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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For period ended March 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-15638
NORTH STAR UNIVERSAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0498850
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
610 Park National Bank Building 55416
Minneapolis, Minnesota (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (612) 546-7500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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At April 30, 1994, 9,438,000 shares of common stock of the registrant were
outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
North Star Universal, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1994 1993
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(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 7,214 $ 6,981
Accounts receivable, net 7,321 7,617
Inventories 10,088 10,800
Prepaid expenses and other 1,239 1,309
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Total current assets 25,862 26,707
Property and equipment, net 3,337 3,429
Investment in unconsolidated subsidiaries 70,453 69,108
Goodwill, net 7,159 7,275
Other assets 2,030 2,088
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$ 108,841 $ 108,607
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 300 $ --
Current portion of long-term debt 12,734 12,799
Accounts payable and accrued expenses 9,838 10,473
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Total current liabilities 22,872 23,272
Long-term debt, net of current maturities 30,605 30,395
Deferred income taxes 20,560 20,265
Shareholders' Equity
Common stock, $.25 par value
100,000,000 shares authorized,
9,438,000 issued and outstanding 2,360 2,360
Additional paid-in-capital 30,937 30,937
Retained earnings 1,769 1,623
Foreign currency translation adjustment (262) (245)
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Total shareholders' equity 34,804 34,675
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$ 108,841 $ 108,607
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See accompanying notes to condensed consolidated financial statements
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North Star Universal, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
Three Months Ended
March 31,
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1994 1993
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Revenues $ 23,989 $ 26,354
Operating and product costs 18,514 20,676
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Gross profit 5,475 5,678
Selling, general, and administrative expenses 5,710 5,834
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Operating loss (235) (156)
Interest expense, net (1,036) (1,032)
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Loss before income taxes and equity in
earnings of unconsolidated subsidiaries (1,271) (1,188)
Income tax benefit (390) (420)
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Loss before equity in earnings
of unconsolidated subsidiaries (881) (768)
Equity in earnings of unconsolidated
subsidiaries 1,027 271
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Net income (loss) $ 146 $ (497)
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Income (loss) per share $ 0.01 $ (0.05)
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Weighted average shares outstanding 9,834,900 9,438,000
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See accompanying notes to condensed consolidated financial statements
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North Star Universal, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, (Unaudited)
(In thousands)
1994 1993
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Net cash used in operating activities $ (610) $ (879)
Cash flows for investing activities
Capital expenditures (205) (219)
Other 235 645
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Net cash used in investing activities (30) 426
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Cash flow from financing activities
Proceeds from long-term debt 12,591 991
Payments on long-term debt (12,446) (1,295)
Proceeds from notes payable 1,150 --
Payments on notes payable (850) --
Cash dividends received from Michael Foods 368 368
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Net cash provided by financing activities 813 64
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Net increase (decrease) in cash and cash equivalents 233 (389)
Cash and cash equivalents at beginning of period 6,981 9,380
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Cash and cash equivalents at end of period $ 7,214 $ 8,991
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See accompanying notes to condensed consolidated financial statements.
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North Star Universal, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION --
The accompanying unaudited condensed consolidated financial statements have
been prepared by North Star Universal, Inc. ("North Star" or the "Company"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished in the condensed consolidated
financial statements includes normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of such financial
statements. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's latest
annual report on Form 10-K.
Revenues and operating profits for the three months ended March 31 may not
necessarily be indicative of the results to be expected for the full year.
2. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES --
The Company's unconsolidated subsidiaries consist of its investments in
Michael Foods, Inc. ("Michael Foods") and CorVel Corporation ("CorVel"). CorVel
has a fiscal year ended March 31. The following is summarized balance sheet and
income statement information of the Company's unconsolidated subsidiaries as of
and for the three month period ended March 31, 1994 (in thousands):
Michael Foods CorVel
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Current assets $ 91,877 $ 23,468
Noncurrent assets 244,996 10,625
Current liabilities 56,168 6,230
Noncurrent liabilities 123,457 --
Revenues 121,641 21,569
Gross profit 17,168 13,288
Net income 3,211 1,283
3. INVENTORIES --
Inventories are stated at the lower of average cost (first-in, first-out)
or market. Inventories consist of the following (in thousands):
March 31, December 31,
1994 1993
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Work in process and finished goods $ 7,765 $ 8,741
Purchased parts and supplies 2,323 2,059
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$ 10,088 $ 10,800
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North Star Universal, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. EARNINGS PER SHARE --
Earnings per share are based on the average number of shares outstanding
during the period after giving effect to the assumed exercise of outstanding
stock options, except where the effects are antidilutive.
5. INCOME TAXES --
Deferred income taxes arise from temporary differences between financial
and tax reporting. To the extent the Company's financial reporting basis in its
investment in unconsolidated subsidiaries exceeds its tax basis, and is not
expected to be realized in a tax-free manner, the Company records a deferred tax
liability. In the fourth quarter of 1993, the Company determined that all
future dispositions of its Michael Foods holdings may not be completed in a
tax-free manner. Accordingly, at December 31, 1993, the Company recorded a
deferred tax liability of approximately $18.7 million related to the accounting
for temporary differences between financial and tax reporting of its investment
in Michael Foods.
At March 31, 1994, the deferred tax liability includes a cumulative tax
effect of approximately $18.9 million and $4.1 million for the differences in
the financial reporting and tax basis of the Company's investments in Michael
Foods and CorVel, respectively.
6. RECLASSIFICATIONS --
Certain 1993 amounts have been reclassified to conform with the financial
statement presentation used in 1994. Such reclassifications had no impact on
previously reported retained earnings or net income.
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North Star Universal, Inc. and Subsidiaries
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
North Star Universal, Inc. ("North Star" or "the Company") is a holding
company. The Company's three key holdings consist of Michael Foods, Inc.
("Michael Foods"), CorVel Corporation ("CorVel") and its computer businesses.
At March 31, 1994, the Company owned a 38% interest in Michael Foods and a 39%
ownership interest in CorVel. The Company's investments in Michael Foods and
CorVel are accounted for as unconsolidated subsidiaries using the equity method
of accounting.
The Company's continuing operations consist of Americable, Inc., Transition
Engineering, Inc., and C.E. Services, Inc., (including its United Kingdom
subsidiary, C.E. Services (Europe) Limited). Americable is a provider of voice
and data communications networking products, systems and services. Transition
Engineering designs and manufactures connectivity devices used in local area
network ("LAN") applications. C.E. Services remarkets, reconfigures,
refurbishes and warehouses mainframe computers and peripherals and provides
related technical and maintenance services.
The following is unaudited summarized operating results for each of the
Company's continuing operations for the three months ended March 31 (in
thousands).
Three months ended March 31, 1994 1993
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Revenues
C.E. Services $ 14,043 $ 15,618
Americable 7,751 8,890
Transition Engineering 2,460 2,149
Eliminations (265) (303)
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$ 23,989 $ 26,354
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Gross Profit
C.E. Services $ 2,424 $ 2,285
Americable 2,039 2,518
Transition Engineering 1,012 875
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$ 5,475 $ 5,678
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Operating Income (Loss)
C.E. Services $ 66 $ 67
Americable (148) (47)
Transition Engineering 130 153
Corporate expenses (283) (329)
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$ (235) $ (156)
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North Star Universal, Inc. and Subsidiaries
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994 vs. THREE MONTHS ENDED MARCH 31, 1993
Consolidated revenues decreased $2.4 million or 9% to $24 million from
$26.3 million in 1993. The $1.6 million or 10.1% decrease at C.E. Services is
primarily due to lower demand of used mainframe systems and features within its
European operations. Sales from C.E. Services' European operations decreased
$2.3 million or 55% to approximately $1.9 million for the period. C. E.
Services does not expect demand for its products and services within its
European operations to measurably improve during the remainder of 1994.
Revenues at Americable, excluding approximately $1.6 million of sales in 1993
from its Canadian operations which were disposed in December 1993, increased
approximately $500,000 or 7% to $7.7 million. This was due primarily to higher
demand for its value-added products and services. The 14.5% increase in
revenues at Transition Engineering resulted primarily from higher demand for its
LAN products.
Consolidated gross profit, as a percent of revenues, increased to 22.8% in
1994 as compared to 21.5% in 1993. The increased margins at C.E. Services is
attributed to a higher mix of higher margin product sales and technical service
revenues. This was offset by decreased margins at Americable due to overall
lower pricing resulting from increased competition.
The Company's selling, general and administrative expenses decreased
$124,000, or 2.1%, to $5,710,000 from $5,834,000 in 1993. Operating expenses
at Americable decreased $378,000 which reflects approximately $390,000 of
expenses eliminated through the closure of its Canadian facilities effected in
December 1993. This was offset by increased expenses of approximately
$160,000 at Transition Engineering due primarily to the addition of engineering
personnel for new product development and the addition of administrative,
quality control and technical support staff needed to support its overall
growth.
The income tax benefit of $390,000 in 1994 and $420,000 in 1993 relate to
the elimination of deferred tax liabilities that will reverse as net operating
losses available for carryforward are utilized in future periods. To the extent
loss carryforwards are realized in the future, deferred taxes will be
reinstated.
Equity in earnings of unconsolidated subsidiaries increased $756,000 to
$1,027,000 from $271,000 in the previous year. This includes an increase of
$641,000 and $115,000 in the equity in earnings of Michael Foods and CorVel
Corporation, respectively, which is a result of higher earnings at each of these
companies.
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North Star Universal, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
CAPITAL RESOURCES AND LIQUIDITY
Historically, the Company has experienced cash flow deficits from
operations. Cash used in operations was approximately $610,000 for the three
months ended March 31, 1994 as compared to $879,000 in 1993. The Company
expects such operating cash flow deficits to continue. The Company does not
have the use of cash flow generated by Michael Foods other than proceeds from
quarterly dividends. In each of the three month periods ended March 31, 1994
and 1993, the Company received dividends of $368,000. There can be no assurance
that Michael Foods will continue to declare such dividends.
Likewise, since CorVel's initial public offering in July 1991, the Company
has not had the use of cash generated by CorVel and its subsidiaries. Since its
initial public offering, CorVel has not declared any dividends, and has
indicated that it does not anticipate doing so for the foreseeable future.
The Company maintains a 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. Historically, a substantial portion of maturing
debentures have been reinvested in new debentures. At March 31, 1994, the
Company had approximately $39.9 million principal amount of subordinated
debentures outstanding.
For the three months ended March 31, 1994, approximately $2.8 million or
65% of debenture maturities were reinvested in new debentures. Included within
long-term debt repayments for the three months ended March 31, 1994, is
approximately $1.5 million of scheduled maturities of subordinated debentures.
Proceeds from long-term debt include approximately $1.3 million of new
debentures sold along with $500,000 of compounded interest on debentures. The
net activity under the debenture program for the period resulted in net cash
proceeds to the Company of approximately $300,000.
Americable maintains a revolving line of credit and term loan facility
which provides borrowings up to $5.5 million due in May 1996. Borrowings under
the revolving credit facility are based on eligible accounts receivable and
inventory with interest at prime plus 1.5% (8% at March 31, 1994.) At March 31,
1994, Americable had outstanding borrowings of $1.4 million under its revolving
line of credit and $1,785,000 under its term loan.
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North Star Universal, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
C. E. Services maintains revolving credit facilities which provide for
borrowings up to $3.5 million with interest at 1/2% and 1% over its bank's
reference rate (6.75% and 7.25% at March 31, 1994). During the three months
ended March 31, 1994, C.E. Services used bank borrowings of approximately $1.1
million to finance its working capital requirements, principally the purchase of
inventory related to its remarketing of mainframe systems. At March 31, 1994,
there was $300,000 outstanding under these facilities. At March 31, 1994, North
Star had no borrowings outstanding under its $6.5 million revolving credit
facility and approximately $6 million of cash and cash equivalents, excluding
cash of its operating subsidiaries.
The Company believes that its available cash and cash equivalents along
with its debenture program and amounts available under its revolving credit
facility and the credit facilities of its operating companies, will be adequate
to meet expected cash requirements for the remainder of the year.
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PART II - OTHER INFORMATION
North Star Universal, Inc. and Subsidiaries
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are filed with this report on Form 10-Q.
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1994.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH STAR UNIVERSAL, INC.
(Registrant)
Date May 12, 1994 by /s/ Jeffrey J. Michael
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Jeffrey J. Michael
President and Chief Executive Officer
Date May 12, 1994 by /s/ Peter E. Flynn
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Peter E. Flynn
Executive Vice President,
Chief Financial Officer
and Secretary
(Principal Financial and Accounting
Officer)
