (filed as exhibit 10.28 to the Annual Report on
Form 10-K of North Star Universal, Inc., and incorporated herein by
reference.)
10.6 Sixth Amendment to the Amended and Restated Loan and Security
Agreement, dated August 9, 1996, among Americable, Inc.,
Transition Networks, Inc., Cable Distribution Systems, Inc.,
and First Bank National Association, amending the terms of
the Amended and Restated Loan and Security Agreement (filed
as Exhibit 10.1 to the Quarterly Report on Form 10-Q of
North Star Universal, Inc. for the quarter ended June 30, 1996,
and incorporated herein by reference).
10.7 Lease Agreement dated June 13, 1995 between Transition and
West Life & Annuity Insurance Company for lease of premises
at 6475 City West Parkway, Eden Prairie, Minnesota. (Filed
as Exhibit 10.11 to the Company's Registration Statement on
Form S-4, Registration No. 333-1925, and incorporated herein
by reference).
10.8 Lease Agreement dated February 21, 1989 between Americable and
Ryan/Flying Cloud Associates Limited Partnership, including amendments
thereto, for the lease of premises at 7450 Flying Cloud Drive, Eden
Prairie, Minnesota. (Filed as Exhibit 10.12 to the Company's
Registration Statement on Form S-4, Registration No. 333-1925, and
incorporated herein by reference).
10.9 Distribution Agreement between North Star Universal, Inc., and the
Company (Filed as an Exhibit to Agreement and Plan of Reorganization,
dated as of December 21, 1995, by and among North Star Universal,
Inc., Michael Foods, Inc. and NSU Merger Co., which agreement was
filed as Exhibit 2 to the Company's Registration Statement on Form
S-4, Registration No. 333-1925, and is incorporated herein by
reference).
10.10 Commercial Lease Agreement between Americable, Inc. and LaSalle
National Trust (filed as Exhibit 10.4 to the Quarterly Report on
Form 10-Q of North Star Universal, Inc. for the quarter ended
September 30, 1996 and incorporated herein by reference).
-30-
<PAGE>
10.11 Commercial Lease Agreement between Americable, Inc. and Petroleum,
Inc. (filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q of
North Star Universal, Inc. for the quarter ended June 30, 1996 and
incorporated herein by reference).
10.12 Separation and General Release, dated February 17, 1997, between
Americable and Gary L. Eizenga (filed as Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10.13 First Amendment to Loan and Security Agreement, dated May 29, 1997,
among Transition Networks, Inc., and First Bank National Association,
amending the terms of the Loan and Security Agreement dated August 9,
1996 (filed as Exhibit 10.9 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 and incorporated herein
by reference).
10.14 Seventh Amendment to Amended and Restated Loan and Security
Agreement, dated May 29, 1997, among Americable, Inc., Cable
Distribution Systems, Inc., and First Bank National Association,
amending the terms of the Amended and Restated Loan and Security
Agreement dated August 9, 1996 (filed as Exhibit 10.10 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference).
10.15 Second Amendment to Loan and Security Agreement, dated September 30,
1997, among Transition Networks, Inc., and First Bank National
Association, amending the terms of the Loan and Security Agreement
dated August 9, 1996 (filed as Exhibit 10.11 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997 and incorporated herein by reference).
10.16 Eighth Amendment to Amended and Restated Loan and Security Agreement,
dated September 30, 1997, among Americable, Inc., Cable Distribution
Systems, Inc., and First Bank National Association, amending the terms
of the Amended and Restated Loan and Security Agreement dated
August 9, 1996 (filed as Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997 and
incorporated herein by reference).
10.17 Assumption Agreement And Ninth Amendment To Amended And Restated Loan
and Security Agreement And Waiver dated as of March 5, 1998, among
Americable, Inc., Cable Distribution Systems, Inc., Enstar Networking
Corporation, and U.S. Bank National Association, amending the terms
of the Amended and Restated Loan and Security Agreement dated
September 30, 1997 (filed as exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference).
10.18 Third Amendment to Loan and Security Agreement and Waiver, dated
March 27, 1998, among Transition Networks, Inc., and U.S. Bank
National Association, amending the terms of the Amended and Restated
Loan and Security Agreement and Waiver dated September 30, 1997 (filed
as exhibit 10.13 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by reference).
10.19 Assignment of Lease, dated as of January 1999, by and among Enstar
Networking Corporation, Vicom Incorporated and Lexmark Office One
Partners LLP.
-31-
<PAGE>
+10.20 Americable, Inc. 1999 Stock Option Plan (filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1, Registration No.
333-24007 and incorporated herein by reference).
+10.21 Enstar Networking Corporation Stock Option Plan.
10.22 Fourth Amendment to Loan and Security Agreement dated as of June 30,
1998, among Transition Networks, Inc., and U.S. Bank National
Association, amending the terms of the Amended and Restated Loan and
Security Agreement and Waiver dated September 30, 1997 (filed as
exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, and incorporated herein by reference).
10.23 Tenth Amendment to Amended and Restated Loan and Security Agreement
dated as of June 30, 1998, among Americable, Inc., Cable
Distribution Systems, Inc., Enstar Networking Corporation, and
U.S. Bank National Association, amending the terms of the Amended
and Restated Loan and Security Agreement dated September 30, 1997
(filed as exhibit 10.23 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, and incorporated herein by
reference).
10.24 Eleventh Amendment to Amended and Restated Loan and Security Agreement
dated as of August 31, 1998, among Americable, Inc., Cable
Distribution Systems, Inc., Enstar Networking Corporation, and
U.S. Bank National Association, amending the terms of the Amended
and Restated Loan and Security Agreement dated June 30, 1997
(filed as exhibit 10.24 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, and incorporated herein by
reference).
10.25 Lease Agreement dated September 23, 1998, by and between Lexmark
Office One Partners, LLP, a North Dakota limited liability
partnership, and Enstar Networking Corporation of Eden Prairie,
Minnesota (filed as exhibit 10.25 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, and incorporated
herein by reference).
10.26 Lease Agreement dated September 14, 1998, by and between PYLON, INC.,
a North Carolina corporation, and Americable, Inc., a Minnesota
corporation (filed as exhibit 10.26 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998, and
incorporated herein by reference).
10.27 Twelfth Amendment to Amended and Restated Loan and Security Agreement
dated November 30, 1998, among Americable, Inc., Cable
Distribution Systems, Inc., Enstar Networking Corporation, and
U.S. Bank National Association, amending the terms of the Amended
and Restated Loan and Security Agreement dated August 31, 1998.
10.28 Thirteenth Amendment to Amended and Restated Loan and Security
Agreement and Consent dated January 8, 1999, among Americable, Inc.,
Enstar Networking Corporation, and U.S. Bank National Association,
amending the terms of the Amended and Restated Loan and Security
Agreement dated November 30, 1998.
-32-
<PAGE>
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors - Ernst & Young LLP.
27.1 Financial Data Schedule.
99.1 Cautionary Statement Regarding Forward Looking Statements.
</TABLE>
- --------------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Annual Report on Form 10-K pursuant to Item
601(b)(10)(iii)(A) of Regulation S-K.
(b) Reports on Form 8-K. On December 22, 1998, the Company filed a current
report on Form 8-K to report the disposition of assets in connection
with the sale of the stock of Transition Networks, Inc. (Item 2). The
filing included the Company's pro forma financial statements reflecting
the disposition (Item 7).
(c) See the Exhibits set forth above.
(d) See the Financial Statement Schedules of the Company, and Subsidiaries
Consolidated Financial Statements and the CorVel Corporation Financial
Statement Schedule attached as a separate section of this report.
-33-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1999
ENSTAR INC.
By /s/ JEFFREY J. MICHAEL
------------------------------------
Jeffrey J. Michael, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C> <C>
By /s/ JEFFREY J. MICHAEL Dated: March 30, 1999
------------------------------------------------
Jeffrey J. Michael
President, Chief Executive Officer and Director
(principal executive officer)
By /s/ THOMAS S. WARGOLET Dated: March 30, 1999
------------------------------------------------
Thomas S. Wargolet
Chief Financial Officer and Secretary (principal
financial and accounting officer)
By /s/ MILES E. EFRON Dated: March 30, 1999
------------------------------------------------
Miles E. Efron
Director
By /s/ JAMES H. MICHAEL Dated: March 30, 1999
------------------------------------------------
James H. Michael
Director
By Dated: March 30, 1999
------------------------------------------------
Richard J. Braun
Director
</TABLE>
-34-
<PAGE>
ENSTAR INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF ENSTAR PAGE
------------------------------ ----
<S> <C>
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-2
Consolidated Balance Sheets as of December 31, 1998
and 1997.................................................. F-3
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997, and 1996............. F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997, and 1996............. F-5
Notes to Consolidated Financial Statements.................. F-6
Report of Independent Certified Public Accountants.......... F-22
Schedule II -- Valuation and Qualifying Accounts............ F-23
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF CORVEL
------------------------------
<S> <C>
Report of Independent Auditors.............................. S-1
Consolidated Statements of Income for the three years
ended March 31, 1996, 1997, and 1998...................... S-2
Consolidated Balance Sheets as of March 31, 1997 and 1998... S-3
Consolidated Statements of Stockholders' Equity for the
three years ended March 31, 1996, 1997, and 1998.......... S-4
Consolidated Statements of Cash Flows for the three years
ended March 31, 1996, 1997, and 1998...................... S-6
Notes to Consolidated Financial Statements.................. S-7
Schedule II -- Valuation and Qualifying Accounts............ S-19
</TABLE>
F-1
<PAGE>
ENSTAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues.........................................$43,358 $38,632 $48,667
Operating and product costs...................... 34,316 30,115 37,667
------- ------- -------
Gross profit..................................... 9,042 8,517 11,000
Selling, general and administrative expenses..... 12,731 13,284 10,956
------- ------- -------
Operating income (loss).......................... (3,689) (4,767) 44
Interest expense, net............................ (1,336) (722) (169)
------- ------- -------
Loss before taxes and equity in earnings
of unconsolidated subsidiary................... (5,025) (5,489) (125)
Income tax provision (benefit)................... (1,850) (2,078) 25
------- ------- -------
Loss before equity in earnings
of unconsolidated subsidiary................... (3,175) (3,411) (150)
Equity in earnings of
unconsolidated subsidiary...................... 1,512 1,349 1,304
------- ------- -------
Income (loss) from continuing operations......... (1,663) (2,062) 1,154
Discontinued operations, net of taxes
Income (loss) from operations.................. 946 (199) (82)
Gain on disposition............................ 2,490 --- ---
------- ------- -------
3,436 (199) (82)
------- ------- -------
Net income (loss)....... ........................$ 1,773 $(2,261) $ 1,072
======= ======= =======
Basic and diluted income (loss) per share
Continuing operations..........................$ (0.53) $ (0.63) $ 0.34
Discontinued operations........................$ 1.09 $ (0.06) $ (0.02)
------- ------- -------
Net income (loss) per share......................$ 0.56 $ (0.69) $ 0.32
======= ======= =======
Basic and diluted
weighted average shares outstanding............ 3,152 3,289 3,309
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE>
ENSTAR INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.........................$17,155 $12,563
Accounts receivable, net of allowance
for doubtful accounts ($374 in 1998
and $289 in 1997)............................... 4,769 4,979
Inventories....................................... 1,734 2,630
Prepaid expenses and other........................ 161 285
Net assets of discontinued operations............. -- 3,295
------- -------
Total current assets........................... 23,819 23,752
Property and equipment, net......................... 1,072 1,390
Goodwill............................................ 4,486 4,642
Investment in unconsolidated subsidiaries........... 13,293 11,170
Other............................................... 903 152
------- -------
$43,573 $41,106
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable to bank.............................$ 1,680 $ 2,380
Current maturities of long-term debt.............. 4,899 134
Accounts payable.................................. 3,186 2,827
Accrued expenses.................................. 4,580 4,835
------- -------
Total current liabilities.................... 14,345 10,176
Long-term debt, less current maturities............. 14,104 15,993
Deferred income taxes............................... 1,539 --
Commitments and contingencies....................... -- --
Shareholders' equity................................ 13,585 14,937
------- -------
$43,573 $41,106
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
ENSTAR INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- ADDITIONAL OPERATING TOTAL
SHARES PAID-IN RETAINED UNIT SHAREHOLDERS'
ISSUED AMOUNT CAPITAL EARNINGS EQUITY EQUITY
------ ------ ---------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996 -- $ -- $ -- $ -- $ 19,694 19,694
Net income........... -- -- -- -- 868 868
Effect of equity
transactions of
unconsolidated
subsidiary.......... -- -- -- -- (45) (45)
Constructive
dividend............ -- -- -- -- (309) (309)
------ ---- ------- ------- -------- ------
Balance at
November 6, 1996 -- -- -- -- 20,208 20,208
Contribution of common
stock of Americable,
Transition and CorVel
to ENStar Inc. by
North Star Universal,
Inc. (NSU).......... -- -- 20,208 -- (20,208) --
Additional capital
invested............ -- -- 660 -- -- 660
Net income from
November 7, 1996
through December 31,
1996................ -- -- -- 204 -- 204
Effect of equity
transactions of
unconsolidated
subsidiary.......... -- -- (125) -- -- (125)
Issuance of shares of
ENStar common stock
to shareholders...3,304,279 33 (33) -- -- --
--------- ---- ------- ------- -------- ------
Balance at
December 31, 1996 3,304,279 33 20,710 204 -- 20,947
Net loss............. -- -- -- (2,261) -- (2,261)
Effect of equity
transactions of
unconsolidated
subsidiary.......... -- -- (1,434) -- -- (1,434)
Constructive dividend
to NSU.............. -- -- (2,082) -- -- (2,082)
Purchase of
common stock....... (37,290) -- (233) -- -- (233)
--------- ---- ------- ------- -------- ------
Balance at
December 31, 1997 3,266,989 33 16,961 (2,057) -- 14,937
Net income........... -- -- -- 1,773 -- 1,773
Effect of equity
transactions of
unconsolidated
subsidiaries........ -- -- (640) -- -- (640)
Adjustment of net
operating loss
carryforward
allocation.......... -- -- (610) -- -- (610)
Purchase of
common stock...... (290,266) (3) (1,872) -- -- (1,875)
--------- ---- ------- ------- -------- ------
Balance at
December 31, 1998 2,976,723 $ 30 $13,839 $ (284) $ -- $13,585
========= ==== ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
ENSTAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)..................................$ 1,773 $(2,261) $ 1,072
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Equity in earnings of unconsolidated
subsidiary.................................... (1,512) (1,349) (1,304)
Depreciation and amortization................... 1,204 815 683
Deferred income taxes........................... (1,855) (2,078) 34
Gain on sale of discontinued operation.......... (2,490) -- --
Net (income) loss from discontinued operation... (946) 199 82
Discontinued operation - other.................. 518 808 1,112
Changes in operating assets and liabilities,
net of effects from business dispositions
Accounts receivable........................... (1,263) 1,204 751
Inventories................................... 731 (205) 721
Accounts payable, accrued expenses and other.. 132 1,195 (2,331)
-------- -------- ------
Net cash provided by (used in)
operating activities.......................... (3,708) (1,672) 820
Cash flows from investing activities
Capital expenditures............................... (832) (1,145) (627)
Collections on notes receivable.................... -- -- 258
Proceeds from sale of discontinued operations...... 8,903 -- --
Other.............................................. (1) (79) (240)
-------- ------- -------
Net cash provided by (used in)
investing activities............................. 8,070 (1,224) (609)
Cash flows from financing activities
Long term debt repayments.......................... (50,591) (47,671) (56,411)
Long term debt borrowings.......................... 49,891 49,341 56,396
Proceeds from long-term debt....................... 3,004 15,183 944
Payments on long-term debt......................... (128) -- (1,071)
Purchase of common stock........................... (1,875) (233) --
Additional capital invested
(constructive dividends)......................... -- (2,082) 351
Other.............................................. (71) 192 52
-------- -------- --------
Net cash provided by financing activities.......... 230 14,730 261
-------- -------- --------
Net increase in cash
and cash equivalents............................. 4,592 11,834 472
Cash and cash equivalents at
beginning of year.................................. 12,563 729 257
-------- -------- --------
Cash and cash equivalents at end of year.............$ 17,155 $12,563 $ 729
======== ======== ========
Cash paid during the year for:
Interest...........................................$ 1,336 $ 722 $ 169
Taxes.............................................. 20 69 --
See Note 2.
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS
ENStar Inc. ("ENStar" or the "Company") is a holding company principally
comprised of two operating companies, Americable, Inc. ("Americable") and Enstar
Networking Corporation ("Enstar Networking"), and equity investments in CorVel
Corporation ("CorVel") and Vicom, Incorporated ("Vicom"). ENStar was formerly
an operating unit of North Star Universal, Inc. ("North Star"). In November
1996, North Star contributed the operating unit's assets to ENStar. On
February 28, 1997 North Star, in connection with its merger with Michael Foods,
Inc. ("Michael Foods"), distributed its ownership interest in ENStar to North
Star's shareholders through a tax free dividend, thus causing ENStar to become
a publicly held company.
In December 1998, ENStar sold Transition Networks, Inc. ("Transition") for
approximately $9 million cash. As described further in Note 3, the accompanying
consolidated financial statements and related notes have been restated for all
periods to reflect the effects of this discontinued operation. Also, effective
December 31, 1998, ENStar sold certain assets of Enstar Networking to Vicom in
exchange for common stock of Vicom and a promissory note (see Note 4). As a
result of this transaction, ENStar owns a 38.5% ownership interest in Vicom,
which is accounted for as an unconsolidated subsidiary using the equity method
of accounting. Vicom is a telecommunications company providing services to
integrate voice, data and video solutions.
Americable is a distributor of premise wiring, connectivity products, and
low-end networking electronics, with sales throughout the United States.
Americable's sales represents approximately 43% of the Company's consolidated
sales. Enstar Networking is a security integrator providing solutions to
design, manage, and secure corporate network infrastructures and makes up the
remaining 57% of sales. CorVel is a health care services company. At December
31, 1998 and 1997, the Company had a 25% ownership interest in CorVel, which is
accounted for as an unconsolidated subsidiary using the equity method of
accounting.
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. For the period prior to November 1996, financial statements are
those of the combined operating units described in note 1. Operating unit
equity was converted to contributed capital at the time North Star contributed
the capital stock of Americable, Transition, and CorVel to ENStar. There was no
change in the historical cost basis of the assets and liabilities of any of the
entities or investment contributed to ENStar. The consolidated, and formerly
combined, financial statements include an allocation of general and
F-6
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (Continued)
administrative costs incurred by North Star in the management of the operating
companies. Management believes these allocations are reasonable and present the
operations of the Company as though it had operated on a stand-alone basis.
Previously, operating unit equity included the historical equity of each entity,
the net investment in CorVel and intercompany payables owed to North Star. The
net annual advances between the former operating unit and North Star were
considered additional capital invested from, or constructive dividend to, North
Star. Accordingly, the accompanying consolidated financial statements may not
necessarily be indicative of the results that would have been obtained if the
Company had been operated as a stand alone entity throughout all periods
presented.
CASH AND CASH EQUIVALENTS The Company considers its highly liquid temporary
investments with original maturities of three months or less to be cash
equivalents. The carrying value of cash and cash equivalents approximate fair
value because of the short-term maturity of these investments.
ACCOUNTS RECEIVABLE The Company grants credit to customers in the normal
course of business, but generally does not require collateral or any other
security to support amounts due. Management performs ongoing credit evaluations
of customers. The Company maintains an allowance for potential credit losses
which when realized, have been within management expectations.
INVENTORIES Inventories are stated at the lower of average cost (determined
on a first-in, first-out basis) or market. Inventories consist exclusively of
finished goods.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost.
Depreciation and amortization for financial reporting purposes are provided on
the straight-line method over the estimated useful lives of the respective
assets which are generally three to five years. Accelerated methods are used
for income tax reporting. Property and equipment consist of the following
(in thousands):
<TABLE>
<CAPTION> DECEMBER 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Leasehold improvements..................................$ 126 $ 167
Office and computer equipment........................... 3,257 3,230
------ ------
3,383 3,397
Less -- accumulated depreciation and amortization....... 2,311 2,007
------ ------
$1,072 $1,390
====== ======
</TABLE>
F-7
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (Continued)
GOODWILL Goodwill is amortized on a straight-line basis over a period of 40
years. Accumulated amortization was $1,858,000 and $1,701,000 at December 31,
1998 and 1997. The Company maintains separate financial records for each of its
acquired entities and evaluates its goodwill annually to determine potential
impairment by comparing the carrying value to the undiscounted future cash flows
of the related assets. The Company adjusts the value of a subsidiary's goodwill
if an impairment is identified.
ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION> DECEMBER 31,
----------------
1998 1997
---- ----
<S> <C> <C>
Payroll and related benefits..............................$1,011 $ 550
Insurance reserves........................................ 397 544
Business disposition obligations.......................... 2,117 1,974
Other..................................................... 1,055 1,767
------ ------
$4,580 $4,835
====== ======
</TABLE>
The business disposition obligations primarily represent a lease commitment
of a business disposed by North Star. These obligations were part of the
liabilities assumed by ENStar under the indemnification agreement discussed in
Note 8.
REVENUE RECOGNITION The Company recognizes revenue from product sales at
the time product is shipped to a customer. Service revenue is recognized at the
time service is provided or ratably over the contractual service period.
ADVERTISING The Company expenses advertising costs as incurred.
Advertising costs charged to expense were approximately $217,000 in 1998,
$329,000 in 1997, and $138,000 in 1996.
NET INCOME (LOSS) PER SHARE Basic net earnings (loss) per share is computed
by dividing net earnings (loss) by the weighted average number of outstanding
common shares. Diluted net earnings (loss) per share is computed by dividing
net earnings (loss) by the weighted average number of outstanding common shares
and common share equivalents relating to stock options, when dilutive. Options
to purchase 291,750 and 90,750 shares of common stock with weighted average
exercise prices of $7.87 and $8.97 were outstanding during 1998 and 1997, but
were excluded from the computation of common share equivalents because they were
antidultive.
F-8
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (Continued)
For 1996, net income (loss) per share was computed based on the weighted
average number of shares of North Star common stock outstanding (9,927,000).
This weighted average number of shares was adjusted to reflect the distribution
of ENStar Inc. common stock to North Star shareholders whereby one share of
ENStar Inc. common stock was issued to each holder of three shares of North
Star common stock.
NEW ACCOUNTING PRONOUNCEMENTS The American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is
effective for the Company beginning in 1999. SOP 98-1 should not have a
material effect on the financial position, results of operations, or cash flows
of the Company when adopted.
CAPITAL STOCK The Company has available for issue 100,000,000 shares,
consisting of 20,000,000 shares of preferred stock, par value of $.01 per share,
of which none have been issued or are outstanding at December 31, 1998, and
80,000,000 shares of common stock, par value of $.01 per share, of which
3,304,279 were issued in February 1997 in connection with the distribution of
ENStar common stock to NSU shareholders. These shares have been reported in the
Company's financial statements as if they were outstanding at December 31, 1996.
During 1997, the Company repurchased 37,290 shares of its common stock using a
modified "Dutch Auction" self tender offer at an average share price of $6.25.
In March of 1998, the Company's Board of Directors authorized the repurchase of
up to 350,000 shares of common stock. During 1998, the Company purchased
290,266 shares for approximately $1,875,000.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - NON-CASH ITEMS During
1998, in connection with the sale of the Midwest division of Enstar Networking
to Vicom in a non-cash transaction, the company sold net operating assets of
$1,486,000 to Vicom for 1,350,000 shares of Vicom stock and a $750,000
note receivable. Corvel periodically has transactions in its own capital stock
(stock repurchases and the issuance of additional shares due to stock option
exercises) that affect the Company's investment in unconsolidated subsidiary.
As a result of these transactions, the Company has experienced a reduction in
its investment in unconsolidated subsidiary of $938,000, $2,349,000 and $337,000
during 1998, 1997 and 1996. These transactions, net of tax, are also reflected
as a reduction in the Company's additional paid-in capital of $640,000,
$1,434,000, and $170,000 for 1998, 1997, and 1996.
STOCK BASED COMPENSATION The Company utilizes the intrinsic value method of
accounting for its employee stock based compensation plans. Information related
to the fair value based method of accounting is contained in Note 10.
F-9
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES In the preparation of the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and related revenues and
expenses. Actual results could differ from the estimates used by management.
RECLASSIFICATIONS Certain 1997 and 1996 amounts have been reclassified to
conform to the 1998 presentation.
NOTE 3 - DISCONTINUED OPERATIONS
On December 10, 1998, ENStar sold all of Transition's common stock to
Communications Systems, a telecommunications company, for approximately
$9 million which was received in cash. Transition designs, manufactures, and
markets connectivity devices and network applications. The gain on disposition
was approximately $2.5 million, net of income taxes of approximately $1.6
million.
Results of operations of Transition are reflected in discontinued
operations in the accompanying consolidated statement of operations. Operating
results of Transition through the date of sale were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues..............................$21,134 $15,720 $15,456
======= ======= =======
Income (loss) before income taxes.....$ 1,546 $ (299) $ (132)
Income tax provision (benefit)........ 600 (100) (50)
------- ------- -------
Net income (loss) from
discontinued operations.............$ 946 $ (199) $ (82)
======= ======= =======
</TABLE
F-10
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 - DISCONTINUED OPERATIONS (Continued)
At December 31, 1997, the net asset of discontinued operations consist of
the following (in thousands):
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Working capital.......................$ 2,665
Property and equipment................ 774
Other assets.......................... 31
Long term debt........................ (175)
-------
$ 3,295
=======
</TABLE>
NOTE 4 - SALE OF ASSETS
Effective December 31, 1998, ENStar sold the assets of the Midwest region
of Enstar Networking to Vicom. The transaction involved the sale of
substantially all of the assets of the business in exchange for 1,350,000 shares
of Vicom common stock and a $750,000 promissory note to ENStar bearing interest
at an annual rate of 9%, interest payable quarterly, with the principal due on
or before December 2003. There was no gain or loss on this transaction. As a
result of this transaction, ENStar owns a 38.5% ownership interest in Vicom,
which is accounted for as an unconsolidated subsidiary using the equity method
of accounting.
The following sets forth the unaudited consolidated results of operations
as if this transaction had occurred as of January 1, 1998 (in thousands):
<TABLE>
<CAPTION>
1998
----
<S> <C>
Revenues..............................$33,546
Loss from continuing operations....... (1,050)
Basic and diluted loss per share
from continuing operations..........$ (.33)
</TABLE>
NOTE 5 -- INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company's unconsolidated subsidiaries consist of its investments in
CorVel and Vicom. CorVel is a health care services company with a fiscal year
end of March 31. Vicom is a telecommunications company with a December 31,
F-11
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES (Continued)
year end. For the year ended December 31, 1997, Vicom had total assets of
approximately $4,418,000 and net earnings of $56,000 on revenues of $6,639,000.
The Vicom financial information for the year ended December 31, 1998, is not yet
available. The following is unaudited summarized balance sheet and income
statement information for CorVel as of, and for the twelve month period ended
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
CorVel
------
<S> <C>
Current assets.......................$ 40,329
Total assets......................... 64,538
Current liabilities.................. 11,466
Noncurrent liabilities............... 2,649
Revenues............................. 159,500
Gross profit......................... 28,331
Net income (loss).................... 10,087
</TABLE>
At December 31, 1998, shareholders' equity includes approximately $4.8
million of unremitted earnings related to the Company's investment in CorVel.
At December 31, 1998, the fair value of the Company's investments in CorVel,
based on the closing market price, was approximately $36.1 million. As the
Vicom stock is not widely traded on the local over-the-counter market, the
market value of the Company's investment in Vicom was determined in a
non-cash transaction to be approximately $600,000 based upon the net fair value
of the assets sold, less the proceeds received from Vicom and the costs
related to the transaction.
NOTE 6 -- NOTES PAYABLE AND LONG-TERM DEBT
Americable and Enstar Networking maintained a revolving line of credit
facility which provided borrowings up to $4 million during the year ended
December 31, 1998 and is due in October 1999. Borrowings under this facility
were based on eligible accounts receivable and inventory with interest at prime
(7.75% at December 31, 1998). At December 31, 1998, there were outstanding
borrowings of $1,680,000, and approximately $1.3 million of available
borrowings. The note contains certain restrictive covenants, the most
significant of which are capital expenditure limitations and limitations on
operating losses. Under the terms of the credit agreement, ENStar is required
to make capital contributions to Americable to the extent Americable
(including Enstar Networking) incurs pretax losses in excess of specified
levels. At December 31, 1998, the company was in compliance with all
covenants under this agreement.
F-12
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- NOTES PAYABLE AND LONG-TERM DEBT (Continued)
During 1998, ENStar provided an aggregate of approximately $2.5 million
in cash to Americable pursuant to the terms of the credit agreement.
Additional cash investments from ENStar may be required in 1999 to fund
operations and capital expenditures of Americable and Enstar Networking.
Effective January 1, 1999, this agreement was amended to provide a maximum
lending limit of $3 million based upon a borrowing base of eligible accounts
receivable, with an effective interest rate of prime plus 1% (8.75% at January
1, 1999). The Company believes it will be able to renew or obtain new
agreements at substantially the same terms and conditions.
The carrying value of long-term debt, which approximates fair value,
consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Subordinated debentures...............$19,003 $16,127
Less current maturities............... 4,899 134
------- -------
$14,104 $15,993
======= =======
</TABLE>
During 1997, the Company registered with the Securities and Exchange
Commission $25 million of debentures, of which approximately $6 million remain
unissued at December 31, 1998. Subordinated debentures are unsecured and due in
varying monthly installments through 2003 with a weighted average interest rates
of 9.60% and 9.62% at December 31, 1998 and 1997.
F-13
<PAGE>
Aggregate minimum annual principal payments of long-term debt are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999..................................$ 4,899
2000.................................. 647
2001.................................. 44
2002.................................. 5,936
2003.................................. 989
Thereafter............................ 6,488
-------
$19,003
=======
</TABLE>
NOTE 7 -- INCOME TAXES
The activity of the Company through February 1997, was included in the
income tax return of North Star. For financial reporting purposes, the Company
has been allocated a provision for income taxes in an amount generally
equivalent to the provision that would have resulted had the Company filed
separate income tax returns. The provision for income taxes from continuing
operations consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current
Federal..............................$ -- $ -- $ (8)
State................................ 5 -- (1)
------- ------- -------
5 -- (9)
------- ------- -------
Deferred
Federal.............................. (1,617) (1,812) 30
State................................ (238) (266) 4
------- ------- -------
(1,855) (2,078) 34
------- ------- -------
$(1,850) $(2,078) $ 25
======= ======= =======
</TABLE>
F-14
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES (Continued)
The following is a reconciliation of the income tax provision (benefit)
at the federal statutory rate to the effective rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate.................. (34.0)% (34.0)% (34.0)%
State income taxes...................... (4.6) (4.9) 2.4
Goodwill amortization................... 1.1 1.0 43.2
Other................................... 0.7 -- 8.4
------ ------ ------
(36.8)% (37.9)% 20.0%
====== ====== ======
</TABLE>
The tax effects of the cumulative temporary differences resulting in the
net deferred tax asset (liability) are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
---- ----
<S> <C> <C>
Investment in CorVel...................$(4,801) $(4,187)
Accrued expenses not
deductible until paid................ 1,789 1,634
Net operating loss carryforwards....... 1,898 3,158
Other.................................. (425) (571)
------- -------
(1,539) 34
Valuation allowance.................... -- (34)
------- -------
$(1,539) $ --
======= =======
</TABLE>
F-15
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES (Continued)
To the extent the Company's financial reporting basis in its investment in
its unconsolidated subsidiary exceeds its tax basis, and is not expected to be
realized in a tax-free manner, the Company records a deferred tax liability.
The Company's deferred tax liability includes, among other things, the initial
tax effect of $1.8 million for the difference in the financial reporting and tax
basis of the Company's investment in CorVel following the initial public
offering along with the income taxes recorded on the equity in earnings of
CorVel of $1,008,000 in 1998, $897,000 in 1997, and $869,000 in 1996.
In 1997, the Company was allocated, as required under the federal
consolidated income tax regulations, approximately $8,100,000 of net operating
loss carryforwards from North Star at the time of its merger with Michael Foods,
Inc. The tax benefit of a portion of these available carryforwards $2,532,000
was treated as additional capital invested by North Star and the Company's
deferred tax liability was reduced by a like amount. In 1998, the net operating
loss previously allocated was adjusted to agree with the final tax return filed
by North Star for the period ending February 28, 1997 (the date of the merger).
The $610,000 tax effect of the correction was treated as a reduction in
additional paid-in capital and an increase in the Company's deferred tax
liability. At December 31, 1998, the entire remaining Federal operating loss
carryforward of $3,974,000 was available to the Company. These loss
carryforwards begin to expire in 2009.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
LEASING COMMITMENTS The Company leases certain equipment and facilities
under operating leases. The future aggregate minimum rental payments under such
leases which expire at various dates through 2001 are $408,000 in 1999,
$277,000 in 2000 and $99,000 in 2001.
Certain of the leases provide for payment of taxes and other expenses.
Total rent expense on all leases including month-to-month leases for the years
ended December 31 was $654,000 in 1998, $782,000 in 1997, and $795,000 in 1996.
CONTINGENCIES As a result of the transfer of a substantial portion of the
assets of North Star to ENStar, ENStar entered into a supplemental indenture
agreement with North Star in which ENStar assumed the obligations of North Star
with respect to certain debenture indebtedness of North Star. North Star
however, separately agreed to satisfy, and hold ENStar harmless from, all
payment and other obligations with respect to such debenture indebtedness. The
amount of such indebtedness, net of cash transferred to Michael Foods, was
$21,250,000 at the date of the North Star merger with Michael Foods. During
1997, Michael Foods repaid all outstanding indebtedness under the old North
F-16
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
Star debenture program. In addition, ENStar, through the operation of an
indemnification agreement, is contingently liable for any, and all, liabilities
arising from the activities of North Star, through, and including, the
reorganization of North Star and Michael Foods. Under the terms of the
indemnification agreement, the Company is required to maintain certain minimum
levels of market capitalization or net worth for a period of five years.
NOTE 9 -- EMPLOYEE RETIREMENT PLAN
ENStar maintains an incentive savings plan for its employees. Full-time
employees that meet certain requirements are eligible to participate in the
plan. Contributions are made annually, primarily at the discretion of ENStar's
Board of Directors. Contributions of $208,000, $205,000, and $138,000, were
charged to operations in the years ended December 31, 1998, 1997 and 1996.
NOTE 10 -- STOCK OPTION PLANS
The Company and each of its operating subsidiaries maintain non-qualified
stock option plans in their own stock for the benefit of selected officers and
key employees. The ENStar and Americable plans were approved by the respective
Company's Board of Directors in 1996. The ENStar plan reserved 300,000 shares
for issuance while Americable's plan reserved 600,000 shares. In 1998, the
ENStar shareholders approved an additional 200,000 shares for issuance related
to the ENStar stock option plan raising the total available shares to 500,000.
The Enstar Networking plan was approved in 1998 and reserved 600,000 shares.
Options granted under these plans have an exercise price equal to the fair
market value on the date of the grant, generally have a ten year term, vest
ratably over four years and provide that the options shall expire at the end of
such period.
Option transactions under these plans since adoption are summarized as
follows:
[CAPTION]
<TABLE>
ENStar Americable Enstar Networking
---------------- ---------------- -----------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1, 1996 -- $ -- -- $ -- -- $ --
Granted............ 89,250 9.00 345,000 0.82 -- --
------------------------------------------------------
<PAGE>
Outstanding at
December 31, 1996 89,250 9.00 345,000 0.82 -- --
Granted............270,000 7.38 45,000 0.82 -- --
Cancelled.......... -- -- (240,000) 0.82 -- --
------------------------------------------------------
Outstanding at
December 31, 1997.....359,250 7.78 150,000 0.82 -- --
Granted............ 53,000 7.33 83,000 1.25 435,000 1.00
Cancelled.......... -- -- (125,000) 0.82 (143,000) 1.00
------------------------------------------------------
Outstanding at
December 31, 1998.....412,250 $7.72 108,000 $1.23 292,000 $1.00
======================================================
Options exercisable
at December 31:
1996............... -- $ -- 101,000 $0.82 -- $ --
======================================================
1997............... 31,313 $9.00 40,000 $0.82 -- $ --
======================================================
1998...............118,125 $8.07 5,000 $1.15 -- $ --
======================================================
</TABLE>
F-17
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCK OPTION PLANS (Continued)
The following table summarizes information concerning currently outstanding
options:
[CAPTION]
<TABLE>
OPTIONS OUTSTANDING
Weighted average
Number remaining Weighted average
of shares contractual life and exercise price
----------------------------------------------------
<S> <C> <C> <C>
ENStar................. 3,000 9.5 years $6.50
320,000 9.1 years 7.38
89,250 7.2 years 9.00
-------
412,250
=======
Americable............. 25,000 8.5 years $1.15
83,000 9.2 years 1.25
-------
108,000
=======
Enstar Networking...... 292,000 9.1 years $1.00
=======
</TABLE>
Had the Company or its operating subsidiaries elected to use the fair
value method for valuing options granted, the pro forma effect on net
income would have been additional expense of $190,000, or 4 cents per
share in 1998, $69,000, or 1 cent per share in 1997, and $73,000, or
2 cents per share in 1996.
F-18
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCK OPTION PLANS (Continued)
The following represents the weighted average fair value of options
granted for the respective entities and the weighted average assumptions
used in the Black-Scholes option pricing model:
[CAPTION]
<TABLE> Enstar
ENStar Americable Networking
--------------------- --------------------- -------------
1998 1997 1996 1998 1997 1996 1998
--------------------- --------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fair value of
options granted..........$2.82 $2.76 $3.89 $0.48 $0.41 $0.52 $0.38
Assumptions used:
Dividends................$ -- $ -- $ -- $ -- -- $ -- $ --
Volatility............... 50.0% 49.6% 57.5% 50.0% 70.0% 98.0% 50.0%
Risk-free interest rate.. 5.1% 5.5% 5.5% 5.1% 5.9% 5.9% 5.1%
Expected option term.....3 years 3 years 3 years 3 years 3 years 3 years 3 years
</TABLE>
NOTE 11 - BUSINESS SEGMENTS
ENStar consists of two operating segments: Americable and Enstar
Networking (Enstar Networking's assets and balance sheet activity for
1996 were included within Americable as it was formerly a division of
Americable). The operating results of Enstar Networking are segregated
with respect to the Midwest operations sold to Vicom (see Note 4)
("ENC - business disposition").
The Company identifies its segments based on the Company's organizational
structure, which is by operating company (see Note 1 for a description of the
businesses). Operating profit represents earnings before interest expense,
interest income, income taxes, and equity in earnings of unconsolidated
subsidiary. Intersegment sales are made at market prices. Corporate allocates
costs of certain general and administrative expenses to the various segments
based primarily upon the percentage of services performed, which approximates
the costs associated with each segment.
F-19
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 - BUSINESS SEGMENTS (Continued)
Certain financial information on the Company's segments is as follows:
<TABLE>
<CAPTION> YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues - external
Americable................................$17,673 $15,264 $18,935
Enstar Networking......................... 14,271 7,331 5,933
------- ------- -------
31,944 22,595 24,868
ENC - business disposition................ 11,414 16,037 23,799
------- ------- -------
Total Revenues - external..............$43,358 $38,632 $48,667
======= ======= =======
Revenues - intersegment
Americable................................$ 1,602 $ 3,430 $ 3,403
ENC - business disposition................ 146 -- --
------- ------- -------
Total Revenues - intersegment..........$ 1,748 $ 3,430 $ 3,403
======= ======= =======
Operating Income (Loss)
Americable................................$ 489 $ 379 $ 1,514
Enstar Networking......................... (2,147) (1,980) (867)
Corporate................................. (1,018) (1,305) (1,127)
------- ------- -------
(2,676) (2,906) (480)
ENC - business disposition................ (1,013) (1,861) 524
------- ------- -------
Total Operating Income (Loss)..........$(3,689) $(4,767) $ 44
======= ======= =======
Interest Expense
Americable................................$ 111 $ 135 $ 184
Enstar Networking......................... 123 -- --
Corporate................................. 1,102 587 (15)
------- ------- -------
Total Interest Expense.................$ 1,336 $ 722 $ 169
======= ======= =======
F-20
<PAGE>
ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 - BUSINESS SEGMENTS (Continued)
Assets -
Americable................................$11,633 $ 9,130 $14,547
Enstar Networking......................... 2,101 5,115 --
Corporate................................. 29,839 26,861 18,771
------- -------- -------
Total Assets...........................$43,573 $41,106 $33,318
======= ======= =======
Depreciation and Amortization -
Americable................................$ 574 $ 747 $ 669
Enstar Networking......................... 612 52 --
Corporate................................. 18 16 14
------- ------- -------
Total Depreciation and Amortization....$ 1,204 $ 815 $ 683
======= ======= =======
Capital Expenditures -
Americable................................$ 311 $ 150 $ 556
Enstar Networking......................... 517 992 --
Corporate................................. 4 3 71
------- ------- -------
Total Capital Expenditures.............$ 832 $ 1,145 $ 627
======= ======= =======
</TABLE>
NOTE 12 - SUBSEQUENT EVENT
On March 8, 1999, the Company announced that it had established a Special
Committee to consider a proposal by the majority shareholders to acquire the
outstanding shares of ENStar common stock not already owned by them or certain
entities under their control. The majority shareholders have preliminarily
proposed that the shares not controlled by them be acquired for a cash price of
$10.00 per share, however, the proposal is subject to change based on a
number of factors including determination of the structure of the transaction.
The Special Committee will evaluate the fairness of any proposed transaction to
all shareholders of the Company, and will engage counsel and financial advisors
in connection with its role. The majority shareholders and their controlled
entities own approximately 1,920,000 shares, or 65%, of the Company's common
stock.
F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
ENStar Inc.
We have audited the accompanying consolidated balance sheets of ENStar Inc.
and subsidiaries, as of December 31, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of ENStar Inc. and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
We have also audited Schedule II for each of the three years in the period
ended December 31, 1998. In our opinion, this schedule, when considered in
relationship to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 19, 1999 (except
for Note 12 as to which
the date is March 8, 1999)
F-22
<PAGE>
ENSTAR INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGES
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS- AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(1) PERIOD
----------- ---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
1996.............................. 297 92 -- (42) 347
1997.............................. 347 106 -- (164) 289
1998.............................. 289 127 -- (42) 374
</TABLE>
- --------------------------
(1) Write off of accounts deemed uncollectible.
F-23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
CorVel Corporation
We have audited the accompanying consolidated balance sheets of CorVel
Corporation as of March 31, 1997 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CorVel Corporation at March 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ ERNST & YOUNG LLP
Orange County, California
May 11, 1998
S-1
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended March 31
------------------------------------------
1996 1997 1998
------------------------------------------
<S> <C> <C> <C>
REVENUES $109,052,000 $121,704,000 $141,709,000
COSTS AND EXPENSES
Cost of revenues 88,937,000 99,323,000 115,553,000
General and administrative 8,106,000 8,645,000 11,029,000
------------------------------------------
97,043,000 107,968,000 126,582,000
------------------------------------------
Income before income taxes 12,009,000 13,736,000 15,127,000
Income tax provision 4,684,000 5,220,000 5,670,000
------------------------------------------
NET INCOME $ 7,325,000 $ 8,516,000 $ 9,457,000
==========================================
Net income per share:
Basic $ 1.65 $ 1.86 $ 2.26
==========================================
Diluted $ 1.57 $ 1.82 $ 2.21
==========================================
Shares used in computing
net income per share:
Basic 4,435,000 4,585,000 4,193,000
Diluted 4,660,000 4,685,000 4,286,000
</TABLE>
See accompanying notes to consolidated financial statements.
S-2
<PAGE>
CORVEL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31
---------------------------
1997 1998
---------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 15,665,000 $ 8,430,000
Accounts receivable (less allowance
for doubtful accounts of $1,686,000
in 1997 and $2,082,000 in 1998) 22,294,000 25,633,000
Prepaid taxes and expenses 124,000 736,000
Deferred income taxes 1,746,000 2,376,000
---------------------------
Total current assets 39,829,000 37,175,000
---------------------------
Property and equipment, net 13,100,000 16,542,000
Other assets 5,895,000 6,774,000
---------------------------
$ 58,824,000 $ 60,491,000
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable $ 6,603,000 $ 6,078,000
Accrued liabilities 4,630,000 6,371,000
---------------------------
Total current liabilities 11,233,000 12,449,000
---------------------------
Deferred income taxes 1,504,000 2,271,000
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.0001 par value: 20,000,000
shares authorized; 4,697,853 and 4,853,472
shares issued and outstanding in 1997 and
1998, respectively
Paid-in Capital 28,122,000 30,615,000
Treasury Stock, at cost (357,000 and 730,600
shares in 1997 and 1998, respectively) (9,461,000) (21,727,000)
Retained Earnings 27,426,000 36,883,000
---------------------------
Total stockholders' equity 46,087,000 45,771,000
---------------------------
$ 58,824,000 $ 60,491,000
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
S-3
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1996, 1997, and 1998
<TABLE>
<CAPTION>
Common stock
Common and paid in Treasury
stock-shares capital shares
-------------------------------------------------
<S> <C> <C> <C>
Balance - March 31, 1995 4,238,250 $ 24,169,000 ---
Stock issued under employee
stock purchase plan 18,384 444,000 ---
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased 337,041 1,788,000 ---
Net income --- --- ---
-------------------------------------------------
Balance - March 31, 1996 4,593,675 $ 26,401,000 ---
-------------------------------------------------
Stock issued under employee
stock purchase plan 23,039 536,000 ---
Stock issued and income tax
benefits under stock option
plan 81,139 1,185,000 ---
Purchase of common stock --- --- (357,000)
Net income --- --- ---
-------------------------------------------------
Balance - March 31, 1997 4,697,853 $ 28,122,000 (357,000)
-------------------------------------------------
Stock issued under employee
stock purchase plan 20,520 540,000 ---
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased 135,099 1,953,000 ---
Purchase of common stock --- --- (373,600)
Net income --- --- ---
-------------------------------------------------
Balance - March 31, 1998 4,853,472 $ 30,615,000 (730,600)
=================================================
See accompanying notes to consolidated financial statements.
</TABLE>
S-4
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1996, 1997, and 1998
<TABLE>
<CAPTION>
Total
Treasury Retained shareholders'
shares-cost earnings equity
---------------------------------------------
<S> <C> <C> <C>
Balance - March 31, 1995 $ --- $ 11,585,000 $ 35,754,000
Stock issued under employee
stock purchase plan --- --- 444,000
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased --- --- 1,788,000
Net income --- 7,325,000 7,325,000
---------------------------------------------
Balance - March 31, 1996 --- 18,910,000 $ 45,311,000
---------------------------------------------
Stock issued under employee
stock purchase plan --- --- 536,000
Stock issued and income tax
benefits under stock option
plan --- --- 1,185,000
Purchase of common stock (9,461,000) --- (9,461,000)
Net income --- 8,516,000 8,516,000
----------------------------------------------
Balance - March 31, 1997 (9,461,000) $ 27,426,000 46,087,000
----------------------------------------------
Stock issued under employee
stock purchase plan --- --- 540,000
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased --- --- 1,953,000
Purchase of common stock (12,266,000) --- (12,266,000)
Net income --- 9,457,000 9,457,000
----------------------------------------------
Balance - March 31, 1998 $(21,727,000) $ 36,883,000 $ 45,771,000
==============================================
</TABLE>
See accompanying notes to consolidated financial statements.
S-5
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31
---------------------------------------
1996 1997 1998
---------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,325,000 $ 8,516,000 $ 9,457,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 3,048,000 4,215,000 5,349,000
Deferred income taxes (79,000) 420,000 137,000
Loss on write down and disposal
of property and equipment 23,000 96,000 124,000
Changes in operating assets
and liabilities:
Accounts receivable (2,526,000) (3,900,000) (3,339,000)
Prepaid taxes and expenses (363,000) 421,000 (612,000)
Accounts and taxes payable 700,000 3,546,000 (525,000)
Accrued liabilities (382,000) 384,000 1,741,000
Other assets (511,000) (1,607,000) (1,069,000)
----------------------------------------
Net cash provided by
operating activities 7,235,000 12,091,000 11,263,000
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,565,000) (5,799,000) (8,725,000)
----------------------------------------
Net cash used in investing activities (5,565,000) (5,799,000) (8,725,000)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds and tax benefits from
exercise of stock options 2,232,000 1,721,000 2,493,000
Purchase of common stock --- (9,461,000) (12,266,000)
----------------------------------------
Net cash provided by (used in)
financing activities 2,232,000 (7,740,000) (9,773,000)
----------------------------------------
Net increase (decrease) in cash
and cash equivalents 3,902,000 (1,448,000) (7,235,000)
Cash and cash equivalents
at beginning of year 13,211,000 17,113,000 15,665,000
----------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $17,113,000 $15,665,000 $ 8,430,000
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
S-6
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: CorVel Corporation (CorVel or the Company) provides
services and programs nationwide that are designed to enable insurance
carriers, third party administrators and employers with self-insured programs
to administer, manage and control the cost of worker's compensation and other
healthcare benefits.
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of CorVel and its subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
financial statements. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consists of
short-term, highly-liquid investments with maturities of 90 days or less when
purchased. The carrying amounts of the Company's financial instruments
approximate their relative fair values at March 31, 1997 and 1998.
CONCENTRATIONS OF CREDIT RISK: The Company performs periodic credit
evaluations of its customers' financial condition and does not require
collateral. No customer represented 10% of accounts receivable at March 31,
1997 and 1998. Receivables generally are due within 60 days. Credit losses
relating to customers in the worker's compensation insurance industry
consistently have been within management's expectations.
PROPERTY AND EQUIPMENT: Additions to property and equipment are recorded
at cost. Depreciation and amortization are provided using the straight-line
and accelerated methods over the estimated useful lives of the related assets
which range from three to seven years.
LONG-LIVED ASSETS: The carrying amount of all long-lived assets is
evaluated whenever events and circumstances indicated that the assets might be
impaired. Such evaluation is based principally on the expected utilization of
the long-lived assets and the projected, undiscounted cash flows of the
operations in which the long-lived assets are deployed.
OTHER ASSETS: Other assets consists primarily of the excess of the
purchase price over the estimated fair value of the net assets of businesses
acquired (goodwill) and is being amortized using the straight-line method over
periods not exceeding 40 years. Goodwill amounted to $4,886,000 (net of
accumulated amortization of $898,000) at March 31, 1997 and $5,342,000 (net of
accumulated amortization of $1,088,000) at March 31, 1998.
S-7
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
REVENUE RECOGNITION: The Company's revenues are recognized primarily as
services are rendered based on time and expenses incurred. A certain portion
of the Company's revenues are derived from fee schedule auditing which is
based on the number of provider charges audited and, to a limited extent, on a
percentage of savings achieved for the Company's clients. Accounts receivable
includes $1,580,000 and $1,582,000 of unbilled receivables at March 31, 1997 and
1998, respectively. No one customer accounted for more than 10% of consolidated
revenues during the years ended March 31, 1996, 1997 and 1998.
INCOME TAXES: The consolidated financial statements reflect the
application of Statement of Financial Accounting Standards No. 109 -
"Accounting for Income Taxes".
EARNINGS PER SHARE: The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128) in 1998. SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share is computed
by dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
reflects the assumed conversion of all dilutive securities. Earnings per share
amounts for all periods presented have been calculated in accordance with the
requirements of SFAS No. 128.
STOCK OPTION PLANS: Effective April 1, 1996, the Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123) and accordingly, is
continuing to account for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
and related interpretations. The adoption of SFAS No. 123 had no impact on the
Company's consolidated results of operations or financial position.
RECENT ACCOUNTING PRONOUNCEMENT: In June 1997, the FASB issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
(SFAS No. 131) which requires publicly-held companies to report financial and
descriptive information about its operating segments in financial statements
issued to shareholders for interim and annual periods. The statement also
requires additional disclosures with respect to products and services,
geographical areas of operations, and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented.
S-8
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at March 31:
<TABLE>
<CAPTION>
1997 1998
-----------------------------
<S> <C> <C>
Office equipment and computers $ 19,875,000 $ 24,930,000
Computer software 5,186,000 7,808,000
Leasehold improvements 784,000 1,154,000
-----------------------------
25,845,000 33,892,000
Less: accumulated depreciation
and amortization 12,745,000 17,350,000
-----------------------------
$ 13,100,000 $ 16,542,000
=============================
</TABLE>
NOTE C - ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities consists of the following at March 31:
1997 1998
----------------------------
<S> <C> <C>
Payroll and related benefits $ 2,891,000 $ 3,303,000
Self-insurance reserves 599,000 650,000
Other 1,140,000 2,418,000
----------------------------
$ 4,630,000 $ 6,371,000
============================
</TABLE>
S-9
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE D - INCOME TAXES
<TABLE>
<CAPTION>
The income tax provision consists of the following for the three years
ended March 31:
1996 1997 1998
----------------------------------------------
<S> <C> <C> <C>
Current - Federal $ 4,045,000 $ 4,212,000 $ 5,427,000
Current - State 718,000 588,000 380,000
----------------------------------------------
Subtotal 4,763,000 4,800,000 5,807,000
----------------------------------------------
Deferred - Federal (102,000) 368,000 (127,000)
Deferred - State 23,000 52,000 (100,000)
----------------------------------------------
Subtotal (79,000) 420,000 (137,000)
----------------------------------------------
$ 4,684,000 $ 5,220,000 $ 5,670,000
==============================================
</TABLE>
Income tax benefits associated with the exercise of stock options were
$4,245,000, $228,000 and $1,212,000 for fiscal 1996, 1997 and 1998,
respectively.
<TABLE>
<CAPTION>
The following is a reconciliation of the income tax provision from the
statutory federal income tax rate to the effective rate for the three years
ended March 31:
1996 1997 1998
----------------------------------------------
<S> <C> <C> <C>
Income taxes at federal
statutory rate $ 4,203,000 $ 4,808,000 $ 5,294,000
State income taxes, net
of federal benefit 446,000 423,000 453,000
Goodwill amortization 37,000 40,000 42,000
Other (2,000) (51,000) (119,000)
-----------------------------------------------
$ 4,684,000 $ 5,220,000 $ 5,670,000
===============================================
</TABLE>
S-10
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE D - INCOME TAXES (Continued)
Income taxes paid totaled $1,193,000, $1,683,000 and $5,690,000 for the
years ended March 31, 1996, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
Deferred taxes at March 31, 1997 and 1998 consists of:
1997 1998
----------------------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities not currently deductible $ 939,000 $ 1,427,000
Allowance for doubtful accounts 580,000 814,000
Other 227,000 135,000
----------------------------
Deferred assets $ 1,746,000 $ 2,376,000
Deferred tax liabilities:
Excess of tax under book basis
of fixed assets (1,504,000) (2,271,000)
----------------------------
Deferred liability (1,504,000) (2,271,000)
----------------------------
Net deferred tax asset $ 242,000 $ 105,000
============================
</TABLE>
S-11
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE E - STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
SFAS No. 123 requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB No. 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Under the Company's Restated 1988 Executive Stock Option Plan ("the Plan"),
as amended, options for up to 1,735,000 shares of the Company's common stock may
be granted to key employees, nonemployee directors and consultants at prices
not less than 85% of the fair value of the stock at the date of grant as
determined by the Board. Options granted under the Plan may be either
incentive stock options or non-statutory stock options and are generally
exercisable beginning one year from the date of grant and vest monthly
thereafter for three years. As of March 31, 1998, all of these options have
S-12
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE E - STOCK OPTION PLANS (Continued)
vested and have been exercised. Summarized information for all stock options
for the past three fiscal years follow:
<TABLE>
<CAPTION>
------------------------------------------
1996 1997 1998
------------------------------------------
<S> <C> <C> <C>
Options outstanding at the
beginning of the year 827,018 423,411 455,832
Options granted 81,300 126,450 102,750
Options exercised (468,572) (81,139) (158,937)
Options cancelled (16,335) (12,890) (18,679)
------------------------------------------
Options outstanding at the
end of the year 423,411 455,832 380,966
==========================================
During the year:
Weighted average fair value
of options granted during
the year $7.43 $8.67 $9.29
Weighted average price of
options granted $ 25.19 $ 28.48 $ 32.31
Weighted average price of
options exercised $ 2.54 $ 11.71 $ 10.28
Weighted average price of
options cancelled $ 18.40 $ 22.80 $ 27.63
At the end of the year:
Price range of
outstanding options $.0001- $.0001- $10.75-
$31.50 $31.50 $37.75
Weighted average price
per share $15.73 $19.77 $26.75
Options available for
future grants 202,444 288,884 404,813
Exercisable options 242,575 244,881 167,895
</TABLE>
S-13
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE E - Stock Option Plans (continued)
<TABLE>
<CAPTION>
The following table summarizes the status of stock options
outstanding and exercisable at March 31, 1998:
Outstanding Exercisable
Weighted Options- Exercisable Options-
Average Weighted Options- Weighted
Number of Remaining Average Number of Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices Options Life Price Options Price
- - ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$10.75-$18.50 40,538 1.88 years $16.20 37,930 $16.06
19.50- 25.75 111,983 2.20 years 23.01 76,193 22.52
26.50- 29.63 133,855 4.04 years 28.09 46,778 28.29
30.63- 37.75 94,590 5.08 years 33.78 6,994 31.42
----------------------------------------------------------
Total 380,966 3.53 years $26.75 167,895 $23.04
==========================================================
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation cost for the Company's stock option and stock purchase plans
been recorded consistent with the provisions of SFAS No. 123, pro forma net
income would have been reduced to $7,251,000, $8,315,000 and $9,185,000
from $7,325,000, $8,516,000 and $9,457,000 for the years ended March 31, 1996,
1997 and 1998, respectively. Pro forma diluted earnings per share would have
been reduced to $1.56, $1.77 and $2.14 for the three years ending March 31,
1996, 1997 and 1998, respectively. Pro forma basic earnings per share would
have been reduced to $1.63, $1.81, and $2.19 for the three years ending
March 31, 1996, 1997, and 1998.
The fair value of each plan is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted average
assumptions were used for fiscal 1996: expected volatility of 0.45; risk free
interest rate of 6.4%. The following weighted average assumptions were used
for fiscal 1997: expected volatility of 0.41; risk free interest rate of 6.4%.
The following weighted average assumptions were used for fiscal 1998: expected
S-14
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE E - STOCK OPTION PLANS (Continued)
volatility of 0.34; risk free interest rate of 5.5%. The assumptions for
all three years reflect no dividend yield and a weighted average option life of
three years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjecting assumptions including the
expected stock price volatility. Because the Company's employee stock options
have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options. Because SFAS No. 123 is applicable only to the
Company's options granted subsequent to April 1, 1995, its pro forma effect
will not be fully reflected until 1999. The aforementioned results are not
likely to be representative of the effects of applying SFAS No. 123 on reported
net income for future years as these amounts reflect the expense for only one
to three years of vesting.
NOTE F - EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan which allows
employees of the Company and its subsidiaries to purchase shares of common
stock on the last day of two six-month purchase periods (i.e. March 31 and
September 30) at a purchase price which is 85% of the closing sale price of
shares as quoted on NASDAQ on the first or last day of such purchase period,
whichever is lower. Employees are allowed to participate up to 20% of their
gross pay. A maximum of 250,000 shares has been authorized for issuance under
the plan, as amended. As of March 31, 1998, 134,000 shares had been issued
S-15
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE F - EMPLOYEE STOCK PURCHASE PLAN (Continued)
pursuant to the plan. Summarized plan information is as follows:
<TABLE>
<CAPTION>
------------------------------------------
1996 1997 1998
------------------------------------------
<S> <C> <C> <C>
Employee contributions $ 444,000 $ 536,000 $ 540,000
Shares acquired 18,384 23,039 20,520
Average purchase price $24.15 $23.27 $26.32
</TABLE>
NOTE G - TREASURY STOCK
During fiscal 1997, the Company's Board of Directors approved a plan to
repurchase up to 100,000 shares of the Company's common stock, and subsequently
increased the number of shares authorized to repurchase to a total of 850,000
shares. The share repurchases for fiscal years ending March 31, 1997 and 1998,
are as follows:
<TABLE>
<CAPTION>
1997 1998 Cumulative
---- ---- ----------
<S> <C> <C> <C>
Shares repurchased 357,000 373,600 730,600
Cost $9,461,000 $12,266,000 $21,727,000
Average price $26.50 $32.83 $29.74
The repurchased shares were recorded as treasury stock, at cost, and is
available for general corporate purposes. The repurchases were financed from
cash generated from operations and on hand cash balances.
S-16
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under noncancelable operating leases.
Future minimum rental commitments under operating leases at March 31, 1998 are
$5,489,000 in fiscal 1999, $4,646,000 in fiscal 2000, $3,507,000 in fiscal 2001,
$2,623,000 in fiscal 2002, $1,218,000 in fiscal 2003, and $329,000, thereafter.
Total rental expense of $3,901,000, $4,573,000, and $5,022,000 was charged to
operations for the years ended March 31, 1996, 1997, and 1998, respectively.
The Company is involved in litigation arising in the normal course of
business. The Company believes that resolution of these matters will not
result in any payment that, in the aggregate, would be material to the
financial position and results of the operations of the Company.
NOTE I - SAVINGS PLAN
The Company maintains a retirement savings plan for its employees which
is a qualified plan under section 401(k) of the Internal Revenue Code.
Full-time employees that meet certain requirements are eligible to participate
in the plan. Contributions are made annually primarily at the discretion of
the Company's Board of Directors. Contributions of $50,000, $135,000 and
$143,000, were charged to operations for the years ended March 31, 1996, 1997
and 1998, respectively.
NOTE J - SHAREHOLDER RIGHTS PLAN
During fiscal 1997, the Company's Board of Directors approved the
adoption of a Shareholder Rights Plan. The Rights Plan, which is similar to
rights plans adopted by numerous other public companies, provides for a
dividend distribution to CorVel stockholders of one preferred stock purchase
"Right" for each outstanding share of CorVel's common stock. The Rights are
designed to assure that all stockholders receive fair and equal treatment in
the event of any proposed takeover of the Company and to encourage a potential
acquirer to negotiate with the Board of Directors prior to attempting a
takeover. The Rights have an exercise price of $125.00 per Right, subject to
subsequent adjustment. Initially, the Rights will trade with the Company's
common stock, and will not be exercisable until the occurrence of certain
takeover-related events. Unless earlier redeemed or exchanged in accordance
with the Rights Agreement, the Rights are due to expire on February 10, 2007.
The issuance of the Rights has no dilutive effect on the Company's earnings per
share.
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<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE K - QUARTERLY RESULTS
The following is a summary of unaudited results of operations for the two
years ended March 31, 1997 and 1998:
</TABLE>
<TABLE>
<CAPTION>
Net income Net income
FISCAL YEAR per basic per diluted
ENDED MARCH 31, Gross Net common common
1997: Revenues Margin income share share
-------- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
First Quarter $ 29,851,000 $ 5,390,000 $ 2,042,000 $ .44 $ .43
Second Quarter 29,719,000 5,488,000 2,092,000 .45 .44
Third Quarter 30,441,000 5,681,000 2,177,000 .47 .46
Fourth Quarter 31,693,000 5,822,000 2,205,000 .50 .49
FISCAL YEAR
ENDED MARCH 31,
1998:
First Quarter $ 34,024,000 $ 6,467,000 $ 2,275,000 $ .53 $ .52
Second Quarter 34,683,000 6,475,000 2,381,000 .57 .55
Third Quarter 35,558,000 6,595,000 2,395,000 .58 .56
Fourth Quarter 37,444,000 6,619,000 2,406,000 .58 .57
</TABLE>
S-18
<PAGE>
<TABLE>
<CAPTION>
Schedule II
CORVEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Additions
---------
Balance at Charged to Balance at
Beginning Costs and End of
of Year Expenses Deductions Year
------- -------- ---------- ----
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year Ended March 31, 1998: $1,686,000 $2,437,000 $(2,041,000) $2,082,000
Year Ended March 31, 1997: 1,268,000 1,763,000 (1,345,000) 1,686,000
Year ended March 31, 1996: 825,000 500,000 (57,000) 1,268,000
</TABLE>
S-19
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- --------
2.2 Asset Purchase Agreement, dated as of December 31, 1998
by and between Vicom, Inc. and Enstar Networking
Corporation.
2.3 Stock Purchase & Registration Rights Agreement, dated as of
December 31, 1998, by and between Americable, Inc.,
and Vicom, Inc.
10.19 Assignment of Lease, dated as of January 1999, by and among
Enstar Networking Corporation, Vicom Incorporated and Lexmark
Office One Partners LLP.
10.21 Enstar Networking Corporation Stock Option Plan
10.27 Twelfth Amendment to Amended and Restated Loan and Security
Agreement dated November 30, 1998, among Americable, Inc.,
Cable Distribution Systems, Inc., Enstar Networking Corporation,
and U.S. Bank National Association.
10.28 Thirteenth Amendment to Amended and Restated Loan and Security
Agreement and Consent dated January 8, 1999, among Americable,
Inc., Enstar Networking Corporation, and U.S. Bank National
Association, amending the terms of the Amended and Restated Loan
and Security Agreement dated November 30, 1998.
21.1 Subsidiaries of ENStar Inc.
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
99.1 Cautionary Statement
<PAGE>
Exhibit 2.2
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of December 31, 1998 (the "Effective Date"), by and between
Vicom, Inc., a Minnesota corporation ("Buyer"), and Enstar Networking
Corporation, a Minnesota corporation ("Seller").
RECITALS
A. Seller is engaged in the business of providing products and
services to design, build and maintain corporate network infrastructures
(the "Business").
B. Seller desires to sell and assign to Buyer, and Buyer desires
to purchase from Seller, on the terms and subject to the conditions set
forth in this Agreement, the assets of Seller identified in Article I of this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreement and the conditions set forth in
this Agreement, Buyer and Seller hereby agree as follows:
ARTICLE I
TRANSFER OF ASSETS; ASSUMPTION OF LIABILITIES
1.01 Transfer of Assets. On the terms and subject to the
conditions set forth in this Agreement, Seller shall, at the Closing (as
defined in Section 3.01 hereof), sell, transfer and assign to Buyer, and
Buyer shall purchase and acquire from Seller, all of Seller's right, title
and interest, as of the Closing Date (as defined in Section 3.01 hereof), in
and to the following assets of Seller (collectively, the "Assets"):
(a) The accounts receivable of Seller as of the Effective Date
(the "Accounts Receivable"), all of which are listed on Schedule 1.01(a)
hereto;
(b) The work in progress of Seller as of the Effective Date
(the "WIP"), all of which is listed on Schedule 1.01(b) hereto;
(c) The inventory of Seller as of the Effective Date (the
"Inventory"), all of which is listed on Schedule 1.01(c) hereto; and
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<PAGE>
(d) The fixed assets of Seller listed on Schedule 1.01(d)
hereto (the "Fixed Assets");
(e) The open order backlog of Seller (gross profit) as of the
Effective Date (the "Backlog"), all of which is listed on Schedule 1.01(e)
hereto.
1.02 Excluded Assets. No assets of any kind, other than those
specifically enumerated in Section 1.01 hereof, shall be sold to Buyer or
purchased by Buyer from Seller.
1.03 Liabilities Assumed. Buyer shall assume all liabilities
of Seller with respect to (a) the Lease Agreement dated September 23, 1998
by and between Lexmark Office One Partners, LLP, and Seller and (b) the
maintenance contracts of Seller listed on Schedule 1.03 hereto.
1.04 Excluded Liabilities. Buyer shall not assume, and nothing
contained in this Agreement shall be construed as an assumption by Buyer of,
any other liabilities, obligations or undertakings of Seller of any nature
whatsoever, whether accrued, absolute, fixed or contingent, known or unknown
due or to become due, unliquidated or otherwise.
ARTICLE II
PURCHASE PRICE
2.01 Amount and Manner of Payment. The purchase price (the
"Purchase Price") for the Assets shall consist of the following:
(a) One Million Three Hundred Fifty Thousand (1,350,000) shares
of the Common Stock, par value $.01, of Buyer (the "Shares"); and
(b) A promissory note of Buyer in the form of Exhibit A attached
hereto (the "Closing Date Note"), in the principal amount of Seven Hundred
Fifty Thousand Dollars ($750,000). The Closing Date Note shall be delivered
by Buyer to Seller subject to the requirement that Seller shall hold the
Closing Date Note until the amount of the Book Value (defined below) of the
Assets is determined pursuant to Section 2.02 hereof, and, pursuant to
Section 2.02, Seller and Buyer have exchanged the Closing Date Note for the
Promissory Note of buyer in the form of Exhibit B attached hereto (the
"Adjusted Note") pursuant to Section 2.02 hereof.
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<PAGE>
2.02 Adjustment to Purchase Price.
(a) The Purchase Price shall be decreased on a dollar-for-dollar
basis, by the amount, if any (the "Purchase Price Downward Adjustment"), by
which the Book Value (as defined below) of the Assets as determined on the
Adjustment Date (as defined below) is less than $1,675,000; provided that, to
the extent the Purchase Price Downward Adjustment is attributable to the
collection of Accounts Receivable in an amount less than the aggregate amount
shown on Schedule 1.01(a) (an "AR Adjustment"), the AR Adjustment shall be made
only to the extent that such amount exceeds five percent (5%) of the aggregate
amount shown on Schedule 1.01(a). The Purchase Price Downward Adjustment
shall be reflected by a substitution of the Adjusted Note (in an amount equal
to $750,000 less the Purchase Price Downward Adjustment) for the Closing Date
Note pursuant to Section 2.02(e) hereof.
(b) The Purchase Price shall be increased, on a dollar-for-dollar
basis, by the amount, if any (the "Purchase Price Upward Adjustment"), by
which the Book Value of the Assets as determined on the Adjustment Date is
greater than $1,675,000. The Purchase Price Upward Adjustment shall be paid
to Seller in cash pursuant to the provisions of Section 2.02(e).
(c) "Book Value" shall mean (i) with respect to the Accounts
Receivable, the total dollar amount of the Accounts Receivable collected on
or before April 30, 1999 or, if later, the final collection date of any such
Account Receivable, but in any event, no later than June 30, 1999 (the
"Adjustment Date"), (ii) with respect to the WIP, the Inventory and the
Fixed Assets, the total dollar amount of such Assets as shown on the Final
Asset List (as defined below), and with respect to the Backlog, the total
dollar amount of the gross profit realized with respect to the Backlog on
or before the Adjustment Date as determined in accordance with the billing
practices and revenue recognition practices of Seller applied consistently
throughout the applicable period.
(d) "Final Asset List" shall mean the asset list of Seller as of
the Effective Date prepared in accordance with Sellers past practices and
delivered as provided in Section 2.02(e).
(e) As soon as practicable after the Closing Date (but in all
events prior to the Adjustment Date), Buyer shall (i) prepare the Final Asset
List and (ii) calculate the Purchase Price Downward Adjustment or the Purchase
Price Upward Adjustment, as the case may be (in either case, the "Purchase
Price Adjustment"), and deliver the same to Seller. If Seller does not agree
with the Final Asset List or the amount of the Purchase Price Adjustment, then
the accounting firms and representatives of Buyer and Seller shall meet and
work in good faith to resolve the issues pertaining to the Final Asset List or
the Purchase Price Adjustment and the computation thereof. If, as a result of
the meeting or meetings, Buyer and Seller agree on the Purchase Price
Adjustment, then the amount so agreed upon shall become the final Purchase Price
Adjustment. In the case of a Purchase Price Downward Adjustment, the principal
amount of the Adjusted Note shall be based on such Purchase Price Downward
Adjustment. In the case of a Purchase Price Upward Adjustment, Buyer shall
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<PAGE>
promptly make a cash payment to Seller in the amount of such Purchase Price
Adjustment. If within ten (10) days after delivery to Seller of the Purchase
Price Adjustment calculated by Buyer (or such longer period as the parties may
mutually agree) Buyer and Seller are unable to agree on the Final Asset List or
Purchase Price Adjustment and the computation thereof, then Seller and Buyer
shall retain a mutually agreeable arbitrator or arbitrators using the applicable
Commercial Arbitration Rules of the American Arbitration Association (the
"Arbitrator") to resolve the dispute. The Arbitrator's work shall be limited to
resolving the dispute arising in connection with the Final Asset List or the
Purchase Price Adjustment and the computation thereof, and the decision of the
Arbitrator shall result in a Purchase Price Adjustment which shall, for purposes
of this Agreement, be and become the final Purchase Price Adjustment. The
decision of the Arbitrator shall be final and binding and not reviewable for
error of any kind. Each party shall bear its own costs in connection with the
preparation and review of the Purchase Price Adjustment and in resolving any
disputes related thereto, except that the fees and costs of the Arbitrator, if
one is retained, shall be paid one-half by the Seller and one-half by the Buyer.
Within five (5) business days of the agreement of Buyer and Seller, or
resolution of any dispute regarding the Purchase Price Adjustment (whether such
resolution is by settlement or by decision of the Arbitrator), Buyer shall
deliver to Seller (i) in the case of a Purchase Price Downward Adjustment, the
Adjusted Note, dated the Closing Date, in the principal amount established based
on the final Purchase Price Downward Adjustment, in exchange for which Seller
shall cancel the Closing Date Note and shall deliver the same back to Buyer in
full satisfaction of all principal and accrued interest owing thereunder and
(ii) in the case of a Purchase Price Upward Adjustment, a cash payment in the
amount of the Purchase Price Upward Adjustment.
2.03 Allocation of Purchase Price. The Buyer and Seller have
allocated the Purchase Price among the Assets as set forth on Schedule 2.03,
which schedule shall be updated as of the Closing Date in such a manner as
determined by Buyer subject to Seller's consent (which shall not be
unreasonably withheld), after taking into account the applicable Treasury
Regulations and the fair market value of such items. Buyer shall prepare for
filing all of the tax returns, information returns and statements ("Returns")
that may be required with respect to the transaction provided for herein
pursuant to Section 1060 of the Internal Revenue Code of 1986, as amended
(the "Code"), any Treasury Regulations promulgated thereunder, any other similar
provision of the Code and any other similar, applicable foreign, state or local
tax law or regulation. Seller shall provide information that may be required by
Buyer for the purpose of preparing such Returns, execute and file such Returns
as requested by Buyer and file all other returns and tax information on a basis
that is consistent with such Returns prepared by Buyer.
ARTICLE III
CLOSING
3.01 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of Dorsey & Whitney,
220 South Sixth Street, Minneapolis, Minnesota at 10:00 a.m. on January 8, 1999,
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<PAGE>
or at such other place and on such other date as is mutually agreeable to Buyer
and Seller. The date on which the Closing occurs is referred to herein as the
"Closing Date," and the Closing shall be deemed effective as of 8:00 a.m.,
Minneapolis time, on the Effective Date.
3.02 General Procedure. At the Closing, each party shall deliver to
the party entitled to receipt thereof, the documents required to be delivered
pursuant to Article VIII hereof and such other documents, instruments and
materials (or complete and accurate copies thereof, where appropriate) as may
be reasonably required in order to effectuate the intent and provisions of this
Agreement, and all such documents, instruments and materials shall be
satisfactory in form and substance to counsel for the receiving party. The
conveyance, transfer, assignment and delivery of the Assets shall be effected
by Seller's execution and delivery to Buyer of a bill of sale substantially in
the form attached hereto as Exhibit C (the "Bill of Sale") and such other
instruments of conveyance, transfer, assignment and delivery as Buyer shall
reasonably request to cause Seller to transfer, convey, assign and deliver the
Assets to Buyer.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer that, except as set
forth in the Disclosure Schedule delivered by Seller to Buyer on the date
hereof (the "Disclosure Schedule") (which Disclosure Schedule sets forth the
exceptions to the representations and warranties contained in this Article IV):
4.01 Incorporation and Corporate Power. Seller is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Minnesota and has all requisite corporate power and authority to own the
Assets being sold to Buyer.
4.02 Execution, Delivery; Valid and Binding Agreement. The
execution, delivery and performance of this Agreement by Seller and the
consumation of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of Seller, and, except for approval by
Seller's shareholders, no other proceedings on its part are necessary to
authorize the execution, delivery and performance of this Agreement. This
Agreement has been duly executed and delivered by Seller and, assuming that
this Agreement is the valid and binding agreement of Buyer, constitutes the
valid and binding obligation of Seller, enforceable in accordance with its
terms, except as such enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
affecting enforcement of creditors' rights or by general principles of equity.
4.03 Authority; No Breach. Seller has the requisite corporate power
and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution, delivery and performance of this
Agreement by Seller and the consummation of the transactions contemplated
hereby do not conflict with or result in any breach of any of the provisions
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<PAGE>
of, or constitute a default under, result in a violation of, result in the
creation of a right of termination or acceleration or any lien, security
interest, charge or authorization, consent, approval, exemption or other action
by notice to any court or other governmental body, under the provisions of the
Articles of Incorporation or Bylaws of Seller or any indenture, mortgage, lease,
loan agreement or other agreement or instrument by which Seller or the Assets
are bound or affected (other than consents required under Section 8.01(c)
hereof, which Seller undertakes to obtain prior to the Closing Date), or any
law, statute, rule or regulation or order, judgment or decree to which Seller
or the Assets are subject. No consent, approval or authorization of any
governmental or regulatory authority is required to be obtained by Seller in
connection with its execution, delivery and performance of this Agreement.
4.04 Book Value. Except as provided in Section 4.09 hereof, the
Book Value of the Assets as of the Effective Date is not less than $1,675,000.
4.05 Brokerage. No third party shall be entitled to receive any
brokerage commissions, finder's fees, fees for financial advisory services or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of Seller,
except for the fees of Goldsmith, Agio, Helms & Company, whose fees will be
borne by Seller.
4.06 Title to Assets. Seller owns good and marketable title to the
Assets, fee and clear of all liens and encumbrances, except for (i) liens for
current taxes not yet due and payable, (ii) liens set forth under the caption
referencing this Section 4.06 in the Disclosure Schedule, and (iii) assets
disposed of in the ordinary course of business.
4.07 Inventory. The Disclosure Schedule describes under the
caption referencing this Section 4.07 all of the inventory comprising any of
the Assets. Seller's inventory of purchase parts, work in process and finished
goods relating to the Business consists of items of a quality and quantity
usable and, with respect to finished goods only, salable at the Seller's normal
profit levels, in each case, in the ordinary course of the business. Seller's
inventory of finished goods generated by the Business is not obsolete or
damaged and is merchantable and fit for its particular use. Seller has on hand
or has ordered and expects timely delivery of such quantities of raw materials
and has on hand such quantities of work in process and finished goods aa are
reasonably required timely to fill current orders on hand with respect to the
Business which require delivery within 30 days and to maintain the manufacture
and shipment of products at its normal level of operations. As of the date of
the relevant dates, the values at which such inventories are carried on the
books of Seller will be determined in accordance with generally accepted
accounting principles.
4.08 Tax Matters. To the best of Seller's knowledge, there are no
liens for any taxes, charges, fees, levies, or other assessments, including,
without limitation, all net income, gross income, gross receipts, sales, use,
ad valorem, transfer, franchise, profits, license, withholding, payroll,
employment, social security, unemployment, excise, estimated, severance, stamp,
-6-
<PAGE>
occupation, property, or other taxes, customs duties, fees, assessments, or
charges of any kind whatsoever, including, without limitation, all interest
and penalties thereon, and additions to tax or additional amounts imposed by
any taxing authority, domestic or foreign ("Taxes") upon any of the assets,
except liens for Taxes not yet due.
4.09 Accounts Receivable. Not less than 95% in dollar amount of
the Accounts Receivable are valid receivables, are not subject to valid
counterclaims or setoffs, and are collectible in accordance with their terms
on or before the Adjustment Date.
4.10 Litigation. Except as set forth in the Disclosure Schedule
under the caption referencing this Section 4.10, there are no actions, suits,
proceedings, orders or investigations pending or, to the best knowledge of
Seller, threatened against Seller, at law or in equity, or before or by any
federal, state, municipal or other governmental department, commissions, board,
bureau, agency or instrumentality, domestic or foreign, affecting the Business
or the Assets, and there is no reasonable basis known to Seller for any of the
foregoing.
4.11 Warranties. The Disclosure Schedule summarizes under the
caption referencing this Section 4.11 all claims outstanding, pending or, to
the best of Seller's knowledge, threatened for beach of any warranty relating
to any products of the Business sold by Seller prior to the date hereof.
4.12 Customers and Supplies. To the best of Seller's knowledge, the
Disclosure Schedule, under the caption referencing this Section 4.12, lists the
current customers and suppliers of Seller, and no customer or supplier listed on
the Disclosure Schedule under the caption referencing this Section 4.12 has
indicated that it will stop or decrease the rate of business done with Seller
except for changes in the ordinary course of Seller's business.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller that:
5.01 Incorporation and Corporate Power. Buyer is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Minnesota, with the requisite corporate power and authority to enter into
this Agreement and perform its obligations hereunder.
5.02 Execution, Delivery; Valid and Binding Agreement. The
execution, delivery and performance of this Agreement by Buyer and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by all requisite corporate action, and no other
corporate proceedings on its part are necessary to authorize the execution,
delivery or performance of this Agreement. This Agreement has been duly
executed and delivered by Buyer and constitutes the valid and binding
obligation of Buyer, enforceable in accordance with its terms except as such
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<PAGE>
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights or by general principles of equity.
5.03 No Breach. The execution, delivery and performance of
this Agreement by Buyer and the consummation by Buyer of the transactions
contemplated hereby do not conflict with or result in any breach of any of
the provisions of, constitute a default under, result in a violation of,
result in the creation of a right of termination or acceleration or any
lien, security interest, charge or encumbrance upon any assets of Buyer,
or require any authorization, consent, approval, exemption or other action by
or notice to any court or other governmental body, under the provisions of the
Articles of Incorporation or Bylaws of Buyer or any indenture, mortgage,
lease, loan agreement or other agreement or instrument by which Buyer is
bound or affected, or any law, statute, rule or regulation or order, judgment
or decree to which Buyer is subject.
5.04 Brokerage. No third party shall be entitled to receive any
brokerage commissions, finder's fees, fees for financial advisory services
or similar compensation in connection with the transactions contemplated by
this Agreement based on any arrangement or agreement made by or on behalf
of Buyer.
ARTICLE VI
COVENANTS OF SELLER
6.01 Conduct of the Business. Seller agrees to observe each term set
forth in this Section 6.01 and agrees that, from the date hereof until the
Closing Date, unless otherwise consented to by Buyer in writing:
(a) Seller shall not, directly or indirectly, sell, pledge, dispose
of or encumber any of the Assets, except in the ordinary course of business.
(b) Seller shall not cancel or terminate its current insurance
policies covering the Assets and the Business, or cause any of the coverage
thereunder to lapse, unless simultaneously with such termination, cancellation
or lapse, replacement policies providing coverage equal to or greater than the
coverage under the canceled, terminated or lapsed policies for substantially
similar premiums are in full force and effect.
(c) Seller shall (i) file any Tax returns, elections or information
statements with respect to any liabilities for Taxes of Seller or other matters
relating to Taxes of Seller which affect the Assets and pursuant to applicable
law must be filed prior to the Closing Date; (ii) promptly upon filing provide
copies of any such Tax returns, elections or information statements to Buyer;
(iii) make any such Tax elections or other discretionary positions with respect
to Taxes taken by or affecting Seller only upon prior consultation with and
consent of Buyer; and (iv) not amend any Return.
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6.02 Access to Books and Records. Between the date hereof and the
Closing Date, Seller shall afford to Buyer and its authorized representatives
(the "Buyer's Representatives") full access at all reasonable times and upon
reasonable notice to the offices, properties, books, records, officers,
employees and other items of the Business, and otherwise provide such
assistance as is reasonably requested by Buyer in order that Buyer may have a
full opportunity to make such investigation and evaluation as it shall
reasonably desire to make of the Business and the Assets. In addition, Seller
and its officers and directors shall cooperate fully (including providing
introductions where necessary) with Buyer to enable Buyer to contact such third
parties, including customers, prospective customers, specifying agencies,
vendors or suppliers of the Business, as Buyer deems reasonably necessary to
complete its due diligence; provided that Buyer agrees not to initiate such
contacts without the prior approval of Seller, which approval will not be
unreasonably withheld.
6.03 Conditions. Seller shall take all commercially reasonable
actions necessary to cause the conditions set forth in Section 8.01 to be
satisfied and to consummate the transactions contemplated herein as soon as
reasonably possible after the satisfaction thereof (but in any event within
three business days of such date).
ARTICLE VII
COVENANTS OF BUYER
Buyer covenants and agrees with Seller as follows:
7.01 Conditions. Buyer shall take all commercially reasonable
actions necessary to cause the conditions set forth in Section 8.02 to be
satisfied and to consummate the transactions contemplated herein as soon as
reasonably possible after the satisfaction thereof (but in any event within
three business days of such date).
ARTICLE VIII
CONDITIONS TO CLOSING
8.01 Conditions to Buyer's Obligations. The obligations of Buyer to
consummate the transactions contemplated by this Agreement is subject to the
satisfaction of the following conditions on or before the Closing Date:
(a) The representations and warranties set forth in Article IV
hereof shall be true and correct in all material respects at and as of the
Closing Date as though then made, except that any such representation or
warranty made as of a specific date (other than the date hereof) shall only
need to have been true on and as of such date.
(b) Seller shall have performed in all material respects all of
the convenants and agreements required to be performed and complied with by
it under this Agreement prior to the Closing.
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(c) Seller shall have obtained, or caused to be obtained, each
consent and approval required in order to complete the transactions
contemplated hereby.
(d) There shall not be threatened, instituted or pending any
action or proceeding, before any court or governmental authority or agency,
domestic or foreign, challenging or seeking to make illegal, or to delay or
otherwise directly or indirectly restrain or prohibit, the consummation of
the transactions contemplated hereby or seeking to obtain material damages
in connection with such transactions.
(e) On the Closing Date, Seller shall have delivered to Buyer
the following:
(i) the Bill of Sale and such other instruments of
conveyance, transfer, assignment and delivery as Buyer shall have
reasonably requested pursuant to Section 3.02 hereof;
(ii) a certificate of an officer of Seller, dated the Closing
Date, stating that the conditions set forth in subsections 8.01(a) and
(b) above have been satisfied; and
(iii) a certificate of the Secretary of Seller as to the
currency of the Articles of Incorporation and Bylaws of Seller and the
resolutions adopted by the board of directors and shareholder of
Seller with respect to the transactions contemplated by this Agreement
(with copies of such documents attached).
(f) Buyer shall have completed to its satisfaction its due diligence
review of Seller's business and the Assets.
(g) Buyer and Seller shall have entered into a transition services
agreement (the "Transition Services Agreement") on terms and conditions mutually
satisfactory to Buyer and Seller with respect to services to be provided to
Buyer by Seller, at Seller's cost, until March 31, 1999 or earlier terminated to
Buyer. The principal purpose of the Transition Services Agreement is to ensure
the smooth transition from Seller to Buyer of vendors, customers, employee
benefits and open work orders.
(h) Buyer and Seller shall have entered into a Stock Purchase and
Registration Rights Agreement in the form Attached hereto as Exhibit D (the
"Stock Purchase Agreement").
8.02 Conditions to Seller's Obligations. The obligations of Seller
to consummate the transactions contemplated by this Agreement are subject to the
satisfaction of the following conditions on or before the Closing Date:
(a) The representations and warranties set forth in Article V hereof
will be true and correct in all material respects at and as of the Closing as
though then made;
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(b) Buyer shall have performed in all material respects all the
covenants and agreements required to be performed by it under this Agreement
prior to the Closing;
(c) There shall not be threatened, instituted or pending any action
or proceeding, before any court or governmental authority or agency, domestic or
foreign, challenging or seeking to make illegal, or to delay or otherwise
directly or indirectly restrain or prohibit, the consummation of the
transactions.
(d) On the Closing Date, Buyer will have delivered to Seller, or
in the case of the certificates representing the Shares, at Seller's option,
to such designee of Seller as shall become a party to the Stock Purchase
Agreement:
(i) a certificate or certificates representing the Shares;
(ii) the Closing Date Note;
(iii) a certificate of the President of Buyer, dated the
Closing Date, stating that the conditions set forth in subsections
8.02(a) and (b) above have been satisfied; and
(iv) a certificate of the Secretary of Buyer as to the
currency of the Articles of Incorporation and Bylaws of Seller and
the resolutions adopted by the board of directors of Buyer with
respect to the transactions contemplated by this Agreement (with
copies of such documents attached).
(e) Buyer and Seller shall have entered into the Stock Purchase
Agreement.
ARTICLE IX
TERMINATION
9.01 Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by the mutual consent of Buyer and Seller;
(b) by either Buyer or Seller if there has been a material
misrepresentation, breach of warranty or breach of covenant on the part of the
other in the representations, warranties and covenants set forth in this
Agreement;
(c) by either Buyer or Seller if the transactions contemplated
hereby have not been consummated on or before January 15, 1999; provided that,
neither Buyer nor Seller will be entitled to terminate this Agreement pursuant
to this Section 9.01(c) if such party's willful breach of this Agreement has
prevented the consummation of the transactions contemplated hereby; or
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(d) by Buyer if, after the date hereof, there shall have been a
material adverse change in the condition of the Business or assets or if,
after the date hereof, an event shall have occurred which, so far as reasonably
can be foreseen, would result in any such change, except to the extent such
change is directly caused by Buyer.
9.02 Effect of Termination. In the event of termination of this
Agreement by either Buyer or Seller as provided in Section 9.01, this
Agreement shall become void and there shall be no liability on the part of
either Buyer or Seller, or their respective stockholders, officers, or
directors, except that Section 11.01, 11.02 and 11.10 hereof shall survive
indefinitely, and except with respect to willful breaches of this Agreement
prior to the time of such termination.
ARTICLE X
SURVIVAL
10.01 Survival, Indemnification. The covenants, representations
and warranties contained in this Agreement shall survive the closing.
11.01 Election of Directors. To the extent permitted by applicable
law, commencing at the first meeting of its Board of Directors of Buyer
following the Closing Date, Buyer will cause one individual to be selected
by Seller to be appointed to its Board of Directors, and thereafter, for so
long as Seller continues to hold not less that 10% of the Shares, at each
meeting of the shareholders of Buyer at which directors are to be elected,
to cause such individuals to be nominated, and to use its best efforts to
cause such individual or a substitute selected by Seller, to be elected,
to such Board of Directors. Seller shall have the absolute right to replace
or fill vacancies with respect to the director selected by it.
11.02 Seller Employees. Buyer will use its best efforts to employ
Seller's employees listed on Schedule V on terms comparable to their current
employment terms and to maintain such employment on comparable terms through
the Adjustment Date.
11.03 Purchase Rights. Through June 30, 1999, Seller will use its
best efforts to ensure that buyer can continue to purchase cable and networking
equipment at the same cost of goods structure currently obtained by Seller,
subject to changes in market conditions and manufacturer's standard pricing
and discount structures.
11.05 Lease. Buyer and Seller shall use their best efforts to
cooperate and accomplish the assignment, from Seller to Buyer, of the Lease
Agreement dated September 23, 1998 by and between Lexmark Office One Partners,
LLP, and Seller.
11.06 Business Practices. Buyer will continue to treat Backlog in
accordance with the billing practices and revenue recognition practices of
Seller throughout the period prior to the Adjustment Date. Buyer will pay all
vendors on terms and conditions consistent with past practices of Seller
throughout the period prior to the Adjustment Date.
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ARTICLE XII
MISCELLANEOUS
12.01 Confidentiality; Press Releases and Announcements. The
existence of this Agreement and the negotiations between Buyer and Seller
relative to the transactions contemplated hereby are confidential information
and Buyer and Seller shall each use their best efforts to maintain the
confidentiality of that information. Prior to the Closing Date, neither party
hereto shall issue any press release (or make any other public announcement)
related to this Agreement or the transactions contemplated hereby or make any
announcement to the employees, customers or suppliers of Seller without prior
written approval of the other party hereto, except as may be necessary, in
the opinion of counsel to the party seeking to make disclosure, to comply
with the requirements of this Agreement or applicable law. If any such press
release or public announcement is so required, the party making such disclosure
shall consult with the other party prior to making such disclosure, and the
parties shall use all reasonable efforts, acting in good faith, to agree upon
a text for such disclosure which is satisfactory to both parties.
12.02 Expenses. Except as otherwise expressly provided for herein,
Seller and Buyer will pay all of their own expenses (including attorneys' and
accountants' fees) in connection with the negotiation of this Agreement, the
performance of their respective obligations hereunder and the consummation of
the transactions contemplated by this Agreement (whether consummated or not).
12.03 Further Assurances. Seller agrees that, on and after the
Closing Date, it shall take all appropriate action (without incurring any
out-of-pocket expenses) and execute any documents, instruments or conveyances
of any kind which may be reasonably necessary or advisable to carry out any of
the provisions hereof, including , without limitation, putting Buyer in
possession and operating control of the Assets.
12.04 Amendment and Waiver. This Agreement may not be amended or
waived except in writing executed by the party against which such amendment or
waiver is sought to be enforced. No course of dealing between or among any
persons having any interest in this Agreement will be deemed effective to modify
or amend any part of this Agreement or any rights or obligations of any person
under or by reason of this Agreement.
12.05 Notices. All notices, demands and other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when personally delivered
or three business days after being mailed by first class U.S. mail, return
receipt requested, or when receipt is acknowledged, if sent by facsimile,
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telecopy or other electronic transmission device. Notices, demands and
communications to Buyer and Seller will, unless another address is specified
in writing, be sent to the address indicated below:
Notices to Seller or Sellers: with a copy to:
Seller, Inc. Dorsey & Whitney LLP
7450 Flying Cloud Drive 220 South Sixth Street
Eden Prairie, Minnesota 55344 Minneapolis, Minnesota 55402
Attention: President Attention: Patrick F. Courtemanche
Telecopy: (612) 942-3875 Telecopy: (612) 340-8827
Notices to Buyer: with a copy to:
Jim Mandel Steven Bell
Vicom, Inc. Vicom, Inc.
9449 Science Center Drive 9449 Science Center Drive
New Hope, Minnesota 55428 New Hope, Minnesota 55428
Telecopy: (612) 504-3060 Telecopy: (612) 504-3060
12.06 Assignment. This Agreement and all of the provisions hereof
will be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, except that neither this
Agreement nor any of the rights, interests or obligations hereunder may be
assigned by either party hereto without the prior written consent of the
other party hereto.
12.07 Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
12.08 Complete Agreement. This Agreement and the Exhibits hereto,
the Disclosure Schedule and the other documents referred to herein contain the
complete agreement between the parties and supersede any prior understandings,
agreements or representations by or between the parties, written or oral,
which may have related to the subject matter hereof in any way.
12.09 Counterparts. This Agreement may be executed in one or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the
same instrument.
12.10 Governing Law. The internal law, without regard to conflicts
of laws principles, of the State of Minnesota will govern all questions
concerning the construction, validity and interpretation of this Agreement and
the performance of the obligations imposed by this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
VICOM, INC.
By
---------------------------
Its------------------------
ENSTAR NETWORKING CORPORATION
By
---------------------------
Its------------------------
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Exhibit 2.3
STOCK PURCHASE & REGISTRATION RIGHTS AGREEMENT
This STOCK PURCHASE AND REGISTRATION RIGHTS AGREEMENT (this "Agreement"),
dated as of December 31, 1998, is made and entered into by and between
Americable, Inc., a Minnesota corporation (the "Investor") and Vicom, Inc.,
a Minnesota corporation (the "Company").
WHEREAS, the Investor has effective December 31, 1998, acquired one million
three hundred fifty thousand (1,350,000) common shares (the "Securities") of
Vicom, Inc., pursuant to the terms and conditions of an Asset Purchase Agreement
between Enstar Networking Corporation and Company dated as of December 31, 1998
(the "Asset Purchase Agreement").
WHEREAS, it is a condition to the obligations of the parties to the Asset
Purchase Agreement to enter into this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, and for the other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
I. Sales and Securities. The Company hereby sells and transfers the
Securities to the Investor for the consideration set forth in the Asset Purchase
Agreement and subject to the additional terms and conditions of this Agreement.
II. Investor Representations. The Investor has been advised that these
Securities have not been registered under the Securities Act of 1933, as
amended, because in the opinion of the Company the sale of Securities to the
Investor is an exempt transaction under the Securities Act of 1933, as amended.
The Investor acknowledges that the Company's reliance on the exemption under
that Securities Act of 1933, as amended, is predicated upon the representations
made by the Investor in this Agreement. The Company has also advised the
Investor that these Securities are not being and have not been registered under
the Minnesota Securities Law because in the opinion of the Company the
transaction is exempt from registration under the Minnesota Securities Law.
The Investor hereby represents to the Company that these Securities are
being acquired for investment for the Investor's own account and not with
current intention to resell or otherwise distribute these Securities in
contravention of Section 5 of the Securities Act of 1933, as amended, or
applicable State Laws. In making these representations, the Investor
understands that the exemptions under the Securities Act of 1933, as amended
may not be applicable to this transaction if the Investor intends to acquire
these Securities for resale or distribution on behalf of other persons or
entities. The Investor also acknowledges that resale or distribution of these
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Securities may result in the Investor being deemed an "underwriter" within the
meaning of Section 2 (11) of the Securities Act of 1933, as amended, which could
give rise to civil and criminal liabilities.
The Investor warrants that its financial condition is presently adequate to
justify its investment in these Securities and the Investor warrants that is
experienced in investments and business matters and is aware of the financial
risks involved in investing in the Company's Securities.
The Investor acknowledges receipt of all financial and business information
related to the Company and its business, which it considers necessary and
advisable to form a decision concerning this investment. The Investor has
discussed the Company's business activities (including future plans) and the
Company's financial statements with its officers and does not desire any further
information or data concerning the Company. The Investor acknowledges that the
Company has offered and agreed to supply the Investor, and its accountants and
attorneys, with any information, data, memorandums, financial statements or
corporate records which pertain to the Company, and the Investor has been given
full access to all corporate records and financial statements of the Company.
The Investor will refrain from transferring or otherwise disposing of any
of the Securities, or any interest therein, in such manner as to cause the
Company to be in violation of the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"), or applicable state securities
or blue sky laws.
The Investor agrees that the following legend shall be placed on the
Securities to be issued by the Company:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE THE SUBJECT OF A STOCK
PURCHASE AND REGISTRATION RIGHTS AGREEMENT SIGNED BY THE OWNER OF THESE
SECURITIES AND HENCE THESE SECURITIES MAY NOT BE SOLD, ASSIGNED,
DISTRIBUTED, PLEDGED, TRADED, TRANSFERRED OR OTHERWISE DISPOSED OF
WITHOUT COMPLYING WITH THE TERMS AND CONDITIONS OF SAID INVESTMENT LETTER,
WHICH IS INCORPORATED HEREIN BY REFERENCE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER EITHER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES
LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR
OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND SUCH LAWS COVERING SUCH SECURITIES, OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY STATING
THAT SUCH SALE, TRANSFER, ASSIGNMENT, OFFER, PLEDGE OR OTHER DISTRIBUTION
FOR VALUE IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
THE ARTICLES OF INCORPORATION OF THE CORPORATION SET FORTH THE RIGHTS,
PREFERENCE, PRIVILEGES, RESTRICTIONS AND OTHER MATTERS RELATING TO THE 8%
CLASS A CUMULATIVE CONVERTIBLE PREFERRED STOCK AND 10% CLASS B CONVERTIBLE
PREFERRED STOCK AND AUTHORIZE THE BOARD OF DIRECTORS TO FURTHER DESIGNATE
AND DIVIDE THE REMAINING SHARES OF UNDESIGNATED SHARES OF CAPITAL STOCK
INTO ONE OR MORE ADDITIONAL CLASSES OR SERIES AND TO ESTABLISH THE
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RELATIVE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS RELATING THERETO.
THE CORPORATION WILL FURNISH TO ANY SHAREHOLDER UPON REQUEST AND WITHOUT
CHARGE, A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND
RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OR SERIES AUTHORIZED TO BE
ISSUED. THE BOARD OF DIRECTORS HAS AUTHORITY TO DETERMINE THE RELATIVE
RIGHTS AND PREFERENCES OF SUBSEQUENT CLASSES OR SERIES WITHOUT SHAREHOLDER
APPROVAL.
III. Representations and Warranties of the Company. The Company hereby
makes the following representations and warranties to the Investor
which representations and warranties survive the acquisition of the
Securities by the Investor:
1. Corporate Existence and Power. The Company is duly incorporated,
validly existing and in good standing under the laws of the State of Minnesota.
The Company has all corporate powers and authority and all governmental
licenses, authorizations, consents and approvals (collectively, the "Permits")
required to carry on its business as now conducted, except where the failure to
obtain such Permits, individually or in the aggregate, would not have a Material
Adverse Effect (as defined below) on the Company. The Company is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except for those
jurisdictions where the failure to be so qualified would not, individually or in
the aggregate, have a Material Adverse Effect. The Company has made available
to the Company true and complete copies of the Company's articles of
incorporation and bylaws as currently in effect. For purposes of this
Agreement, a "Material Adverse Effect" means a material adverse effect, on the
condition (financial or otherwise), business, assets or properties of the
Company or on the ability of the Company to perform its obligations hereunder.
For purposes of this Agreement, any reference to any event, change or effect
being "material" means an event, change or effect, whether existing or
prospective, which is material in relation to the condition (financial or
otherwise), business, assets or properties of the Company or on the ability of
the Company to perform its obligations hereunder.
2. Corporate Authorization. The execution, delivery and performance
by the Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby and thereby are within the Company's corporate
powers and have been duly authorized by all necessary corporate action. This
Agreement constitutes a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms except as such enforcement may
be subject to (a) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights generally
and (b) general principles of equity (whether considered in a proceeding in
equity or at law).
3. Consents; Approvals. The execution, delivery and performance
by the Company of the Agreement and the consummation of the transactions
contemplated hereby by the Company require no action, by or in respect of,
notices to, or filing with, any governmental body, agency, official or authority
or any third party, other than those that have been or will be taken or made in
a timely manner.
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4. Non-Contravention. The execution, delivery and performance by
the Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby do not and will not (except in the case of
clauses (b), (c), and (d) of this Section 4, for any such matters that,
individually or in the aggregate, have not had, and will not have, a Material
Adverse Effect on the Company) (a) contravene or conflict with the articles of
incorporation or by laws of the Company (b) contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgment,
injunction, order or decree binding upon or applicable to the Company or any of
its properties or assets, (c) constitute a default under or give rise to a right
of termination, cancellation, restriction or acceleration of any right or
obligation of the Company or to a loss of any benefit to which the Company is
entitled under any provision of any agreement, contract or other instrument
binding upon or applicable to the Company or any of its properties or assets or
any license, franchise, permit or other similar authorization held by or
applicable to the Company, or (d) result in the creation or imposition of any
Lien on any asset of the Company. For purposes of this Agreement, "Lien" means,
with respect to any asset, mortgage, lien, pledge, charge, security interest or
encumbrance of any kind in respect of such asset.
5. Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock and 335,000 shares of preferred
stock, par value $ .01 per share (the "Preferred Stock"). As of the date hereof
(i) 2,156,236 shares of Common Stock are issued and outstanding and (ii) not
more than 60,000 shares of Preferred Stock are issued and outstanding. As of
the date hereof 1,100,000 shares of Common Stock are reserved for issuance
pursuant to employee stock options, warrants, and preferred stock conversions.
All outstanding shares of capital stock of the Company have been duly authorized
and validly issued, are fully paid and non-assessable, are free from preemptive
rights and were issued in compliance with all state and federal securities law.
Assuming proper payment is made therefore, the Securities are duly authorized,
validly issued and outstanding, fully paid and non-assessable, free from
preemptive rights and issued in compliance with all state and federal securities
laws.
Except as set forth in this Section, there are outstanding (a) no
other shares of capital stock or other voting securities of the Company, (b) no
securities of the Company convertible into or exchangeable for shares of capital
stock or voting securities of the Company, and (c) no other options or other
rights to acquire from the Company, and no obligation of the Company to issue,
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company (the items in
clauses (a), (b), and (c) being referred to collectively as the "Company
Securities"). There are no outstanding obligations of the Company to
repurchase, redeem or otherwise acquire any Company Securities.
6. Financial Statements: SEC Filings. The Company has delivered to
the Investor copies of its unaudited balance sheet, as of November 30, 1998,
(the "Latest Balance Sheet") and the unaudited statements of earnings,
shareholders' equity and cash flows of the Company for the 11 month period ended
of such date (such statements and the Latest Balance Sheet being herein referred
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to as the "Latest Financial Statements"), and (b) its Annual Report to
Shareholders containing financial statements for the year ended December 31,
1997 (the "Annual Report"), including the audited balance sheets, as of
December 31, 1997, and December 31, 1996, and the audited statements of
earnings, shareholders' equity cash flows of the Company for each of the years
ended December 31, 1997, December 31, 1996, and December 31, 1995 (collectively,
the "Annual Financial Statements"). The Latest Financial Statements and the
Annual Financial Statements are based upon the information contained in the
books and records of the Company and fairly present the financial condition of
the Company as of the dates thereof and results of operations for the periods
referred to therein. The Annual Financial Statements have been prepared in
accordance with generally accepted accounting principles, consistently applied
throughout the periods indicated. The Latest Financial Statements have been
prepared in accordance with generally accepted accounting principles applicable
to unaudited interim financial statements (and thus may not contain all notes
and may not contain prior period comparative data which are required to be
prepared in accordance with generally accepted accounting principles)
consistently with Annual Financial Statements and reflect all adjustments
necessary to a fair statement of the results of the interim period(s) presented,
except for valuation reserves of $750,000. The Company has filed any and all
reports and other documents required to be filed under the rules and regulations
of the Securities and Exchange Commission (the "Commission") and is in
compliance with its reporting requirements under such rules and regulations.
7. Absence of Undisclosed Liabilities. Except as reflected in the
Latest Balance Sheet, the Company has no liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise, whether due or to become due, whether
known or unknown, and regardless of when asserted) arising out of transactions
or events heretofore entered into, or any action or inaction, or any state of
facts existing, with respect to or based upon transactions or events heretofore
occurring, except liabilities which have arisen after the date of the Latest
Balance Sheet in the ordinary course of business (none of which is a material
uninsured liability for breach of contract, breach of warranty, tort,
infringement, claim or lawsuit).
8. Litigation. There is no action, suit, investigation or
proceeding (or any basis therefor) pending against or, to the knowledge of the
Company, threatened against or affecting, the Company or any of its properties
before any court or arbitrator or any governmental body, agency or official
which, if determined or resolved adversely to the Company, could reasonable be
expected to have a Material Adverse Effect on the Company, nor is there any
judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding
against the Company having, or which, insofar as can reasonably be foreseen,
may have, any such effect.
9. Full Disclosure: No Misrepresentations. No information
contained in the representations and warranties of the Company set forth in
this Agreement contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statement contained herein or
therein, in light of the circumstances under which they made, not misleading.
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To the knowledge of the Company, there is no fact or condition which has not
been hereto disclosed to Purchasers in writing which has a Material Adverse
Effect on the Company, or reasonably could be expected to have a Material
Adverse Effect on the Company.
IV. Additional Obligations of the Company and the Investor.
1. Legal Opinion. Simultaneous to, and as a condition to the
Investor's willingness to enter into this Agreement, the Investor shall receive
the opinion of Winthrop & Weinsteine, P.A., special counsel for the Company,
dated the date of this Agreement, substantially in the form attached hereto as
Exhibit A.
2. Registration Rights:
(a) As soon as practicable following a request by Investor, but
no later than 90 days following such request, the Company shall at its
own expense file a registration statement under the Securities Act of
1933 (the "Act") covering resale or distribution of the Securities by
the Investor or an affiliate of the Investor or take such other
actions required under the federal and state securities laws to permit
distribution of the Securities to the shareholders of an affiliate of
Americable. The Company will use its best efforts to cause such
registration statement, which shall be on Form S-1 or another
appropriate form, or other statement to become effective as soon as
practicable. For purposes of this Section, Securities and similar
references shall refer to the Securities and any additional securities
issued with respect to the Securities upon any stock split, stock
dividend, recapitalization or similar event.
(b) In connection with the Company's obligations, the Company
will:
(i)use its best efforts to cause the registration statement
or other statement to remain effective for such period as may be
reasonably necessary to effect for such period the sale or
distribution of such shares, not to exceed two years;
(ii) in the case of a registration statement, prepare and
file with the Commission such amendments to such registration
statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective for
such period as may be reasonably necessary to effect the sale of
such securities, not to exceed two years;
(iii) in the case of a registration statement, furnish to
the Investor and to the underwriters of the securities being
registered, if any, such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus
and such other documents as the Investor and underwriters may
reasonably request in order to facilitate the public offering of
such securities;
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<PAGE>
(iv) use its best efforts to register or qualify the
securities covered by such registration statement or to be
distributed under such state securities or blue sky laws of such
jurisdictions as the Investors or the underwriters may reasonably
request within 20 days following the original filing of such
registration statement or other statement, except that the Company
shall not for any purpose be required to execute a general consent
to service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not qualified; and
(v) prepare and promptly file with the Commission and
promptly notify the Investor of the filing of such amendment or
supplement to such registration statement or prospectus or other
statement as may be necessary to correct any statements of
omissions if, at the time when a prospectus or information
statement relating to such securities is required to be delivered
under the Securities Act, any event shall have occurred as the
result of which any such prospectus or any other prospectus or
information statement as then in effect would include an untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading.
(c) With respect to any registration of shares or other mechanism
of distribution pursuant to the Agreement, the Company shall bear the
following fees, costs and expenses: all registration, filing and NASD
fees, printing expenses, fees and disbursements of counsel and
accountants for the Company, fees and disbursements of counsel for the
underwriter or underwriters of such securities (if the Company and/or
selling security holder are required to bear such fees and
disbursements), all internal Company expenses, the premiums and other
costs of policies of insurance against liability arising out of the
public offering, and all legal fees and disbursements and other
expenses of complying with state securities or blue sky laws of any
jurisdictions in which the securities to be offered are to be
registered or qualified. Fees and disbursements of counsel and
accountants for the Investor, underwriting discounts and commissions
and transfer taxes for the Investor and any other expenses incurred by
Investor not expressly included above shall be borne by Investor.
(d) In connection with the registration or distribution of the
Securities:
(i) The Company will indemnify and hold harmless the
Investor from and against any and all loss, damage, liability,
cost and expense to which the Investor may become subject under
the Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue statement
or alleged untrue statement of any material fact contained in such
registration statement or information statement, any prospectus
contained therein or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state
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<PAGE>
therein a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in
which they were made, not misleading; providing, however, that the
Company will not be liable in any such case to the extent that any
such loss, damage, liability, cost or expense arises out of or is
based upon an untrue statement or omission or alleged omission so
made in conformity with information furnished by the Investor.
(ii) The Investor will indemnify and hold harmless the
Company from and against any and all loss, damage, liability, cost
or expense to which the Company may become subject under the
Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue or alleged
untrue statement of any material fact contained in such
registration statement or information statement, any prospectus
contained therein or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, in each
case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged
omission was so made in reliance upon and in strict conformity
with information furnished by the Investor.
(iii) Promptly after receipt by an indemnified party pursuant
to the provisions of paragraph (a) or (b) of this section of
notice of the commencement of any action involving the subject
matter of the foregoing indemnity provisions, such indemnified
party will, if a claim thereof is to be made against the
indemnifying party pursuant of the provisions of said paragraph
(a) or (b), promptly notify the indemnifying party of the
commencement thereof; but the omission to so notify the
indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than hereunder. In
case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party shall have the right to participate in, and, to
the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however,
if the defendants in any action include both the indemnified party
and the indemnifying party and there is a conflict of interest
which would prevent counsel for the indemnifying party from also
representing the indemnified party, the indemnified party or
parties shall have the right to select separate counsel to
participate in the defense or such action on behalf of such
indemnified party or parties. After notice from the indemnifying
party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such
indemnified party pursuant to paragraph (a) or (b) for any legal
or other expense subsequently incurred by such indemnified party
in connection with the defense thereof other than reasonable costs
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<PAGE>
of investigation, unless (i) the indemnified party shall have
employed counsel in accordance with the proviso of the preceding
sentence, (ii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after the notice of
commencement of the action or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party
at the expense of the indemnifying party.
3. Lock-Up Provision. The Investor agrees that for a period of two
years it will sell Securities only pursuant to the registration statement
required by paragraph IV.2 of this Agreement; provided, however, that such
provision shall not apply to a distribution of the Securities to the
shareholders of an affiliate of Investor. During such period, the Investor
agrees to sell no more than 5% of the outstanding voting securities of the
Company during any calendar quarter (based on the number of outstanding voting
securities at the beginning of such calendar quarter).
Company agrees to provide Investor with a stock certificate (or evidence
thereof) for the common shares acquired hereunder on the Closing Date (as
defined in the Asset Purchase Agreement).
4. Anti-Dilution Provision. For purposes of this Section, Securities
and similar references shall refer to the Securities and any additional
securities issued with respect to the Securities upon any stock split, stock
dividend, recapitalization or similar event. In the event that the Company
sells any shares of its voting stock for a price of less than $2.00 per share
(as adjusted to reflect any adjustments in the Securities pursuant to the
previous sentence) (the "Issuance"), Investor shall have the right for a period
of nine months following the Issuance to purchase that number of shares of
voting securities, for a purchase price of $.01 per share, that would result in
the Investor owning the same percentage of voting securities of the Company as
it owned immediately prior to the Issuance. The provisions of this Section
shall not apply to any issuance of common stock pursuant to the exercise of
outstanding stock options or warrants as disclosed in Section III.5 of this
Agreement. In the event that the representations in Section III.5 relating to
capitalization prove to be inaccurate and the result is that Investor receives
a lower percentage of the Company's common stock on a fully diluted basis than
indicated in such representation, the Company shall take all necessary actions
to issue to Investor such additional number of shares of its common stock, at a
price of $.01 per share, that will result in the percentage ownership by
Investor indicated by such representation.
5. Amendment and Waiver. This Agreement may not be amended or waived
except in writing executed by the party against which such amendment or waiver
is sought to be enforced. No course of dealing between or among any persons
having any interest in this Agreement will be deemed effective to modify or
amend any part of this Agreement or any rights or obligations of any person
under or by reason of this Agreement.
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<PAGE>
6. Assignment. This Agreement and all of the provisions hereof will
be binding upon and insure to the benefit of the parties hereto and their
respective successors and permitted assigns, except that neither this Agreement
nor any of the rights, interests or obligations hereunder may be assigned by
either party hereto without prior written consent of the other party.
7. Complete Agreement. This Agreement and the other documents
referred to herein contain the complete agreement between the parties and
supersede any prior understandings, agreements or representations by or between
the parties, written or oral, which may have related to the subject matter
hereof in any way.
8. Counterparts. This Agreement may be executed in one or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
instrument.
9. Governing Law. The internal law, without regard to conflicts of
law principles, of the State of Minnesota will govern all questions concerning
the construction, validity and interpretation of this Agreement and the
performance of the obligations imposed by this Agreement.
10. Survival. The representations, warranties and covenants made in
this Agreement and in any agreement or instrument executed and delivered in
connection with this Agreement shall survive the Closing (as defined in the
Asset Purchase Agreement).
11. Representation of Investor. Investor is a corporation duly
incorporated, validly existing and in good standing under the laws of the
State of Minnesota. Investor is the only shareholder of Enstar Networking
Corporation.
IN WITNESS THEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
VICOM, INC.
AMERICABLE, INC.
By
--------------------------------
Its
-----------------------------
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<PAGE>
Exhibit 10.19
ASSIGNMENT OF LEASE
This Assignment of Lease is made and entered into as of January
1999, by and among Enstar Networking Corporation, a Minnesota corporation
("Assignor"),Vicom, Inc., a Minnesota corporation ("Assignee"), and Lexmark
Office One Partners, LLP, a North Dakota Limited Liability Partnership
("Landlord").
RECITALS:
A. Landlord and Assignor entered into that certain Lease Agreement
dated September 23, 1998 (the "Lease") regarding certain premises consisting of
approximately 3,874 square feet of space located at 1402 43rd St. SW, Fargo,
North Dakota (the "Premises").
B. Assignor desires to assign all its right, title and interest in
the Lease to Assignee, and the parties wish to obtain Landlord's consent to such
assignment.
AGREEMENT
NOW, THEREFORE, in consideration of the Recitals, the mutual promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Assignment and Assumption. Assignor assigns and transfers to
Assignee all its right, title and interest in the Lease as of January ,
1999 (the "Effective Date"), and Assignee assumes and agrees to perform all of
Assignor's obligations under the Lease arising on and after the Effective Date.
Assignee has inspected the Premises and accepts possession and occupancy of the
Premises in the condition existing on the Effective Date.
2. Landlord's Consent. Landlord consents to this assignment, without
waiving any rights provided to it in the Lease to restrict any subsequent
assignment or subletting of the Premises.
3. Tenant's Notices. From and after the Effective Date, all notices
to be given to the tenant under the Lease shall be sent to Assignee's attention
at the follow address:
Vicom, Inc.
9449 Science Center Drive
New Hope, Minnesota 55428
Attention: President
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<PAGE>
4. Compliance with Notification and Information Provisions. Landlord
hereby acknowledges that Assignor has satisfied the notification and
information submission provisions set forth in Section 11 of the Lease.
5. Miscellaneous. This Assignment shall be binding on and inure to
the benefit of the parties and their successors and assigns. This Assignment
may be executed in several counterparts, each of which may be deemed an
original, but all of which together shall constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
of Lease as of the date first written above.
ASSIGNOR:
ENSTAR NETWORKING CORPORATION
OF EDEN PRAIRIE
By:
-----------------------------
Its:
-------------------------
ASSIGNEE:
VICOM, INC.
By:
-----------------------------
Its:
-------------------------
LANDLORD:
LEXMARK OFFICE ONE PARTNERS, LLP
By:
-----------------------------
Its:
-------------------------
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<PAGE>
Exhibit 10.21
ENSTAR NETWORKING CORPORATION
1998 STOCK OPTION PLAN
1. Purpose of Plan
This Plan shall be known as the "ENSTAR NETWORKING 1998 STOCK OPTION PLAN"
and is hereinafter referred to as the "Plan." The purpose of the Plan is to aid
in maintaining and developing personnel capable of assuring the future success
of Enstar Networking Corporation., a Minnesota corporation (the "Company") and
wholly-owned subsidiary of ENStar Inc., a Minnesota corporation ("ENStar"), to
enhance the Company's ability to attract and retain the services of experienced
and knowledgeable key executives and other persons who perform services for the
Company from time to time, to offer such personnel additional incentives to put
forth maximum efforts for the success of the business, and to afford them an
opportunity to acquire a proprietary interest in the Company through stock
purchase options as provided herein. Options granted under the Plan ("Stock
Options") are not intended to be incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
2. Stock Subject to Plan
Subject to Section 10 hereof, the stock to be subject to Stock Options
under the Plan shall be the Company's authorized shares of common stock, par
value $.01 per share (the "Common Stock"). Such shares may be either authorized
but unissued shares or issued shares that have been reacquired by the Company.
Subject to adjustment as provided in Section 10 hereof, the maximum number of
shares which may be issued under all Stock Options granted pursuant to the Plan
shall be equal to Six Hundred Thousand (600,000) shares. If a Stock Option
expires, or for any reason is terminated or unexercised with respect to any
shares, such shares shall again be available for Stock Options thereafter
granted during the term of the Plan.
3. Administration of Plan
The Plan shall be administered by the Board of Directors of the Company.
The Board of Directors of the Company shall have plenary authority in its
discretion, but subject to the express provisions of the Plan: (i)to determine
the persons to whom and the time or times at which Stock Options shall be
granted and the number of shares to be subject to each, (ii)to determine the
terms and conditions of each Stock Option, (iii)to accelerate the time at which
all or any part of a Stock Option may or must be exercised, (iv)to amend or
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<PAGE>
modify the terms of any Stock Option with the consent of the optionee, (v) to
interpret the Plan, (vi) to prescribe, amend and rescind rules and regulations
relating to the Plan, (vii) to exercise the Company's rights under the Plan,
(viii) to make all other determinations necessary or advisable for the
administration of the Plan and (ix) to amend or terminate the Plan pursuant to
Section 14 herein. The Board of Directors' determinations on the foregoing
matters shall be final and conclusive.
4. Eligibility for Participation
Stock Options may only be granted under this Plan to full-time employees
and members of the Board of Directors of the Company (regardless of whether such
members of the Board of Directors are employees (full or part-time) of the
Company). In determining the persons to whom Stock Options shall be granted and
the number of shares subject to each, the Board of Directors may take into
account the nature of services rendered by such persons, their present and
potential contributions to the success of the Company and such other factors as
the Board of Directors in its discretion shall deem relevant. A person who has
been granted a Stock Option under the Plan may be granted additional Stock
Options under the Plan, if the Board of Directors shall so determine. Nothing
in the Plan or in any agreement thereunder shall confer on any employee any
right to continue in the employ of the Company or affect, in any way, the right
of the Company to terminate his or her employment at any time.
5. Terms and Conditions of Options
Stock Options granted pursuant to the Plan shall be authorized by action of
the Board of Directors and shall be evidenced by written stock option agreements
in such form as the Board of Directors shall from time to time approve, which
agreements shall comply with and be subject to the terms and conditions of the
Plan. The grant of a Stock Option shall be effective only if a written option
agreement shall have been duly executed and delivered by and on behalf of the
Company following such grant. Nothing contained in the Plan or in any
resolution adopted or to be adopted by the Board of Directors or by the
shareholders of the Company, and no action taken by the Board of Directors
(other than the execution and delivery of an option agreement), shall constitute
the granting of a Stock Option hereunder.
6. Option Price
The option price per share for any Stock Option granted pursuant to the
Plan shall be not less than 100% of the fair value of a share of Common Stock as
determined by the Board of Directors or as set forth in the related option
agreement.
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<PAGE>
7. Term and Vesting
Each Stock Option granted hereunder shall expire on the date determined by
the Board of Directors and specified in the option agreement. The Board of
Directors shall be under no duty to provide terms of like duration for Stock
Options granted under the Plan, but the term of a Stock Option may not extend
more than ten (10) years from the date of grant of such option.
8. Exercise of Option
(a) Except as otherwise provided for in the Plan, the Board of Directors
shall have full and complete authority to determine whether a Stock Option will
be exercisable in full at any time or from time to time during the term thereof,
or to provide for the exercise thereof in such installments, upon the occurrence
of such events (such as termination of employment for any reason) and at such
times during the term of the Stock Option as the Board of Directors may
determine and specify in the option agreement.
(b) The exercise of any Stock Option shall only be effective at such time
as counsel to the Company shall have determined that the issuance and delivery
of shares pursuant to such exercise will not violate any state or federal
securities or other laws and may otherwise be limited by the Company in order
to maintain compliance with state and federal securities laws.
9. Manner of Exercise of Option
(a) A Stock Option may be exercised only by the optionee, or his or her
legal representative in the case of death or disability, by delivering written
notice to the Company at its principal office. The notice shall state the
number of whole shares as to which the Stock Option is being exercised and be
accompanied by payment in full of the option price for all shares designated by
the notice. Payment shall be in cash or certified check or in such other form
as is acceptable to the Company, including, but not limited to, a promissory
note issued by the optionee.
(b) No person shall have any rights as a shareholder with respect to any
shares of capital stock of the Company until a stock certificate evidencing such
shares shall have been issued to such optionee upon exercise of a Stock Option.
10. Dilution or Other Adjustments
If there shall be any change in the shares of the Company's Common Stock
through merger, consolidation, reorganization, recapitalization, stock dividend
(of whatever amount), stock split or other change in the corporate structure,
appropriate adjustments in the Plan and outstanding options shall be made by the
Board of Directors. In the event of any such changes, adjustments may include,
where appropriate, changes in the aggregate number of shares subject to the
Plan, and changes in the number of shares and the price per share subject to
outstanding options, in order to prevent dilution or enlargement of option
rights.
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<PAGE>
11. No Restrictions on Dividends, Company's Accounting or Business Operations
(a) Except as otherwise provided for herein, neither the Plan nor any
Stock Option granted pursuant hereto shall be interpreted as imposing any
restrictions on the right of the Company to: (i) pay dividends, on such terms as
the Company's Board of Directors may determine, (ii) issue additional equity or
make other distributions with respect to its capital stock, (iii) borrow money
from or have business dealings with North Star, its affiliates and any
successors to North Star, or (iv) adopt or modify any accounting or business
practices.
(b) The Company shall be under no obligation to pay dividends at any time
or in any amount with respect to its capital stock.
12. Additional Restrictions
The Board of Directors shall have full and complete authority to determine
whether all or any part of the shares acquired upon exercise of any of the Stock
Options granted under the Plan shall be subject to additional restrictions not
set forth herein on the transferability thereof or any other restrictions
affecting in any manner the optionee's or the Company's rights with respect
thereto, but any such restrictions shall be contained in the option agreements
relating to such Stock Options.
13. Available Shares
The Company shall at all times when any Stock Option remains outstanding
reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the terms of any and all outstanding Stock Options and the
related option agreements.
14. Amendment or Discontinuance of Plan
The Board of Directors of the Company may discontinue the Plan at any time
or from time to time may amend or modify any of the provisions of the Plan; and
the Board of Directors may make any administrative changes to the Plan
consistent therewith. The Board of Directors shall not alter or impair any
Stock Option theretofore granted under the Plan without the consent of the
holder of the Stock Option.
15. Governing Law
The internal law, and not the law of conflicts, of the State of Minnesota
will govern all questions concerning the construction, validity and
interpretation of the Plan and any agreements in connection with any Stock
Option granted under the Plan and the performance of any obligations imposed by
any such agreements.
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<PAGE>
16. Effective Date and Termination of Plan
The Plan was adopted by the Board of Directors on September 30, 1996.
Unless the Plan shall have been discontinued as provided in Section 14
hereof, the Plan shall expire ten years after the date set forth in paragraph
(a) above. No Stock Option may be granted after such expiration, but expiration
or termination of the Plan shall not, without the consent of the optionee, alter
or impair any rights or obligations under any Stock Option theretofore granted.
17. Reorganization
North Star is a party to that certain Reorganization Agreement, dated
December 21, 1995, among North Star, NSU Merger Co., a Delaware corporation
("Merger Co."), and Michael Foods, Inc., a Delaware corporation ('Michael'),
pursuant to which it is presently anticipated that (i) the currently outstanding
shares of Common Stock will be contributed to ENStar Inc., a Minnesota
corporation and a wholly owned subsidiary of North Star ("ENStar"), (ii) Merger
Co. will be merged with and into Michael and (iii) the outstanding common stock
of ENStar, all of which is currently owned by North Star, will be distributed to
the holders of the common stock of North Star (the "Distribution"). After the
contribution of the Company' Common Stock to ENStar, the Company will be a
subsidiary of ENStar. Following the Distribution, EnStar will be a public
company. All references herein to North Star shall be deemed to refer to ENStar
following the Distribution, if it is effected.
<PAGE>
EXHIBIT 10.27
TWELFTH AMENDMENT TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
AND WAIVER
THIS TWELFTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
AND WAIVER (the "Amendment") is dated as of November 30, 1998, and is by and
among AMERICABLE, INC., a Minnesota corporation ("Americable"), CABLE
DISTRIBUTION SYSTEMS, INC., a Georgia corporation ("Cable") (Americable and
Cable are hereinafter each individually referred to as an "Original Borrower"
and collectively as the "Original Borrowers"), ENSTAR NETWORKING CORPORATION, a
Minnesota corporation ("ENC") (Americable, Cable and ENC are hereinafter each
individually referred to as an "Borrower" and collectively as the "Borrowers")
and U.S. BANK NATIONAL ASSOCIATION, a national banking association and the
successor by merger with First Bank National Association, (the "Bank").
Capitalized terms not otherwise expressly defined herein shall have the meanings
set forth in the Loan Agreement hereinafter described.
RECITALS
WHEREAS, the Original Borrowers and the Bank are parties to an Amended and
Restated Loan and Security Agreement, dated as of June 1, 1993, as amended by a
First Amendment dated as of November 29, 1993, a Waiver, a Second Amendment
dated March 3, 1995, a Third Amendment dated May 31, 1996, a letter amendment
dated June 28, 1996, a letter amendment dated July 31, 1996, a Sixth Amendment
dated as of August 9, 1996, a Seventh Amendment dated as of May 29, 1997, an
Eighth Amendment dated as of September 30, 1997, a Ninth Amendment dated as of
March 5, 1998 and a Tenth Amendment dated as of June 30, 1998 (as so amended,
the "Loan Agreement");
WHEREAS, the Borrowers have requested and the Bank has agreed further to
amend the Loan Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1 - AMENDMENTS TO THE LOAN AGREEMENT
1.1 Amendments to Loan Agreement. As of the effective date of this
Amendment, the Loan Agreement is hereby amended as follows:
(a) Section 1.1 is amended to delete the date "September 30, 1998,"
appearing in the definition of the "Termination Date" and the date
"October 31, 1999" is substituted therefor;
(b) Section 2.1(c) is amended in its entirety to read as follows:
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"(c) The Revolving Loans shall be constituted of Eurodollar
Advances and Reference Rate Advances, as shall be selected by the
Borrower; provided, that no new Eurodollar Advances will be made
after November 30, 1998, no Reference Rate Advance may be converted
into a Eurodollar Advance after that date and no Eurodollar Advance
existing on that date may be continued as a Eurodollar Advance after
the end of its then effective Interest Period."
(c) Section 2.5(a) is amended by adding the following as the last
sentence thereof:
"Notwithstanding anything to the contrary set forth in this
Section 2.5(a), no Eurodollar Advance shall be obtained after
November 30, 1998."
(d) Section 2.13 is amended by adding the following as the last
sentence thereof:
"Notwithstanding anything to the contrary set forth in this
Section 2.13, no Reference Rate Advance may be converted into a
Eurodollar Advance after November 30, 1998 and no existing Eurodollar
Advance may be continued as a Eurodollar Advance after the end of its
then effective Interest Period."
(e) Section 6.2 is amended in its entirety to read as follows:
"6.2 Sale of Assets. Sell, transfer, convey, lease, assign or
otherwise dispose (with or without recourse) of: (a) any of the
1,025,000 shares of CorVel Corporation's common stock (the 'CorVel
Stock') owned by Americable; or (b) any of its other assets
(including, without limitation, any Accounts Receivable, instruments
or chattel paper) except for sales and leases of Inventory in the
ordinary course of business."
(f) Section 6.8 is amended in its entirety to read as follows:
"6.8 Restricted Payments. Purchase or redeem any shares of its
stock, declare or pay any dividends thereon (other than stock
dividends and dividends payable to Americable), make any distribution
to stockholders as such (other than Americable) or set aside any funds
for any such purpose, and not prepay, purchase or redeem any
subordinated Indebtedness of the Borrower or any Subsidiary; provided,
however, that, so long as no Event of Default or Unmatured Event of
Default has occurred and is continuing or would result therefrom,
Americable may make payments to ENStar: (a) with respect to any tax
obligation of Americable or any of its Subsidiaries actually paid by
ENStar (less any refund actually received by ENStar); and (b) of an
additional amount not to exceed in the aggregate, the sum of the
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following amounts received by Americable after February 28, 1997: (i)
cash dividends received by Americable with respect to the CorVel
Stock; and (ii) net cash proceeds received by Americable from the
sale of the CorVel Stock permitted by Section 6.2 except that all such
cash proceeds received by Americable after November 1, 1998 shall be
paid to the Lender for application to the Obligations in such order as
Lender may elect and, if any such net proceeds are applied to the
Advances, then such applied amount shall reduce the Credit Amount.
Any Excess Cash Flow which is not paid to the Borrower in the next
succeeding fiscal year may not be included in the determination of
Excess Cash Flow for such fiscal year."
(g) Supplement A (Amended 3/98) attached to the Loan Agreement is
hereby deleted and Supplement A (Amended 11/98) attached to this
Amendment is substituted therefor. All references in the Loan Agreement to
"Supplement A" shall be references to Supplement A (Amended 11/98).
(h) The Borrowing Base Certificate attached to the Loan Agreement as
Exhibit A (Amended 8/9/96) is hereby amended to conform to Exhibit A
(Amended 11/98) attached to this Amendment.
1.2 Construction. All references in the Loan Agreement to "this
Agreement," "herein" and similar references shall be deemed to refer to the Loan
Agreement as amended by this Amendment.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to make and
maintain the Loans under the Loan Agreement as amended hereby, the Borrowers
hereby warrant and represent to the Bank that: (a) The execution, delivery
and performance by the Borrowers of this Amendment and any other documents to
which the Borrower is a party have been duly authorized by all necessary
corporate or partnership action, do not require any approval or consent of,
or any registration, qualification or filing with, any government agency or
authority or any approval or consent of any other person (including, without
limitation, any stockholder or partner), do not and will not conflict with,
result in any violation of or constitute any default under, any provision of
the Borrower's articles of incorporation or bylaws, any agreement binding on
or applicable to such Borrower or any of its property, or any law or
governmental regulation or court decree or order, binding upon or applicable,
to such Borrower or of any of its property and will not result in the creation
or imposition of any security interest or other lien or encumbrance in or on
any of its property pursuant to the provisions of any agreement applicable to
the Borrower or any of its property; (b) The Loan Agreement as amended by this
Amendment is the legal, valid and binding obligations of each Borrower and is
enforceable in accordance with its terms, subject only to bankruptcy,
insolvency, reorganization, moratorium or similar laws, rulings or decisions
at the time in effect affecting the enforceability of rights or creditors
generally and to general equitable principles which may limit the right to
obtain equitable remedies.
-3-
<PAGE>
ARTICLE III - CONDITIONS AND EFFECTIVENESS
This Amendment shall become effective on the date first set forth above,
provided, however, that the effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions:
3.1 Before and after giving effect to this Amendment, the
representations and warranties in ARTICLE IV of the Loan Agreement shall
be true and correct as though made on the date hereof except for changes
that are permitted by the terms of the Loan Agreement. The execution by
the Borrowers of this Amendment shall be deemed a representation that the
Borrowers have complied with the foregoing condition.
3.2 Before and after giving effect to this Amendment, no Event of
Default or no Default, shall have occurred and be continuing under the
Loan Agreement except for those expressly waived by the terms hereof. The
execution by the Borrowers of this Amendment shall be deemed a
representation that the Borrowers have complied with the foregoing
condition.
3.3 The Bank shall have received the following documents
appropriately completed and duly executed by the Borrowers and the other
Obligors where appropriate and shall have received the other items
described herein:
(a) This Amendment appropriately completed and duly executed by
the Borrowers, together with a resolution of each of the Borrowers
authorizing the execution and delivery of this Amendment in form and
substance satisfactory to the Bank;
(b) An Acknowledgement and Consent duly executed by ENStar in
form and substance satisfactory to the Bank;
(c) A $15,000 extension fee in immediately available funds;
and
(d) Such other approvals, opinions or documents, as the Bank
may reasonably request.
ARTICLE IV - GENERAL
4.1 Expenses. The Borrowers jointly and severally agree to reimburse
the Bank upon demand for all reasonable expenses, including reasonable fees of
attorneys (who may be employees of the Bank) and legal expenses incurred by the
Bank in the preparation, negotiation and execution of this Amendment and any
other document required to be furnished herewith, and in enforcing the
obligations of the Borrowers hereunder, and to jointly and severally pay and
save the Bank harmless from all liability for, any stamp or other taxes which
may be payable with respect to the execution or delivery of this Amendment,
which obligations of the Borrowers shall survive any termination of the Loan
Agreement.
-4-
<PAGE>
4.2 Counterparts. This Amendment may be executed in as many
counterparts as may be deemed necessary or convenient, and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed an original but all such counterparts shall
constitute but one and the same instrument.
4.3 Severability. Any provision of this Amendment which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining portions hereof or
affecting the validity or enforceability of such provisions in any other
jurisdiction.
4.4 Law. This Amendment shall be a contract made under the laws of
the State of Minnesota, which laws shall govern all the rights and duties
hereunder.
4.5 Successors: Enforceability. This Amendment shall be binding
upon the Borrowers and the Bank and their respective successors and
assigns, and shall inure to the benefit of the Borrowers and the Bank and
the successors and assigns of the Bank. Except as hereby amended, the
Loan Agreement shall remain in full force and effect and is hereby
ratified and confirmed in all respects.
4.6 Recitals. The recitals hereto are incorporated herein by
reference and constitute and integral part of this Amendment.
4.7 Acknowledgement and Release. In order to induce the Bank
to enter into this Amendment, the Borrowers: (a) represent and warrant
to the Bank that no events have taken place and no circumstances exist
at the date hereof which would give the Borrowers the right to assert a
defense, offset or counterclaim to any claim by the Bank for payment of
the Obligations; and (b) hereby releases and forever discharges the Bank
and its successors, assigns, directors, officers, agents, employees and
participants from any and all actions, causes of action, suits,
proceedings, debts, sums of money, covenants, contracts, controversies,
claims and demands, at law or in equity, which the Borrower ever had or
now has against the Bank or its successors, assigns, directors, officers,
agents, employees or participants by virtue of their relationship to the
Borrower in connection with the Loan Documents and the transactions
related thereto.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the
date first written above.
AMERICABLE, INC., a Minnesota Corporation
By: /s/ Thomas S. Wargolet
----------------------
Thomas S. Wargolet
Vice President, Finance
CABLE DISTRIBUTION SYSTEMS, INC.,
a Georgia Corporation
By: /s/ Thomas S. Wargolet
----------------------
Thomas S. Wargolet
Vice President, Finance
> ENSTAR NETWORKING CORPORATION,
a Minnesota Corporation
By: /s/ Thomas S. Wargolet
----------------------
Thomas S. Wargolet
Vice President, Finance
U.S. BANK NATIONAL ASSOCATION,
f/k/a First Bank National Association
By: /s/ Kim Leppanen
----------------------
Kim Leppanen
Assistant Vice President
-6-
<PAGE>
SUPPLEMENT A
to
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
Dated as of JUNE 1, 1993 Among
U.S. BANK NATIONAL ASSOCIATION, as the successor
by merger with First Bank National Association (the "Bank") and
AMERICABLE, INC., CABLE DISTRIBUTION SYSTEMS, INC.
and ENSTAR NETWORKING CORPORATION
(collectively, the "Borrowers")
(AMENDED 11/98)
1. Loan Agreement Reference. This Supplement A, as it may be amended or
modified from time to time, is a part of the Amended and Restated Loan and
Security Agreement, dated as of June 1, 1993, among the Borrowers and the Bank
(together with all amendments, modifications and supplements thereto, the "Loan
Agreement"). Terms used herein which are defined in the Loan Agreement shall
have the meanings given such terms in the Loan Agreement unless the context
other requires.
2. Credit Amount; Borrowing Base.
2.1 Credit Amount. The maximum amount of Revolving Loans which the
Bank will make available to the Borrowers shall not exceed THREE MILLION AND
NO/100 DOLLARS ($3,000,000) (such amount is herein called the "Credit
Amount") (unless such amount is increased by the Bank in its sole and
absolute discretion).
2.2 Borrowing Base.
The term "Borrowing Base," as used herein, shall mean:
(a) an amount of up to 80% of the net amount (as determined by
the Bank after deduction of such reserves and allowances as the Bank
deems proper and necessary) of the Borrowers' Eligible Accounts
Receivable; provided, that the 80% borrowing base percentage shall be
reduced to 75% on May 1, 1999;
provided further, however, that the Bank, in its sole discretion, may: (x)
limit the amount of ENC's Eligible Accounts Receivable included in the
consolidated Borrowing Base for all Borrowers to an amount which does not
exceed the sum of the outstanding principal balance of Advances obtained by
ENC directly from the Bank or obtained by any other Borrower and disbursed
to, or for the benefit of ENC; and/or (y) require that the Borrowing Base
be separately calculated for each of Americable and ENC and that the
Advances made to such Borrower be limited to such Borrower's Borrowing
Base.
-7-
<PAGE>
2.3 Bank's Rights. The Borrowers agree that nothing contained in this
Supplement A (a) shall be construed as the Bank's agreement to resort or
look to a particular type or item of Collateral as security for any specific
Loan or advance or in any way limit the Bank's right to resort to any or all
of the Collateral as security for any of the obligations, (b) shall be
deemed to limit or reduce any lien on or any security interest in or upon
any portion of the Collateral or other security for the Obligations or (c)
shall supersede Section 2.10 of the Loan Agreement.
3. Interest.
3.1 Revolving Loans. The unpaid balance of the Revolving Loans shall
bear interest to maturity as follows:
(a) Eurodollar Advances. The unpaid principal amount of each
Eurodollar Advance shall bear interest prior to maturity at a rate per
annum equal to the Eurodollar Rate (Reserve Adjusted) in effect for
each Interest Period for such Eurodollar Advance plus 2.50% per annum.
(b) Reference Rate Advances. The unpaid principal amount of
Revolving Loans accruing interest as Reference Rate Advances shall bear
interest prior to maturity as follows: (i) on that portion of the
aggregate outstanding principal of the Revolving Loans which is equal
to or less than $2,500,000, at a rate per annum equal to the Reference
Rate; and (ii) on that portion of the aggregate outstanding principal
of the Revolving Loans which exceeds $2,500,000, at a rate per annum
equal to the sum of the Reference Rate plus one-half of one percent
(0.50) per annum.
3.2 Default Rate. If any amount of the Loans is not paid when due,
whether by acceleration or otherwise, the entire unpaid principal balance
of the Loans (other than overdraft Loans and Over Advances) shall bear
interest until paid at a rate per annum equal to the greater of (i) the
Reference Rate from time to time in effect plus four percent (4%) or (ii)
two percent (2%) above the rate in effect at the time such amount became
due for such past due amount.
3.3 Overdraft Loans; Over Advances. Overdraft Loans and over Advances
shall bear interest at the rate(s) determined pursuant to Section 2.8 or
Section 2.9 of the Original Agreement, as applicable.
-2-
<PAGE>
4. Eligible Account Receivable Data.
(a) The Account Receivable must not be unpaid on the date that is
90 days after the date of the invoice evidencing such Account Receivable.
(b) If invoices representing 10% or more of the unpaid net amount of
all Accounts Receivable from any one Account Debtor are unpaid more than 90
days after the dates of the invoices evidencing such Accounts Receivable,
then all Accounts Receivable relating to such Account Debtor shall cease to
be Eligible Accounts Receivable.
5. Additional Covenants. From the date of the Loan Agreement and thereafter
until all of the Borrowers' Obligations under the Loan Agreement are paid in
full, the Borrowers agree that, unless the Bank shall otherwise consent in
writing, it will not, and will not permit any Subsidiary to, do any of the
following:
5.1 Tangible Capital Base.
5.2 Leverage Ratio.
5.3 Interest Coverage Ratio.
5.4 Capital Expenditures. Make Capital Expenditures in an amount
exceeding: (a) $1,000,000 during Americable's fiscal year ended December 31,
1998, or (b) $750,000 during Americable's fiscal year ending December 31,
1999; determined on a consolidated basis for the Borrowers only (excluding
Transition).
5.5 Fiscal Month Loss. Sustain, at any fiscal month-end, commencing
as of October 31, 1998, a loss before taxes computed on a consolidated basis
for Americable and its consolidated Subsidiaries in accordance with GAAP
greater than $100,000 for the relevant fiscal month; provided, however, that
if the consolidated loss before taxes for any fiscal month exceeds $100,000,
then Borrowers, by no later than 10 days after submitting its financial
statements for such fiscal month to Bank, shall obtain a capital
contribution from ENStar in amount equal to double the amount by which the
consolidated loss before taxes exceeds $100,000.
Borrowers' Initials
------
------
------
Bank's Initials
-----
Date: November 30, 1998
<PAGE>
EXHIBIT 10.28
THIRTEENTH AMENDMENT TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
AND CONSENT
THIS THIRTEENTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT AND CONSENT (the "Amendment") is dated as of January 8, 1999, and is
by and among AMERICABLE, INC., a Minnesota corporation ("Americable")
(Americable is hereinafter referred to as the "Original Borrower"), ENSTAR
NETWORKING CORPORATION, a Minnesota corporation ("ENC") (Americable and ENC are
hereinafter each individually referred to as an "Borrower" and collectively as
the "Borrowers") and U.S. BANK NATIONAL ASSOCIATION, f/k/a First Bank National
Association, (the "Bank"). Capitalized terms not otherwise expressly defined
herein shall have the meanings set forth in the Loan Agreement hereinafter
described.
RECITALS
WHEREAS, the Borrowers and the Bank are parties to an Amended and Restated
Loan and Security Agreement, dated as of June 1, 1993, as amended by a
First Amendment dated as of November 29, 1993, a Waiver, a Second Amendment
dated March 3, 1995, a Third Amendment dated May 31, 1996, a letter amendment
dated June 28, 1996, a letter amendment dated July 31, 1996, a Sixth Amendment
dated as of August 9, 1996, a Seventh Amendment dated as of May 29, 1997, an
Eighth Amendment dated as of September 30, 1997, a Ninth Amendment dated as of
March 5, 1998, a Tenth Amendment dated as of June 30, 1998, an Eleventh
Amendment dated as of August 31, 1998 and a Twelfth Amendment dated as of
November 30, 1998 (as so amended, the "Loan Agreement");
WHEREAS, the Borrowers have requested and the Bank consent to ENC's sale of
a portion of its Accounts Receivable, Inventory and other Assets to Vicom, Inc.
("Vicom") pursuant to that certain Asset Purchase Agreement dated as of December
28, 1998 (the "Vicom Asset Purchase Agreement") between ENC and Vicom; and
WHEREAS, the Bank is willing to do so provided that certain terms of the
Loan Agreement are further amended and the Borrowers are willing to futher
amend the Loan Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1 - AMENDMENTS TO THE LOAN AGREEMENT
1.1 Amendments to Loan Agreement. As of the effective date of this
Amendment, the Loan Agreement is amended as follows:
(a) The definitions of "Borrower" and "Borrowers" set forth in the
preamble to the Loan Agreement are respectively amended in their entireties
-1-
<PAGE>
to read as follows:
"Americable and ENC are hereinafter each individually referred
to as a 'Borrower' and collectively as the 'Borrowers'."
(b) Section 6.2 of the Loan Agreement is amended in its entirety to
read as follows:
"6.2 Sale of Assets. Sell, transfer, convey, lease, assign or
otherwise dispose (with or without recourse) of: (a) any of the
1,025,000 shares of CorVel Corporation's common stock (the 'CorVel
Stock') owned by Americable; or (b) any of the shares of Vicom, Inc.
common stock (the 'Vicom Stock') acquired by ENC as part of the
consideration of the sale of certain of its assets to Vicom pursuant
to that certain Asset Purchase Agreement dated as of December 28, 1998
(the "Vicom Asset Purchase Agreement") between ENC and Vicom, which
Vicom Stock includes the 1,350,000 shares of Vicom Stock originally
acquired by ENC and any additional shares of Vicom Stock acquired by
ENC pursuant to the antidilution provisions of the Vicom Asset
Purchase Agreement; or (c) any of its other assets (including, without
limitation, any Accounts Receivable, instruments or chattel paper)
except for sales and leases of Inventory in the ordinary course of
business."
1.2 Construction. All references in the Loan Agreement to "this
Agreement," "herein" and similar references shall be deemed to refer to the Loan
Agreement as amended by this Amendment.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to make and
maintain the Loans under the Loan Agreement as amended hereby, the Borrowers
hereby warrant and represent to the Bank that: (a) The execution, delivery
and performance by the Borrowers of this Amendment and any other documents to
which the Borrower is a party have been duly authorized by all necessary
corporate or partnership action, do not require any approval or consent of,
or any registration, qualification or filing with, any government agency or
authority or any approval or consent of any other person (including, without
limitation, any stockholder or partner), do not and will not conflict with,
result in any violation of or constitute any default under, any provision of
the Borrower's articles of incorporation or bylaws, any agreement binding on
or applicable to such Borrower or any of its property, or any law or
governmental regulation or court decree or order, binding upon or applicable,
to such Borrower or of any of its property and will not result in the creation
or imposition of any security interest or other lien or encumbrance in or on
any of its property pursuant to the provisions of any agreement applicable to
the Borrower or any of its property; (b) The Loan Agreement as amended by this
Amendment is the legal, valid and binding obligations of each Borrower and is
-2-
<PAGE>
enforceable in accordance with its terms, subject only to bankruptcy,
insolvency, reorganization, moratorium or similar laws, rulings or decisions
at the time in effect affecting the enforceability of rights or creditors
generally and to general equitable principles which may limit the right to
obtain equitable remedies; and (c) the Borrowers have provided the Bank with
true, correct and complete copies of the Vicom Asset Purchase Agreement and
all amendments, modifications or supplements thereto.
ARTICLE III - CONDITIONS AND EFFECTIVENESS
This Amendment shall become effective on the date first set forth above,
provided, however, that the effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions:
3.1 Before and after giving effect to this Amendment, the
representations and warranties in ARTICLE IV of the Loan Agreement shall
be true and correct as though made on the date hereof except for changes
that are permitted by the terms of the Loan Agreement. The execution by
the Borrowers of this Amendment shall be deemed a representation that the
Borrowers have complied with the foregoing condition.
3.2 Before and after giving effect to this Amendment, no Event of
Default or no Default, shall have occurred and be continuing under the
Loan Agreement except for those expressly waived by the terms hereof. The
execution by the Borrowers of this Amendment shall be deemed a
representation that the Borrowers have complied with the foregoing
condition.
3.3 The Bank shall have received the following documents
appropriately completed and duly executed by the Borrowers and the other
Obligors where appropriate and shall have received the other items
described herein:
(a) This Amendment appropriately completed and duly executed by
the Borrowers, together with a resolution of each of the Borrowers
authorizing the execution and delivery of this Amendment in form and
substance satisfactory to the Bank;
(b) An Acknowledgement and Consent duly executed by ENStar in
form and substance satisfactory to the Bank;
(c) Copies of the Vicom Asset Purchase Agreement and all
amendments, modifications or supplements thereto certified by ENC's
secretary to be true, correct and complete copies thereof, and
(d) Such other approvals, opinions or documents, as the Bank
may reasonably request.
-3-
<PAGE>
ARTICLE IV - GENERAL
4.1 Expenses. The Borrowers jointly and severally agree to reimburse
the Bank upon demand for all reasonable expenses, including reasonable fees of
attorneys (who may be employees of the Bank) and legal expenses incurred by the
Bank in the preparation, negotiation and execution of this Amendment and any
other document required to be furnished herewith, and in enforcing the
obligations of the Borrowers hereunder, and to jointly and severally pay and
save the Bank harmless from all liability for, any stamp or other taxes which
may be payable with respect to the execution or delivery of this Amendment,
which obligations of the Borrowers shall survive any termination of the Loan
Agreement.
4.2 Counterparts. This Amendment may be executed in as many
counterparts as may be deemed necessary or convenient, and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed an original but all such counterparts shall
constitute but one and the same instrument.
4.3 Severability. Any provision of this Amendment which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining portions hereof or
affecting the validity or enforceability of such provisions in any other
jurisdiction.
4.4 Law. This Amendment shall be a contract made under the laws of
the State of Minnesota, which laws shall govern all the rights and duties
hereunder.
4.5 Successors: Enforceability. This Amendment shall be binding
upon the Borrowers and the Bank and their respective successors and
assigns, and shall inure to the benefit of the Borrowers and the Bank and
the successors and assigns of the Bank. Except as hereby amended, the
Loan Agreement shall remain in full force and effect and is hereby
ratified and confirmed in all respects.
4.6 Recitals. The recitals hereto are incorporated herein by
reference and constitute and integral part of this Amendment.
4.7 Acknowledgement and Release. In order to induce the Bank
to enter into this Amendment, the Borrowers: (a) represent and warrant
to the Bank that no events have taken place and no circumstances exist
at the date hereof which would give the Borrowers the right to assert a
defense, offset or counterclaim to any claim by the Bank for payment of
the Obligations; and (b) hereby releases and forever discharges the Bank
and its successors, assigns, directors, officers, agents, employees and
participants from any and all actions, causes of action, suits,
proceedings, debts, sums of money, covenants, contracts, controversies,
claims and demands, at law or in equity, which the Borrower ever had or
now has against the Bank or its successors, assigns, directors, officers,
agents, employees or participants by virtue of their relationship to the
Borrower in connection with the Loan Documents and the transactions
related thereto.
-4-
<PAGE>
4.8 Consent. The Bank hereby consents to ENC's sale of a portion of
its Accounts Receivable, Inventory and other Assets to Vicom pursuant to
the Vicom Asset Purchase Agreement and in accordance with the terms thereof
as set forth in the copies thereof delivered to the Bank pursuant to
Section 3.3 hereof and as further amended, modified or supplemented with
the Bank's prior written consent. This Consent is limited to the specific
transaction described above and is not intended, and shall not be
construed, to be a consent to any other transaction or a general waiver of
any term or provision of the Loan Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the
date first written above.
AMERICABLE, INC., a Minnesota Corporation
By: /s/ Peter E. Flynn
----------------------
Peter E. Flynn
President
ENSTAR NETWORKING CORPORATION,
a Minnesota Corporation
By: /s/ Thomas S. Wargolet
----------------------
Thomas S. Wargolet
Chief Financial Officer
U.S. BANK NATIONAL ASSOCATION,
f/k/a First Bank National Association
By: /s/ Kim Leppanen
----------------------
Kim Leppanen
Assistant Vice President
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF ENSTAR INC.
Americable, Inc., a Minnesota corporation
Cable Distribution Systems of Minnesota, Inc., a Minnesota corporation and
wholly owned subsidiary of Enstar Networking Corporation.
Enstar Networking Corporation, a Minnesota corporation and wholly owned
subsidiary of Americable, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated May 11, 1998, with respect to the
consolidated financial statements and schedule of CorVel Corporation included in
the ENStar Inc. Annual Report (Form 10-K) for the year ended December 31, 1998.
/S/ ERNST & YOUNG LLP
Orange County, California
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,155
<SECURITIES> 0
<RECEIVABLES> 5,143
<ALLOWANCES> (374)
<INVENTORY> 1,734
<CURRENT-ASSETS> 23,819
<PP&E> 3,505
<DEPRECIATION> (2,433)
<TOTAL-ASSETS> 43,573
<CURRENT-LIABILITIES> 14,345
<BONDS> 14,104
0
0
<COMMON> 30
<OTHER-SE> 13,555
<TOTAL-LIABILITY-AND-EQUITY> 43,573
<SALES> 43,358
<TOTAL-REVENUES> 43,358
<CGS> 34,316
<TOTAL-COSTS> 34,316
<OTHER-EXPENSES> 12,604
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 1,336
<INCOME-PRETAX> (5,025)
<INCOME-TAX> (1,850)
<INCOME-CONTINUING> (3,175)
<DISCONTINUED> 3,436
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,773
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
EXHIBIT 99.1
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
ENStar Inc. ("ENStar" or the "Company") desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
and is filing this cautionary statement in connection with such safe harbor
legislation. The Company's Annual Report on Form 10-K, the Company's Annual
Report to Shareholders, any Quarterly Report on Form 10-Q or Report on Form 8-K
filed by the Company or any other written or oral statements made by or on
behalf of the Company may also include forward-looking statements which reflect
the Company's current views with respect to future events and financial
performance. The words "believe," "expect," "anticipate," "intends," "estimate,"
"forecast," "project" and similar expressions identify forward-looking
statements.
The Company wishes to caution investors that any forward-looking statements
made by or on behalf of the Company are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not limited
to, the factors listed below (many of which have been discussed in the Company's
prior filings with the Securities and Exchange Commission). Though the Company
has attempted to list comprehensively these important factors, the Company
wishes to caution investors that other factors may in the future prove to be
important in affecting the Company's results of operations. New factors emerge
from time to time and it is not possible for management to predict all of such
factors, nor can it assess the impact of each such factor on the business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only of the Company's views as of the
date the statement was made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Except to the extent otherwise defined below, capitalized terms set forth
below have the meanings assigned to such terms in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
-1-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(CONTINUED)
LIMITED HISTORY OF PROFITABILITY; UNCERTAINTY OF FUTURE RESULTS
ENStar has a limited history of profitability. During 1998 and 1997,
ENStar experienced operating losses of approximately $3.7 million and $4.8
million, respectively, as a result of a reduction in demand from certain large
customers, costs associated with the introduction of Enstar Networking as a
separate business, and the addition of new engineering and sales personnel
within each of its operating companies. ENStar expects to record an operating
loss for the year ended December 31, 1999. ENStar's ability to achieve
profitability is primarily dependent upon Enstar Networking generating higher
volumes of service revenues from network integration and network security
consulting. No assurance can be made, however, that Enstar Networking will be
successful in increasing its service revenues to an adequate level to achieve
profitability. Enstar Networking closed certain regional operations during
1998 in an effort to reduce operating losses.
If Enstar Networking is not successful in generating higher volumes of
service revenues, its ability to achieve operating profitability will be
materially adversely affected. Based on the above factors, there can be no
assurance that ENStar will be able to achieve profitability on a quarterly or
annual basis in the future.
CASH FLOW DEFICITS
ENStar has experienced cash flow deficits from operations in certain prior
years. ENStar's ratio of earnings to fixed charges for each of the five fiscal
years ended December 31, 1998, 1997, 1996, 1995 and 1994 was (2.16), (4.26),
.69, .75 and (1.55), respectively. During the years 1998, 1997, 1996, 1995 and
1994, the Company's earnings were inadequate to cover its fixed charges. The
coverage deficiency was approximately $5,025,000, $5,489,000, $125,000, $122,000
and $1,390,000 for the fiscal years ended December 31, 1998, 1997, 1996, 1995
and 1994, respectively. Based on the Company's recent cash flow deficits, the
Company does not expect its fixed charges to decrease significantly or for its
earnings from its operating subsidiaries to improve significantly.
-2-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(CONTINUED)
CERTAIN RISKS PERTAINING TO THE CORVEL COMMON STOCK
Because CorVel is not a wholly owned subsidiary, the Company does not have
the ability to utilize cash flows from CorVel in connection with its wholly
owned operating subsidiaries or to repay its indebtedness, including the
Debentures. The only cash the Company can obtain from CorVel is cash dividend
payments made to all CorVel shareholders. Since its initial public offering,
CorVel has not paid any dividends and it has indicated that it does not
anticipate doing so during the foreseeable future.
ENStar does not have any agreement with CorVel requiring CorVel to register
the shares of CorVel Common Stock currently held by ENStar for sale under
federal or state securities laws. In the absence of registration of its CorVel
Common Stock, the ability of ENStar to sell the CorVel Common Stock will be
limited to sales pursuant to Rule 144 of the Securities Act of 1933, as amended
(the "Securities Act"), and the volume limitations thereof, and privately
negotiated sales, which may adversely affect the ability of ENStar to sell a
large portion of its holdings of CorVel Common Stock at a given time.
PRODUCT AND SERVICE DEVELOPMENT RISKS
The markets for the products and services offered by Americable and Enstar
Networking are also characterized by rapidly changing technology and frequent
new product and service offerings by its competitors. The introduction of new
technologies can render existing products and services obsolete or unmarketable.
The companies' success will depend on its ability to enhance existing products
and services and to develop and introduce, on a timely and cost-effective basis,
new products and services that keep pace with technological developments and
address increasingly sophisticated customer requirements.
ENStar's business, financial condition and results of operations could be
materially adversely affected in the event that Americable or Enstar Networking
were to incur delays in sourcing and developing new products and services or
that these products and services fail to achieve market acceptance.
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<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(CONTINUED)
FLUCTUATIONS IN QUARTERLY RESULTS
ENStar's quarterly revenues and operating results have varied significantly
in the past and will likely continue to do so in the future. Quarterly revenues
and operating results may fluctuate as a result of the demand for the products
and services of its operating companies, the introduction of new hardware and
software technologies offering improved features, the introduction of new
products and services by competitors, changes in the level of operating
expenses, competitive conditions and economic conditions generally.
At Enstar Networking, the purchase of its products and services generally
involves a significant commitment of capital, with the delays frequently
associated with large capital expenditures and required authorization procedures
within an organization. Such expenditures by customers can range from $50,000
to over $500,000. The sales cycle for Enstar Networking's products and services
generally ranges from three to nine months depending on the size of the project,
extent of competition and degree of the customer's technical expertise. For
these and other reasons, Enstar Networking's operating results are subject to a
number of risks over which it has little or no control, including customers'
technology life cycle needs, budgetary constraints and internal authorization
reviews.
A variety of factors may cause period-to-period fluctuations in the
operating results of Americable. Such factors include, but are not limited
to, product mix, competitive pricing pressures, material costs and timely
availability, revenue and expenses related to new product introductions,
as well as delays in customer purchases in anticipation of new products or
enhancements.
ENStar's operating results also could be adversely affected if its
operating subsidiaries are unable to adjust spending sufficiently in a timely
manner to compensate for any unexpected revenue shortfall.
DEPENDENCE ON, AND NEED TO RECRUIT AND RETAIN, KEY PERSONNEL
ENStar's success depends to a significant extent on its ability to attract
and retain key personnel. In particular, Enstar Networking is dependent on
their respective engineering and technical personnel. Competition for such
technical personnel is intense and no assurance can be given that ENStar will
be able to recruit and to retain such personnel. The failure to recruit and to
retain management and technical personnel could have a material adverse effect
on ENStar's anticipated growth, revenues and results of operations.
-4-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(CONTINUED)
CONCENTRATION OF REVENUES
Enstar Networking provides its products and services to customers in
various industries including health care, financial services, legal,
manufacturing, and education. In 1998 and 1997, Enstar Networking derived
approximately 74% and 81%, respectively, of its revenues from its 25 largest
customers. While Enstar Networking seeks to build long-term customer
relationships, revenues from any particular customer can fluctuate from
period-to-period due to such customer's purchasing patterns.
Americable sells products to a number of installers, resellers, other
distributors and system integrators. During 1998 and 1997, Americable derived
approximately 71% and 80%, respectively, of its sales from its largest 100
customers.
Any termination or significant disruption of the companies' relationships
with a number of its principal customers could have a material adverse effect on
ENStar's business, financial condition and results of operations. In addition, a
deterioration in the financial condition of any of its principal customers could
expose ENStar to the possibility of large accounts receivable write-offs, which
would adversely affect ENStar's financial condition and results of operations.
DEPENDENCE ON KEY SUPPLIERS AND PRODUCT SUPPLY
The networking industry has experienced product supply shortages and
customer order backlogs due to the inability of certain manufacturers to supply
certain products on a timely basis. In addition, certain suppliers have
initiated new channels of distribution that increase competition for the
available product supply. There can be no assurance that suppliers will be able
to maintain an adequate supply of products to fulfill customer orders for each
of the operating companies on a timely basis. Each of the operating companies
have experienced product supply shortages in the past and expect to experience
such shortages from time to time in the future. Failure to obtain adequate
product supplies or fulfill customer orders on a timely basis or substantial
change in the cost of components could affect the companies' ability to deliver
products in a timely and cost-effective manner and could have a material adverse
effect on ENStar's business, financial condition, and results of operations.
A significant portion of Enstar Networking's revenues is derived from sales
of network hardware, including products of various major manufacturers such as
Cisco Systems, Inc. Americable derives a significant portion of its sales from
cable assemblies, bulk cable and connectors, including components and materials
of certain manufacturers including Berk-Tek, Inc., AMP Incorporated, and General
Cable Corporation. The agreements with these suppliers from which the companies
purchase products directly generally contain provisions for periodic renewals
and for termination by the supplier without cause, generally upon relatively
-5-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(CONTINUED)
DEPENDENCE ON KEY SUPPLIERS AND PRODUCT SUPPLY (Continued)
short notice. Although Americable and Enstar Networking believe its supplier
relationships are good, there can be no assurance that their relationships will
continue as presently in effect. Although Americable and Enstar Networking
believe that they would be able to obtain alternative sources of supply for its
products if required, there can be no assurance that Americable and Enstar
Networking will be able to locate any such sources or will be able to obtain
alternative sources of supply on a timely and economic basis, if at all. The
loss of a major manufacturer or supplier, the deterioration of a relationship
with a major supplier or the failure of Americable or Enstar Networking to
establish good relationships with major new suppliers as they develop, could
have a material adverse effect on ENStar's business.
INVENTORY MANAGEMENT
The networking industry is characterized by rapid product improvement and
technological change resulting in relatively short product life cycles and rapid
product obsolescence, which can place inventory at considerable valuation risk.
Although it is industry practice for Americable's suppliers to provide
price protection to distributors such as Americable in order to reduce the risk
of inventory devaluation, such policies are subject to change. Americable also
has the option of returning, subject to certain limitations, a percentage of its
current product inventories each quarter to certain manufacturers as it assesses
each product's current and forecasted demand. The amount of inventory that can
be returned to suppliers varies under Americable's agreements and such return
policies may provide only limited protection against excess inventory. There can
be no assurance that suppliers will continue such policies, that unforeseen new
product developments will not affect Americable adversely or that Americable can
successfully manage its existing and future inventories. Any inventory
adjustments could adversely affect ENStar's financial condition and results of
operations.
-6-
<PAGE>
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(CONTINUED)
COMPETITION
Each of ENStar's businesses faces substantial competition from a large
number of companies, some of which are larger, have greater financial resources,
broader name recognition and, in many cases, lower product and operating costs
than ENStar.
Enstar Networking faces competition from large system integrators such as
GE Capital Information Technology Services, CompuCom Systems Inc., Vanstar
Corporation and a significant number of smaller regional VARs and network
integrators. Significant competitors within Americable's business include,
among others, Anixter International Inc., Anicom, Inc., Kent Electronics
Corporation, and Graybar, Inc. See "BUSINESS - Competition." There can be no
assurance that ENStar will be able to compete successfully.
ENStar expects to face further competition from new market entrants and
possible alliances between competitors in the future. Certain of ENStar's
current and potential competitors have greater financial, technical, marketing
and other resources than ENStar. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products and services than ENStar. No assurance can be given that ENStar will be
able to compete successfully against current and future competitors. See
"BUSINESS -- Competition."
SHARES ELIGIBLE FOR FUTURE SALE; CONTROL BY MICHAEL FAMILY
Sales of a substantial number of shares of ENStar Common Stock in the
public market could adversely affect the market price for the ENStar Common
Stock. James A. Michael and Jeffrey J. Michael, each a member of the Board of
Directors of ENStar, and certain limited partnerships controlled by them (the
"Michael Family Shareholders"), beneficially own approximately 1,920,000 (or
65%) of the outstanding Common Stock of ENStar as of March 8, 1999.
Accordingly, the Michael Family Shareholders will have the ability to
exercise significant influence over the business and affairs of ENStar,
including the ability to approve or reject corporate actions requiring the
approval of shareholders. The shares of ENStar Common Stock held by the Michael
Family Shareholders are "restricted securities" as that term is defined in Rule
144 under the Securities Act. Such shares are eligible for immediate sale,
subject to compliance with the volume limitations and other restrictions of
Rule 144.
-7-
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
(CONTINUED)
INDEMNIFICATION OBLIGATIONS WITH RESPECT TO REORGANIZATION TRANSACTIONS
In connection with the Reorganization Transactions, Enstar agreed to
indemnify Michael against certain losses and to assume certain liabilities of
NSU, including liabilities arising out of the Distribution and any taxes
resulting from the Distribution. There can be no assurance that any obligation
to indemnify Michael for any such loss or other liability will not have a
material adverse effect on the business, financial condition and results of
operations of ENStar.
-8-
