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NEIL P. AYOTTE
(612) 340-2827
March 23, 1994
Securities and Exchange Commission
Division of Corporation Finance
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 10549
Re: North Star Universal, Inc.
Annual Report on Form 10-K
For the fiscal year ending December 31, 1993
(Commission File Number: 0-15638)
Ladies and Gentlemen:
Transmitted herewith for filing VIA EDGAR on behalf of North Star
Universal, Inc. (the "Company"), is the Company's Annual report on Form 10-K for
the year ended December 31, 1993, including all exhibits filed therewith.
Pursuant to Reg. S-T, Rule 901(d), the Company also is submitting to
the Commission under separate cover a paper copy of the Form 10-K that meets the
requirements of applicable Commission rules and regulations for paper filings. A
manually signed copy of the Annual Report on Form 10-K is also being filed with
the Pacific Stock Exchange and with NASDAQ.
Pursuant to General Instruction D(3) of Form 10-K, please be advised
that the financial statements in such report do not reflect a change from the
preceding year in any accounting principles or practices, or in the method of
applying any such principles or practices.
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Securities and Exchange Commission
March 22, 1994
Page 2
If you have any questions or comments with respect to the enclosed
materials, please contact either the undersigned at the number listed above or
J. Andrew Herring of this office at (612) 340-5683.
Very truly yours,
Neil P. Ayotte
NPA/nam
Enclosures
cc: Mr. Peter E. Flynn (W/O encl.)
Mr. Thomas S. Wargolet (W/O encl.)
J. Andrew Herring, Esq. (W/O encl.)
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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, 1993
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 546-7500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
COMMON STOCK, $.25 PAR VALUE PACIFIC STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and 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 ( )
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The aggregate market value of the common stock held by non-affiliates of
the registrant at March 15, 1994 was $20,776,781, 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 15, 1994, 9,438,000 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Pursuant to General Instruction G(2),
the responses to Items 5, 6, 7 and 8 of Part II of this report are incorporated
herein by reference from the Company's Annual Report to Shareholders for the
year ended December 31, 1993.
Pursuant to General Instruction G(3), the responses to Items 10, 11, 12 and
13 of Part III of this report are incorporated herein by reference from the
Company's definitive proxy statement for its 1994 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission on or before April 30,
1994.
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
North Star Universal, Inc. ("North Star" or the "Company"), was founded in
1928. The Company's direct and indirect operating companies consist of
Americable, Inc. ("Americable"), Transition Engineering, Inc. ("Transition
Engineering") and C.E. Services, Inc. and its United Kingdom subsidiary, C.E.
Services (Europe) Limited (together, "C.E. Services"). Americable is a provider
of voice and data communications networking products, systems and services.
Transition Engineering is a manufacturer of connectivity devices and equipment
used in local area network ("LAN") applications. C.E. Services remarkets,
reconfigures, refurbishes and warehouses computers and peripherals and provides
related technical and maintenance services.
Additionally, at December 31, 1993, the Company owned approximately 38% of
the outstanding common stock of Michael Foods, Inc. ("Michael Foods"). Michael
Foods is a food processing and distribution company, which the Company brought
public in 1987. In June of 1991, the Company's health care services subsidiary,
CorVel Corporation (formerly FORTIS Corporation) ("CorVel"), completed an
initial public offering of its common stock. As of December 31, 1993, the
Company's ownership in CorVel was approximately 40%.
The Company directly employs six management and administrative employees.
UNCONSOLIDATED SUBSIDIARIES
MICHAEL FOODS. Since its initial public offering in June 1987, Michael
Foods has been operated as an independent company. As a less-than-majority-
owned subsidiary of North Star, Michael Foods' operations are not consolidated
and North Star's investment in Michael Foods is accounted for under the equity
method of accounting. The following summary of Michael Foods' business has been
prepared from information reported by Michael Foods. Additional information
regarding Michael Foods is available from the reports and other documents
prepared and filed by Michael Foods with the Securities and Exchange Commission.
Michael Foods is a diversified producer and distributor of food products in
five basic areas--eggs and egg products, distribution of refrigerator case
products, refrigerated and frozen potato products, specialty dairy products and
refrigerated soups and salads. Michael Foods, through its eggs and egg products
division, is one of the largest producers, processors and distributors of shell
eggs, extended shelf-life liquid eggs and dried, hard-cooked and frozen egg
products in the United States. The refrigerated distribution division also
distributes a broad line of refrigerated grocery products directly to
supermarkets, including cheese, shell eggs, bagels, butter,
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margarine, muffins, potato products, juices and ethnic foods. The potato
products division processes and distributes refrigerated and frozen potato
products for the United States foodservice and retail markets. The dairy
products division processes and distributes ice milk mix, ice cream mix, frozen
yogurt mix and extended shelf-life, ultrapasteurized milk, ice milk and
specialty dairy products to fast food businesses, other foodservice outlets,
independent retailers and ice cream manufacturers. The prepared foods division
processes and distributes refrigerated soups and salads for foodservice and
retail markets, primarily in the eastern United States.
Three North Star directors, James H. Michael, Jeffrey J. Michael and Miles
E. Efron, are members of the Board of Directors of Michael Foods, which
presently consists of nine members.
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
North Star, CorVel's operations are not consolidated and North Star'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 Securities and
Exchange Commission.
CorVel is an independent nationwide provider of medical cost containment
and managed care services designed to address the escalating medical costs of
workers' compensation. CorVel's services include 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 self-administered employers
to assist them in managing the medical costs and monitoring the quality of care
associated with workers' compensation claims.
Pursuant to a voting agreement between North Star and the chief executive
officer of CorVel (who is the other principal shareholder of the company), two
of North Star's directors and executive officers, Jeffrey J. Michael and Peter
E. Flynn, are members of the Board of Directors of CorVel, which presently
consists of five members.
OPERATING SUBSIDIARIES
GENERAL.
AMERICABLE. Americable provides products, systems and services in the
field of voice and data communication networking. Americable seeks to be a
single-source provider for all of its customers' networking needs. As a value-
added reseller ("VAR") and distributor, Americable supplies cables and
connectors, network products, patch panels and fiber optics to various customers
in the voice
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and data communications aftermarket, including resellers, other distributors,
installers and end-users. Americable also manufactures a wide variety of cable
assemblies, sub-assemblies and specialty products for its customers. While some
of these products are manufactured to standard specifications for sale by
Americable as part of its product inventory, most are custom designed and
manufactured by Americable to its customers' specifications. Additionally,
Americable designs and supervises the implementation of the physical layer of
LAN systems for its customers. In connection with such projects, the company
offers products and services for all levels of computing, including mainframe,
mini- and micro-workstations and personal computer based LAN systems.
Americable's distribution business maintains a wide variety of high-quality
products in its inventory (over 5,000), many of which are hard-to-find or
specialty products. Americable's product inventory ranges from connectivity
products such as bulk cable, connectors, patch panels, racks and other cable
accessories to more complex active networking devices such as concentrators,
hubs, bridges and routers. As a broad line distributor, Americable generally
inventories products from multiple manufacturers. These manufacturers include
SynOptics, Chipcom, Transition Engineering, Belden, Berktek and Amp
Incorporated.
Americable also maintains an integrated, real-time, on-line computerized
system for order entry and fulfillment and inventory control at each of its four
distribution facilities. This on-line computer system allows Americable's 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.
In its distribution business, Americable seeks to add value for its
customers by providing superior customer service. All of Americable's sales
representatives and other sales and marketing personnel are trained to assist
customers in product selection, implementation and system upgrading and
expansion. Americable's sales representatives are supported by technical staff
who have a broad range of expertise in various networking technologies, such as
advanced copper wiring and fiber optics, as well as system implementation,
expansion and service. Americable strives to provide its customers with
practical, workable solutions that are cost efficient.
Americable's distribution business services customers of all sizes in the
voice and data communications aftermarket. Customer orders range in size from
under $50 to several hundred thousand dollars. Average distribution order size
during 1993 was approximately $450. Americable's distribution business
constituted approximately 60% of its net sales in 1993.
As a natural extension of its distribution business, and consistent with
Americable's marketing strategy to be a single-source provider for its
customers, Americable has a manufacturing capability to satisfy the individual
needs of those customers that may require custom or specialty cable assemblies.
Americable, working to its customers' specifications, can manufacture custom
designed products
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such as copper, fiber-optic, IBM Bus and Tag and AS/400 cable assemblies and
sub-assemblies. During 1993, sales of custom and specialty cable assemblies and
sub-assemblies consisted of approximately 25% of net sales.
All of Americable's 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. During 1993, Americable began the
process of implementing the quality standards of ISO 9002. ISO 9002 is an
international protocol for documenting processes and procedures used in
establishing a consistent manufacturing quality system.
The majority of Americable's sales from its manufacturing business are made
to customers in the networking aftermarket, rather than to original equipment
manufacturers ("OEM's"). However, Americable has focused on meeting the needs
of OEM's as well. Through this effort, Americable hopes to expand the market
for its custom and specialty cable assemblies utilizing its in-house
manufacturing expertise.
Another outgrowth of Americable's strategy to be a single source provider
for its customers' networking needs, is its value-added service solutions.
Americable designs and supervises the implementation of the physical layer of
various size LAN systems for end-users. LAN's connect a variety of devices over
different types of cabling to enable desktop computer systems to communicate
with each other and to share access to data. As part of its "value-added"
concept, Americable will (i) assist the customer in the design of the network
system and the selection of components and products for the system,
(ii) supervise the implementation of the system, (iii) test the system and
(iv) provide maintenance, training and other ongoing support services.
Americable also assists its end-user customers in connection with upgrades and
expansions to their LAN systems. Americable does not, however, provide
applications software for network systems.
Value-added projects and services range in size from $5,000 to over
$1,000,000. These projects can involve multiple LAN's across a wide area
network, consisting of multi-vendor hardware products and several thousand
nodes. Americable is committed to providing networking systems to customers of
all sizes in the geographic areas served by its regional offices. During 1993,
sales of value-added projects and services consisted of approximately 15% of net
sales.
TRANSITION ENGINEERING. Transition Engineering designs, manufactures and
markets hardware equipment that provides physical connectivity for LAN's and
mini- and mainframe networks. Physical connectivity devices enable computing
and other electronic devices to communicate over a network. These devices
include transceivers, baluns, concentrators, adapters and related communications
modules.
The nature of computing and information processing has undergone a
revolution during the last 20 years, moving away from large, mainframe computers
to more advanced personal desktop computers. End-users now seek greater
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productivity and lower costs by sharing databases, applications and peripheral
equipment such as personal computers and printers through the use of LAN's. As
LAN's have proliferated, demand for multi-vendor interoperability has led to
industry standard network protocols and access methods such as Ethernet, Token-
Ring and Fiber Distributed Data Interface ("FDDI").
Transition Engineering has developed the majority of its Ethernet LAN
products using industry standards. Ethernet's cabling media has evolved from
coaxial cable to its associated 10BaseT implementation, which supports twisted
pair cabling such as telephone wire and more recently 10BaseFL fiber optic
cabling.
Transition Engineering's product line currently includes transceivers that
attach personal computers to a network, thereby enabling the user to communicate
with other users in the LAN; non-manageable hubs and multi-port repeaters that
regenerate the signal, thereby allowing expansion capabilities and providing
connectivity and management of the different cabling schemes used throughout a
LAN; network adapter cards that provide direct connection from the personal
computer to a LAN; and other passive devices that provide a structured wiring
system for mini- and mainframe computer environments.
Transition Engineering's manufacturing operations consist primarily of the
final assembly and quality control testing of materials, components and
subassemblies. Transition Engineering uses third parties to perform printed
circuit board assembly.
The market for Transition Engineering's products is characterized by rapid
technological change, constantly evolving industry standards and rigorous
competition with respect to timely product innovation. Because the introduction
of products embodying new technology and the emergence of new industry standards
can render existing products obsolete and unmarketable, Transition Engineering
believes that its future success will depend upon its ability to develop,
manufacture and market new products and enhancements to existing products on a
cost-effective and timely basis. New product introductions accounted for
approximately $1.3 million or 44% of the increase in net sales at Transition
Engineering in 1993.
Transition Engineering's business may be materially adversely affected if
(i) it is unable, for technological or other reasons, to develop products in a
timely manner in response to changes in the industry, (ii) it fails to timely
manufacture and maintain required quantities of its products in response to
customer needs, or (iii) the products or product enhancements that it develops
do not achieve market acceptance. Transition Engineering has, in the past,
experienced delays in introducing certain of its new products and enhancements.
Transition Engineering distributes its products through an expanding
network of reseller channels, which includes a number of regionally based
domestic and international volume distributors and, to a lesser extent, VAR's.
During 1993, new distributors and VAR's accounted for approximately $520,000 or
5% of
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Transition Engineering's net sales. Distributors and VAR's purchase the
company's products at standard discounts based on certain volume-based incentive
programs. Transition Engineering's distributors and VAR's carry other products
that are complimentary to, and compete with those of Transition Engineering.
Transition Engineering's international sales have accounted for a substantial
portion of its growth. International sales come primarily from the United
Kingdom and Germany. During 1993, sales outside of the United States accounted
for approximately 31% of net sales. Transition Engineering's continued growth
will be dependant, in part, upon its ability to expand its domestic and
international distributor base.
Transition Engineering performs all of its research and development
activities at its headquarters in Eden Prairie, Minnesota. During 1993,
research and development expenses totaled approximately $820,000 or
approximately 8% of net sales. Transition Engineering intends to make a similar
investment in research and development during 1994.
C.E. SERVICES. C.E. Services remarkets, reconfigures, refurbishes and
warehouses IBM and IBM-compatible computers, particularly mainframe computers,
and provides related technical and maintenance services. Many of the company's
services are especially valuable to computer leasing and credit companies that
acquire large quantities of computer components and supply many different
configurations of computer equipment to their customers.
All of the company's services are related to the supply or service of IBM
and IBM-compatible computers following their initial delivery and installation
by the manufacturer. In nearly all cases after shipment to its first user, a
mainframe computer will either be reconfigured, temporarily warehoused, re-sold,
refurbished, or re-installed. Even in the face of newer, more capable models
and technologies, there continues to be a large secondary market for older
computer systems. This market is made possible by the design imperative that
requires a computer manufacturer to keep its newer models compatible with its
older models so that the users' information system software, which represents a
major customer investment, will continue to be compatible with the newer
systems. Thus, older machines continue to have utility, so long as they are
priced appropriately and assembled in the correct configuration. C.E. Services
has built its business on serving a range of needs within this secondary market.
As part of its business strategy, C.E. Services seeks to satisfy the needs
of leasing companies and computer dealers that require custom-configured
computer systems for their end-user customers. C.E. Services provides these
customers with complete, properly configured computer systems or adds additional
features needed to upgrade computer equipment already in the customer's
inventory. In order to fill customer orders promptly, C.E. Services maintains
an inventory of computer systems, features and parts. C.E. Services' technical
knowledge of the IBM product line and the computer aftermarket and its ability
to custom configure systems are its critical competitive attributes in the
secondary market.
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In connection with C.E. Services' remarketing business, the company
continuously purchases computer systems, features and parts for resale, either
alone or as part of larger systems. Also, the company may reconfigure and
refurbish such systems and features during the time they are held in its
inventory. While the company seeks to maintain minimum inventory levels, C.E.
Services does, as a matter of practice, take advantage of opportunities to
purchase for resale in the spot market (generally within 90 days) computer
systems, features and parts. Accordingly, inventory levels may fluctuate.
During the time these systems, features and parts are held in C.E. Services'
inventory, the company is at risk with respect to market changes in the resale
value of such systems, features and parts. The resale value of computer
systems, features and parts in the secondary market can change significantly in
a very short period. No assurance can be made that C.E. Services will not incur
losses on the resale of computer systems, features and parts it may purchase
from time to time in the secondary market because of such market changes. Net
sales from the remarketing of computer systems, features and parts accounted for
approximately 85% of the company's total net sales during 1993.
The company is also able to reconfigure mainframe systems quickly and
reliably. After C.E. Services completes reconfiguration services on a computer
system, IBM must certify that the reconfigured system adequately performs to IBM
standards. C.E. Services' technicians are also able to install or deinstall
equipment at the user's computer facility. Such technical services accounted
for approximately 9% of the company's net sales in 1993.
C.E. Services is attempting to increase its international sales for both
remarketing of computers and technical services. In 1993, the company began
actively marketing in Asia and the Pacific Rim, primarily through a Dallas based
sales representative focusing exclusively on this market. The company also
relocated its C.E. Services (Europe) facility from Bracknell, England to a
larger (41,000 square foot) facility, in Basingstoke, England. The staff based
in the U.K. was expanded and a new Managing Director of C.E. Services (Europe)
was hired.
As part of its services to the owners of computer equipment, C.E. Services
also warehouses and refurbishes computer equipment. When equipment is delivered
to one of the company's facilities, a technical audit is performed on each
machine to determine its condition and to inventory its features. C.E. Services
will then warehouse the equipment for its customers pending re-sale or re-
leasing. The company refurbishes computers by repairing physical, exterior
damage, cleaning and painting. C.E. Services is one of the few third party
vendors that refurbishes both Amdahl, Inc. and IBM equipment. Sales from
refurbishment and warehousing constituted 2% of C.E. Services' net sales during
1993.
Additionally, the company performs maintenance services for mainframe-based
data centers. C.E. Services' maintenance operations primarily serve
Dallas/Ft. Worth, Houston and San Antonio in Texas. C.E. Services provides
maintenance for computer centers under contracts with customers, as well as on a
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per-call basis. Pursuant to its maintenance agreements, C.E. Services
generally agrees to provide all parts and service for a customer's equipment.
These maintenance services are available 24 hours a day, seven days a week.
Sales from C.E. Services' maintenance business constituted approximately 4%
percent of the company's net sales during 1993.
FOREIGN OPERATIONS. The Company's foreign operators consist of C.E.
Services' United Kingdom subsidiary, C.E. Services (Europe) Limited and
Americable's Canadian subsidiary, Adanac Cable, Ltd. ("Adanac Cable"). The
Company's foreign operations consisted of revenues of $17.8 million and $14.0
million, operating losses of $26,000 and $505,000, and total assets of $2
million and $3.9 million for the years ended December 31, 1993 and 1992,
respectively.
In December 1993, Americable implemented a restructuring plan involving
closure of its Canadian facilities, operated by Adanac Cable, and consolidation
of its Canadian sales and customer support activities within its U.S.
operations. In connection with this consolidation, Americable recorded a
restructuring charge of approximately $1.9 million. This charge includes
approximately $600,000 for the write-off of goodwill and other non-current
assets, $700,000 for the reassessment of the carrying value of inventory and
receivables, and $600,000 for lease and severance obligations and other related
expenses.
MARKETING AND CUSTOMERS
AMERICABLE. Americable provides its products and services to a wide range
of customers, including installers, resellers, other distributors, system
integrators, OEM's and end-users. Customer relationships are developed both
face-to-face and via the telephone. Americable's marketing strategy is to build
its sales effectiveness with customers located within the servicing radius of
its four regional centers. The regional centers include Atlanta, Chicago,
Dallas and Minneapolis. Americable has ten outside sales representatives in
addition to thirty-five (35) telemarketing and sales support representatives.
The sales force is supplemented by ten regional technical service engineers and
two corporate product managers.
Americable sales representatives undergo continuous training and attend
company-sponsored classes in order to enhance their technical expertise and
marketing techniques. Also, many of the company's sales and technical personnel
attend vendor-sponsored training and education programs mandated by such vendors
in order for the company to qualify as a licensed VAR of their products.
The company also uses direct mailings, brochures and catalogs in marketing
its products. Americable's catalog, which generally is published every 18
months, is designed to provide end-users with not only product specifications,
but additional technical information to assist them in connection with their
system design.
TRANSITION ENGINEERING. Transition Engineering distributes its products
through an expanding network of reseller channels, which include a number of
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regionally based domestic and international volume distributors and, to a lesser
extent, VAR's. In 1993, Transition Engineering's largest domestic customer
accounted for approximately 17% of domestic net sales (12% overall). The
company's largest international customer accounted for approximately 25% of
international net sales (8% overall). Moreover, the ten distributors that sold
the largest amount of the company's products accounted for approximately 39% of
Transition Engineering's net sales for 1993. A reduction in sales efforts by or
the termination of a business relationship with one or more of Transition
Engineering's key distributors could have a material adverse effect on
Transition Engineering's results of operations.
Transition Engineering has several marketing programs to support the sale
and distribution of its products. Its marketing programs are designed to
generate sales leads for its distribution channels, as well as to enhance brand
name recognition. Transition Engineering's marketing activities include
frequent participation in industry trade shows, advertising in major trade
publications, the distribution of sales literature and product specifications
and ongoing communications with its distributors.
C.E. SERVICES. C.E. Services markets its services directly to owners,
lessors and users of mainframe computers. Maintenance services are primarily
directed toward end-users of computers in its largest geographic markets.
Technical and refurbishment services are primarily marketed to lessors of
computer equipment, emphasizing the company's technical expertise and
responsiveness.
Individual sales are generated almost entirely through customer initiated
telephone calls asking for quotes on various services, computer systems,
features or parts. Outgoing calls are also initiated by the C.E. Services'
sales force, which currently consists of 12 persons, for purposes of soliciting
new customers or renewing contacts with old customers, following up on work
orders, coordinating work in process and insuring that customers' needs and
expectations are being met. The company's senior management, sales force and
customer service managers also periodically make on-site visits to major
customers in an effort to keep in touch with market trends and to better
understand customer needs. In addition, the company frequently conducts
technical seminars for the marketing staffs of selected customers. These
seminars train customers on the technical characteristics of products and help
reinforce the customer's perception of C.E. Services as a vital business
partner.
The company's direct sales force is supplemented by a customer service
department of 23 representatives in its three major locations. This staff
directly handles orders from customers for warehouse and refurbishment services,
follows up on work orders initiated by the sales force and maintains records of
customer inventory, customer machine audits, work order correspondence and
shipping documents.
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C.E. Services' ten largest customers in 1993 represented approximately 38%
of total company sales. Nine of these customers are computer equipment leasing
and credit companies. The loss of one or more of C.E. Services' major customers
could materially adversely affect the company's results of operations.
COMPETITION
AMERICABLE. Americable faces substantial competition from a large number
of distributors, suppliers and manufacturers, some of which are larger, have
greater financial resources, broader name recognition and, in many cases, lower
manufacturing costs than Americable. Americable's manufactured products are not
protected from competition by virtue of any proprietary rights such as trade
secrets or patents. Americable competes by providing its customers with a broad
line of reliable, top--quality products that are priced at competitive levels
and by providing superior customer service, including strong technical support
and rapid product delivery.
TRANSITION ENGINEERING. Transition Engineering operates in an industry
that is highly competitive, and the company believes that such competition will
continue to intensify. The industry is characterized by rapid technological
change, short product life-cycles, frequent product introductions and evolving
industry standards. Transition Engineering competes with a number of
independent companies focused on the LAN market, including, among others,
Cabletron System, Inc., Allied Telesis, Inc., Milan Technology, AMP Incorporated
and Nevada Western, a subsidiary of Thomas Betts. Many of Transition
Engineering's competitors are more established, have greater name recognition,
and have greater financial, technological and marketing resources. In addition
to its current principal competitors, Transition Engineering may face
competition from new entrants into the LAN market.
Transition Engineering's ability to compete successfully depends upon its
ability to adapt to market changes on a timely basis. Increased competition
could adversely affect Transition Engineering's revenue and profitability
through price reduction and market share erosion. Transition Engineering
believes that the principal competitive factors in the LAN industry include
product features, price, product compatibility, performance and reliability,
conformance to industry standards and network management features.
C.E. SERVICES. C.E. Services competes with a number of other companies
that offer some or all of the same services and products in the various lines of
business in which C.E. Services operates, including IBM, which offers
maintenance services on its computer equipment. IBM also competes with C.E.
Services in the installation and deinstallation of computer equipment and in
providing other technical services. Other companies, some of which are larger,
have greater financial strength and broader name recognition, also provide
maintenance and technical operations services for IBM computers and compete with
C.E. Services in its target geographic markets.
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There will continue to be intense price competition in all lines of C.E.
Services' business; however, C.E. Services believes that the company will
continue to compete strongly due to its reputation for reliability, the quality
and expertise of its staff, its responsiveness to customers' demands, its
ability to provide its customers with custom-configured systems and its
knowledge of the secondary market.
EMPLOYEES
At December 31, 1993, Americable, Transition Engineering and C.E. Services
employed 173, 56 and 185 individuals, respectively. None of the employees are
represented by a collective bargaining unit, and management at each company
considers its relations with its employees to be good.
DISCONTINUED OPERATIONS
North Star announced its intention to sell its wholly-owned subsidiary
Eagle Engineering & Manufacturing, Inc. ("Eagle") in March, 1991. Eagle
designs, manufactures and installs a variety of environmental control systems
for the cabins of off--road heavy equipment, including air-conditioning, heating
and pressurization systems. Eagle is still wholly-owned by the Company,
although the Company is hopeful that it will ultimately be able to sell this
subsidiary on terms acceptable to management.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
Jeffrey J. Michael 37 President and Chief Executive Officer
Peter E. Flynn 34 Executive Vice President, Chief
Financial Officer and Secretary
Mr. Jeffrey J. Michael has been President and Chief Executive Officer of
the Company since December 1990. Mr. Michael served as Vice President-Finance
of the Company from 1987 to December 1990. He also served as Vice President-
Treasurer from 1986 to 1987. Prior to 1986, Mr. Michael was employed by the
Company in various capacities. Jeffrey J. Michael is the son of James H.
Michael, a director of the Company and its former Chairman of the Board.
Mr. Peter E. Flynn has been Executive Vice President, Chief Financial
Officer and Secretary of the Company since December 1990. In December 1992, Mr.
Flynn was also elected President and Chief Operating Officer of Transition
Engineering. Mr. Flynn served as Treasurer of the Company from April 1989 to
December 1990.
-11-
<PAGE>
Prior to joining the Company, Mr. Flynn was an audit manager at Arthur
Andersen & Co.
Officers of the Company are elected annually by the Board of Directors.
All of the current officers of the Company are expected to be re-elected to
serve in the same positions for the coming year.
ITEM 2. PROPERTIES.
AMERICABLE. Americable's headquarters are located in a 20,000 square foot
leased facility in Itasca, Illinois, a suburb of Chicago. This facility
includes office, warehouse and production space. Americable also leases its
branch office facilities in Minneapolis, Minnesota (39,000 square feet), Dallas,
Texas (15,000 square feet), and Atlanta, Georgia (9,900 square feet).
TRANSITION ENGINEERING. Transition Engineering's headquarters, including
its executive and corporate administration offices, manufacturing, sales and
technical support, are located in Eden Prairie, Minnesota, which consists of
approximately 26,500 square feet.
C.E. SERVICES. C.E. Services' headquarters are located in Grand Prairie,
Texas, a suburb of Dallas, and include office, warehouse and production space
(101,000 square feet). C.E. Services' branch locations are located in or near
Chicago, Illinois (170,000 square feet), Houston, Texas (3,000 square feet) and
London, U.K. (41,000 square feet). C.E. Services' facilities include two of the
largest staging areas in the United States for large water-cooled mainframes.
All of the C.E. Services' facilities are leased and provide storage, production
and office space.
North Star 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 or consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-12-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Pursuant to General Instruction G(2), information is incorporated herein by
reference to "Stock Information" in the Company's annual report to shareholders
for the year ended December 31, 1993.
ITEM 6. SELECTED FINANCIAL DATA.
Pursuant to General Instruction G(2), information is incorporated herein by
reference to "Selected Consolidated Financial Data" in the Company's annual
report to shareholders for the year ended December 31, 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Pursuant to General Instruction G(2), information is incorporated herein by
reference to "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in the Company's annual report to shareholders for the year
ended December 31, 1993.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Pursuant to General Instruction G(2), information is incorporated herein by
reference to "Report of Independent Certified Public Accountants" and
"Consolidated Financial Statements of North Star Universal, Inc. and
Subsidiaries" and "Selected Quarterly Financial Data" in the Company's annual
report to shareholders for the year ended December 31, 1993.
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.
Pursuant to General Instruction G(3), reference is made to the information
contained in the Company's definitive Proxy Statement for its 1994 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 1994, which information is incorporated herein by
reference.
-13-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3), reference is made to the information
contained in the Company's definitive Proxy Statement for its 1994 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 1994, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3), reference is made to the information
contained in the Company's definitive Proxy Statement for its 1994 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 1994, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3), reference is made to the information
contained in the Company's definitive Proxy Statement for its 1994 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 1994, which information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) l. FINANCIAL STATEMENTS
The consolidated financial statements of North Star Universal, Inc. and
Subsidiaries as of December 31, 1993 and 1992 and for the three years ended
December 31, 1993 are incorporated herein by reference to "Consolidated
Financial Statements of North Star Universal, Inc. and Subsidiaries" and "Report
of Independent Certified Public Accountants" included in the Company's annual
report to shareholders for the year ended December 31, 1993.
2. FINANCIAL STATEMENTS AND SCHEDULES
(i) North Star Universal, Inc. and Subsidiaries
Report of Independent Certified Public Accountants on Schedules
Schedule VIII - Valuation and Qualifying Accounts
Schedule IX - Short-term Borrowings
-14-
<PAGE>
All other schedules have been omitted because they are not applicable
or not required, or because the required information is included in
the consolidated financial statements or notes thereto.
(ii) Michael Foods, Inc. and Subsidiaries
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Report of Independent Certified Public Accountants on Schedules
Schedule II - Accounts Receivable from Related Parties
Schedule V - Property, Plant and Equipment
Schedule VI - Accumulated Depreciation, Depletion and
Amortization of Property, Plant and Equipment
Schedule VIII - Valuation and Qualifying Accounts
Schedule IX - Short-Term Borrowings
Schedule X - Supplementary Income Statement Information
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
3.1 Restated Articles of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference).
3.2 Restated By-laws of the Company (filed as Exhibit 3(a) to Registration
No. 33-10558 and incorporated herein by reference).
-15-
<PAGE>
4.1 Form of Indenture, dated as of April 26, 1989, between the Company and
National City Bank of Minneapolis, as trustee (filed as Exhibit 4.1 to
Registration No. 33-26176 and incorporated herein by reference).
4.2 Form of First Supplemental Indenture, dated as of March 16, 1992,
amending the Indenture described in Exhibit 4.1 above (filed as
Exhibit 4.2 to Registration No. 33-46418 and incorporated herein by
reference).
4.3 Indenture, dated as of December 1, 1986, between the Company and
National City Bank of Minneapolis, as trustee, relating to $25,000,000
principal amount of Subordinated Debentures Series 87/88 (filed as
Exhibit 4.1 to Registration No. 33-10558 and incorporated herein by
reference).
4.4 Indenture, dated as of September, 1985, between the Company and
American National Bank and Trust Company, as trustee, relating to
$14,000,000 principal amount of Subordinated Debentures, Series 1985
(filed as Exhibit 4 to Registration No. 2-99100 and incorporated
herein by reference).
9.1 Voting Agreement, dated May 16, 1991, between the Company and
V. Gordon Clemons, relating to common stock of CorVel Corporation
(filed as Exhibit 9.1 to Registration No. 33-40629 and incorporated
herein by reference).
+10.1 Employment Agreement, dated October 1, 1988, between the Company and
Miles E. Efron (filed as Exhibit 10.1 to Registration No. 33-26176 and
incorporated herein by reference).
+10.2 Severance Agreement, dated December 31, 1990, between the Company and
Miles E. Efron (filed as Exhibit 10.1(a) to Registration No. 33-26176
and incorporated herein by reference).
+10.3 North Star Universal, Inc. Incentive Stock Option Plan, including the
form of Stock Option Agreement related thereto (filed as Exhibit 10.19
to Registration No. 33-10558 and incorporated herein by reference).
+10.4 North Star Universal, Inc. Non-Qualified Stock Option Plan, including
the form of Stock Option Agreement related thereto (filed as Exhibit
10.19 to Registration No. 33-10558 and incorporated herein by
reference).
10.5 Letter Agreement, dated March 25, 1987, between North Star Universal,
Inc. and Michael Foods, Inc., pursuant to which the Company agreed not
to acquire any additional food related businesses as long as it owns
25% of the capital stock of Michael Foods, Inc. (filed as Exhibit
10.34 to Registration No. 33-10558 and incorporated herein by
reference).
-16-
<PAGE>
10.6 Restated and Amended Credit Loan Agreement, dated May 17, 1990,
between the Company and First Bank National Association (filed as
Exhibit 19.1 to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1990, and incorporated herein by reference).
10.7 Amendment to Restated and Amended Revolving Credit Loan Agreement,
dated January 11, 1991, between the Company and First Bank National
Association, amending the Restated and Amended Revolving Credit Loan
Agreement described in Exhibit 10.6 above (filed as Exhibit 10.11(d)
to Registration No. 33-26176 and incorporated herein by reference).
10.8 Letter Agreement, dated February 28, 1991, amending the terms of the
Amendment to Restated and Amended Revolving Credit Loan Agreement
described in Exhibit 10.7 above (filed as Exhibit 10.11(e) to
Registration No. 33-26176 and incorporated herein by reference).
10.9 Second Amendment to Restated and Amended Revolving Credit Loan
Agreement, dated January 2, 1992, between the Company and First Bank
National Association, amending the Restated and Amended Revolving
Credit Loan Agreement described in Exhibit 10.6 above (filed as
Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, and incorporated herein by reference).
10.10 Third Amendment to Restated and Amended Revolving Credit Loan
Agreement, dated November 18, 1992, between the Company and First Bank
National Association, amending the terms of the Restated and Amended
Revolving Credit Loan Agreement described in 10.6 above (filed as
Exhibit 10.12(a) to Registration No. 33-46418 and incorporated herein
by reference).
10.11 Loan Agreement, dated as of May 1, 1989, between the City of Welcome,
Minnesota and Eagle relating to $1,470,000 Industrial Development
Revenue Bonds, Series 1989, Eagle Engineering and Manufacturing
Company, Inc. Project (filed as Exhibit 10.15 to Registration No.
33-26176 and incorporated herein by reference).
-17-
<PAGE>
10.12 Mortgage and Security Agreement, dated as of May 1, 1989, securing the
obligations of Eagle under the Loan Agreement described in Exhibit
10.11 above, pursuant to which Eagle granted a mortgage to American
National Bank and Trust Company, St. Paul, Minnesota, as trustee under
that certain Indenture, dated as of May 1, 1989, relating to its
facility in Welcome, Minnesota (filed as Exhibit 10.16 to Registration
No. 33-26176 and incorporated herein by reference).
10.13 Guaranty Agreement, dated as of May 1, 1989, executed by the Company
as guarantor, pursuant to which the Company guaranties the obligations
of Eagle under the Loan Agreement described in Exhibit 10.11 above
(filed as Exhibit 10.17 to Registration No. 33-26176 and incorporated
herein by reference).
+10.14 North Star Universal, Inc. 1988 Non-qualified Stock Option Plan, as
amended April 26, 1989 and May 15, 1989, including form of Stock
Option Agreement related thereto (filed as Exhibit 10.18 to
Registration No. 33-26176 and incorporated herein by reference).
10.15 Loan Agreement by and among Americable, certain of Americable's
subsidiaries and First Bank National Association ("First Bank"), dated
May 30, 1991, including promissory notes executed in connection
therewith (filed as Exhibit 10.25 to Registration No. 33-26176 and
incorporated herein by reference).
10.16 Form of Security Agreement, dated May 30, 1991, which was executed by
Americable and certain of its subsidiaries as debtors to secure the
loans described in Exhibit 10.15 above (filed as Exhibit 10.25(a) to
Registration No. 33-26176 and incorporated herein by reference).
10.17 Subordination Agreement executed by the Company and Americable for the
benefit of First Bank in connection with the loans described in
Exhibit 10.15 above (filed as Exhibit 10.25(b) to Registration No. 33-
26176 and incorporated herein by reference).
10.18 First Amendment to Loan Agreement and Waiver, dated September 16,
1991, amending the Loan Agreement in Exhibit 10.15 above (filed as
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991 and incorporated herein by reference).
10.19 Second Amendment to Loan Agreement, dated May 31, 1992, amending the
Loan Agreement in Exhibit 10.15 above (filed as Exhibit 10.29(a) to
Registration No. 33-46418 and incorporated herein by reference).
-18-
<PAGE>
10.20 Third Amendment to Loan Agreement, dated June 30, 1992, amending the
Loan Agreement in Exhibit 10.15 above (filed as Exhibit 10.29(b) to
Registration No. 33-46418 and incorporated herein by reference).
10.21 Fourth Amendment to Loan Agreement, dated March 12, 1993, amending the
Loan Agreement in Exhibit 10.15 above, including Letter Agreement
pursuant to which First Bank waived Americable's compliance with
certain financial covenants contained in such Loan Agreement (filed as
Exhibit 10.29(c) to Registration No. 33-46418 and incorporated herein
by reference).
*+10.22 Employment Agreement, dated April 1, 1993, between the Company,
Transition Engineering, Inc. and Peter E. Flynn.
10.23 Lease, dated July 12, 1990, between C.E. Services, Inc. and Kingsland
Properties, Ltd., relating to the leased facility in Batavia, Illinois
(filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991 and incorporated herein by
reference).
10.24 Commercial Lease Agreement, dated January 31, 1990, between C.E.
Services, Inc. and Post and Paddock Associates, relating to the leased
facility in Grand Prairie, Texas (filed as Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991 and incorporated herein by reference).
10.25 Registration Rights Agreement, dated May 16, 1991, between the Company
and FORTIS Corporation (filed as Exhibit 10.17 to Registration No. 33-
40629 and incorporated herein by reference).
10.26 Form of North Star Indemnification Agreement, dated May ___, 1991,
between the Company and FORTIS Corporation (filed as Exhibit 10.20 to
Registration No. 33-40629 and incorporated herein by reference).
10.27 Standstill Agreement, dated May 15, 1991, between the Company and
FORTIS Corporation (filed as Exhibit 10.21 to Registration No. 33-
40629 and incorporated herein by reference).
10.28 Promissory Note, dated June 1, 1991, executed in favor of the Company
by James H. Michael (filed as Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991 and
incorporated herein by reference).
10.29 Credit Agreement by and between C.E. Services, Inc. and Texas Commerce
Bank, National Association, dated September 30, 1992, including
promissory note and security agreements executed in connection
therewith (filed as Exhibit 10.38 to Registration No. 33-46418 and
incorporated herein by reference).
-19-
<PAGE>
10.30 Purchase and Sale Agreement by and among Leslie C. Malmquist,
Universal Press and Label, Inc. and the Company, dated December 22,
1992, relating to the sale of Universal Press and Label, Inc. (filed
as Exhibit 10.39 to Registration No. 33-46418 and incorporated herein
by reference).
10.31 Amended and Restated Loan and Security Agreement dated June 1, 1993
among Americable, Inc., Transition Engineering, Inc., Cable
Distributions Systems, Inc. and First Bank National Association (filed
as Exhibit 10.31 to the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1993, and incorporated herein by
reference.)
10.32 First Amendment to Credit Agreement, dated as of October 1, 1993, by
and between C.E. Services, Inc. and Texas Commerce Bank, amending the
Credit Agreement in Exhibit 10.29 above (filed as Exhibit 10.41 to
Registration No. 33-46418 and incorporated herein by reference).
10.33 Second Amendment to Credit Agreement, dated as of November 15, 1993,
by and between C.E. Services, Inc. and Texas Commerce Bank, amending
the Credit Agreement in Exhibit 10.29 above (filed as Exhibit 10.42 to
Registration No. 33-46418 and incorporated herein by reference).
10.34 Credit Agreement for Discretionary Loans, dated as of July 1, 1993
between C.E. Services, Inc. and Texas Commerce Bank (filed as Exhibit
10.43 to Registration No. 33-46418 and incorporated herein by
reference).
10.35 First Amendment to Credit Agreement for Discretionary Loans, dated as
of October 1, 1993, by and between C.E. Services, Inc. and Texas
Commerce Bank, amending the Credit Agreement for Discretionary Loans
in Exhibit 10.33 above (filed as Exhibit 10.44 to Registration
Statement No. 33-46418 and incorporated herein by reference).
12.1 Computation of Ratio of Earnings to Fixed Charges for North Star
Universal, Inc. for the year ended December 31, 1991 (filed as Exhibit
12.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference).
12.2 Computation of Ratio of Earnings to Fixed Charges for North Star
Universal, Inc. for the years ended December 31, 1988, 1989 and 1990
(filed as Exhibit 12.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990 and incorporated herein by
reference).
-20-
<PAGE>
12.3 Computation of Ratio of Earnings to Fixed Charges for North Star
Universal, Inc. for the year ended December 31, 1992 (filed as Exhibit
12.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference).
*12.4 Computation of Ratio of Earnings to Fixed Charges for North Star
Universal, Inc. for the year ended December 31, 1993.
*13.1 1993 Annual Report to Shareholders of North Star Universal, Inc.
*22.1 Subsidiaries of the Registrant
*23.1 Consent of Independent Certified Public Accountants-Grant Thornton.
- --------------------
* Filed with this Annual Report on Form 10-K.
+ 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. None.
(c) See the Exhibit Index and Exhibits attached as a separate section of this
report.
(d) See the Financial Statement Schedules of the Company, the Michael Foods,
Inc. and Subsidiaries Consolidated Financial Statements and the Michael
Foods, Inc. Financial Statement Schedules attached as a separate section of
this report.
-21-
<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 16, 1994 NORTH STAR UNIVERSAL, 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 on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Miles E. Efron Chairman of the Board March 16, 1994
- -------------------------------------
Miles E. Efron
/s/James H. Michael Director March 16, 1994
- -------------------------------------
James H. Michael
/s/Jeffrey J. Michael President, Chief Executive March 16, 1994
- ------------------------------------- Officer and Director
Jeffrey J. Michael (principal executive officer)
/s/Peter E. Flynn Executive Vice President, March 16, 1994
- -------------------------------------
Peter E. Flynn Chief Financial Officer
(principal financial and
accounting officer), Secretary
and Director
/s/Fred E. Stout Director March 16, 1994
- -------------------------------------
Fred E. Stout
Director
- -------------------------------------
David Z. Johnson
</TABLE>
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<PAGE>
REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULES
Board of Directors
North Star Universal, Inc.
In connection with our audits of the consolidated financial statements
of North Star Universal, Inc. and Subsidiaries referred to in our report dated
February 24, 1994, which is included in the Annual Report to Shareholders and
incorporated by reference in Part II of this form, we have also audited
Schedules VIII and IX for each of the three years in the period ended December
31, 1993. In our opinion, these schedules present fairly, in all material
respects, the information required to be set forth therein.
/s/ GRANT THORNTON
Minneapolis, Minnesota
February 24, 1994
-23-
<PAGE>
<TABLE>
<CAPTION>
North Star Universal, Inc. and Subsidiaries
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31,
(In thousands)
Charge
Balance at Provision for Purpose Balance
Beginning Charged to Reserve was At End
of Year Operations Established Other(a) of Year
---------- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
Allowance of
Doubtful Accounts
- -----------------
1991 $ 675 $ 228 $ (238) $ (281) $ 384
1992 384 277 (346) - 315
1993 315 270 (92) (34) 459
<FN>
(a) At December 31, 1991 this represents accounts of Michael Foods and CorVel
which are accounted for as unconsolidated subsidiaries. See Note 4 to
Consolidated Financial Statements.
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
North Star Universal, Inc. and Subsidiaries
SCHEDULE IX--SHORT-TERM BORROWINGS
(Dollars in thousands)
Maximum Average
Interest Amount Amount Weighted
Balance at Rate at Outstanding Outstanding Average
End of Year End of Year During Year During Year(d) Interest Rate(e)
----------- ----------- ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1991
- -----------------
North Star
Universal, Inc. (a) $ - 6.5% $ 11,000 $ 90 10%
Americable, Inc. (b) $ - 6.875% $ 350 $ 77 8.85%
Year ended
December 31, 1992
- -----------------
North Star
Universal, Inc. (a) $ - 6% $ - $ - -
Americable, Inc. (b) $ 1,300 6.875% $ 1,300 $ 397 6.93%
C.E. Services, Inc. (c) $ - 6.5% $ 1,290 $ 705 6.5%
Year ended
December 31, 1993
- -----------------
North Star
Universal, Inc. (a) $ - 6% $ - $ - -
C.E. Services, Inc. (c) $ - 6.5% $ 1,295 $ 230 6.5%
<FN>
(a) Revolving line of credit due January 1995 with interest at bank's reference
rate.
(b) Revolving line of credit due May 1993 with interest at bank's reference
rate plus .875%.
(c) Revolving line of credit due May 1994 with interest at bank's reference
rate plus .5%.
(d) The average amount outstanding during the period was computed by dividing
the total of daily outstanding principal balance by 365 days or the number
of days the facility was in place during the year.
(e) The weighted average interest rate during the period was computed by
dividing the total of daily average interest rates by the total number of
days debt was outstanding during the year.
</TABLE>
-25-
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 223,000 $ 6,064,000
Accounts receivable, less allowances 33,087,000 33,684,000
Inventories 49,138,000 52,387,000
Prepaid expenses and other 1,279,000 1,157,000
----------------------------
Total current assets 83,727,000 93,292,000
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 4,201,000 4,905,000
Buildings and improvements 89,980,000 91,243,000
Machinery and equipment 166,655,000 171,640,000
----------------------------
260,836,000 267,788,000
Less accumulated depreciation 80,398,000 64,555,000
----------------------------
180,438,000 203,233,000
OTHER ASSETS
Goodwill, net 48,844,000 55,534,000
Net assets held for sale 11,939,000 -
Investment in and advances to joint venture and other 4,139,000 18,159,000
----------------------------
64,922,000 73,693,000
----------------------------
$329,087,000 $370,218,000
----------------------------
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 9,814,000 $ 6,943,000
Accounts payable 20,536,000 17,096,000
Accrued compensation 3,720,000 2,725,000
Accrued insurance 6,701,000 3,697,000
Accrued product line disposal costs 12,702,000 -
Other accrued expenses 7,987,000 7,775,000
Deferred income taxes - 230,000
----------------------------
Total current liabilities 61,460,000 38,466,000
LONG-TERM DEBT, less current maturities 94,194,000 128,855,000
DEFERRED INCOME TAXES 18,430,000 25,860,000
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 3,000,000 shares authorized, none issued - -
Common stock, $.01 par value, 25,000,000 shares authorized,
shares issued 19,915,489 in 1993 and 1992 199,000 199,000
Additional paid-in capital 117,640,000 117,640,000
Retained earnings 42,475,000 62,681,000
Treasury stock, shares held 599,350 in 1993 and 378,750 in 1992 - at cost (5,311,000) (3,483,000)
-----------------------------
Total stockholders' equity 155,003,000 177,037,000
----------------------------
$329,087,000 $370,218,000
----------------------------
----------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 474,783,000 $ 442,734,000 $ 454,735,000
Cost of sales 414,965,000 390,185,000 380,270,000
---------------------------------------------
Gross profit 59,818,000 52,549,000 74,465,000
Selling, general and administrative expenses 39,122,000 36,936,000 34,217,000
Disposal of product line 22,769,000 - -
Restructuring charges 11,164,000 - -
---------------------------------------------
73,055,000 36,936,000 34,217,000
---------------------------------------------
Operating profit (loss) (13,237,000) 15,613,000 40,248,000
Other (income) expense
Interest expense 9,210,000 10,247,000 10,744,000
Interest capitalized (116,000) (261,000) (956,000)
----------------------------------------------
9,094,000 9,986,000 9,788,000
Interest income (731,000) (398,000) (277,000)
----------------------------------------------
8,363,000 9,588,000 9,511,000
----------------------------------------------
Earnings (loss) before income taxes (21,600,000) 6,025,000 30,737,000
Income tax expense (benefit) (5,280,000) 2,175,000 11,070,000
---------------------------------------------
NET EARNINGS (LOSS) $ (16,320,000) $ 3,850,000 $ 19,667,000
---------------------------------------------
---------------------------------------------
NET EARNINGS (LOSS) PER SHARE $ (.84) $ .20 $ 1.07
---------------------------------------------
Weighted average shares outstanding 19,416,000 19,516,000 18,400,000
---------------------------------------------
---------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-26-
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
------------------------
Additional
Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1991 17,121,246 $171,000 $67,459,000 $46,693,000 $(3,483,000) $110,840,00
Stock issued
for acquisition 13,543 - 311,000 - - 311,000
Exercise of non-qualified
stock options to acquire
common stock 121,700 1,000 1,503,000 - - 1,504,000
Public offering
proceeds, net 2,587,500 26,000 47,599,000 - - 47,625,000
Net earnings for the year - - - 19,667,000 - 19,667,000
Cash dividends
of $.20 per share - - - (3,626,000) - (3,626,000)
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1991 19,843,989 198,000 116,872,000 62,734,000 (3,483,000) 176,321,000
Exercise of non-qualified
stock options to acquire
common stock 71,500 1,000 768,000 - - 769,000
Net earnings for the year - - - 3,850,000 - 3,850,000
Cash dividends
of $.20 per share - - - (3,903,000) - (3,903,000)
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 19,915,489 199,000 117,640,000 62,681,000 (3,483,000) 177,037,000
Purchase of shares
for treasury - - - - (1,828,000) (1,828,000)
Net loss for the year - - - (16,320,000) - (16,320,000)
Cash dividends
of $.20 per share - - - (3,886,000) - (3,886,000)
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 19,915,489 $199,000 $117,640,000 $42,475,000 $(5,311,000) $155,003,000
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-27-
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (16,320,000) $ 3,850,000 $ 19,667,000
Adjustments to reconcile net earnings (loss) to
net cash provided from operating activities:
Depreciation 22,446,000 21,454,000 17,603,000
Amortization 1,741,000 1,596,000 1,522,000
Deferred income taxes (7,660,000) (640,000) 2,955,000
Disposal of product line 22,769,000 - -
Restructuring charges 11,164,000 - -
Cash provided from (used in) changes in working capital
employed, net of effect of disposal of product line,
restructuring charges and business acquisitions:
Accounts receivable 392,000 (595,000) 203,000
Inventories 2,968,000 8,011,000 (9,772,000)
Prepaid expenses and other (122,000) (320,000) (169,000)
Accounts payable 3,440,000 (3,625,000) (3,619,000)
Accrued expenses 2,708,000 1,443,000 (8,102,000)
----------------------------------------------
Total adjustments 59,846,000 27,324,000 621,000
----------------------------------------------
Net cash provided by operating activities 43,526,000 31,174,000 20,288,000
Cash flows from investing activities:
Capital expenditures (8,669,000) (28,723,000) (46,883,000)
Business acquisitions, net of cash acquired - - (5,149,000)
Joint venture and other assets (3,194,000) (12,961,000) (4,194,000)
----------------------------------------------
Net cash used in investing activities (11,863,000) (41,684,000) (56,226,000)
Cash flows from financing activities:
Proceeds from issuance of common stock - 769,000 49,129,000
Payments on long-term debt (109,713,000) (90,622,000) (304,304,000)
Proceeds from long-term debt 77,923,000 105,775,000 295,261,000
Purchase of shares for treasury (1,828,000) - -
Cash dividends (3,886,000) (3,903,000) (3,626,000)
----------------------------------------------
Net cash provided by (used in) financing activities (37,504,000) 12,019,000 36,460,000
----------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,841,000) 1,509,000 522,000
Cash and cash equivalents at beginning of year 6,064,000 4,555,000 4,033,000
---------------------------------------------
Cash and cash equivalents at end of year $ 223,000 $ 6,064,000 $ 4,555,000
---------------------------------------------
---------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 9,445,000 $ 9,972,000 $ 10,743,000
Income taxes 3,858,000 2,281,000 7,794,000
Liabilities assumed in business acquisitions - - 5,289,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-28-
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements include the accounts of
Michael Foods, Inc. (the "Company") and its wholly-owned subsidiaries, Kohler
Mix Specialties, Inc., Crystal Foods, Inc., Northern Star Co., Morning Glory
Eggs, Inc., Wisco Farm Cooperative, Farm Fresh Foods, Inc., Drallos Potato Co.,
Inc., Crystal Farms Refrigerated Distribution Company, M.G. Waldbaum Company and
Sunnyside Vegetable Packing, Inc. ("Sunnyside").
At December 31, 1993, North Star Universal, Inc. ("NSU") held 7,354,950
shares of the issued and outstanding common stock of the Company or 38.1%.
Certain directors of the Company are also officers and directors of NSU.
NOTE B
SUMMARY OF ACCOUNTING POLICIES
The Company is a holding company which, through its operating subsidiaries, is
engaged in the food processing and distribution business primarily throughout
the United States. Principal products are eggs, egg products, refrigerated food
products, fresh and frozen potato products, ice milk mix, ice cream mix and
milk, and refrigerated soups and salads.
1. PRINCIPLES OF CONSOLIDATION
The Company consolidates the accounts of its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated.
2. CASH AND CASH EQUIVALENTS
The Company considers its highly liquid temporary investments with maturities of
three months or less to be cash equivalents.
3. INVENTORIES
Inventories other than raw potatoes and potato products are stated at the lower
of cost (determined on a first-in, first-out basis) or market. Raw potatoes and
potato products are stated at the lower of average cost for the year in which
produced or at market.
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1993 1992
- --------------------------------------------------------------------------
<S> <C> <C>
Work in process and
finished goods $ 14,386,000 $ 15,400,000
Raw materials and supplies 17,028,000 16,374,000
Flocks 17,724,000 20,613,000
----------------------------------
$ 49,138,000 $ 52,387,000
----------------------------------
----------------------------------
</TABLE>
4. DEPRECIATION
Depreciation is provided in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives, principally on the
straight-line basis.
5. GOODWILL AND AMORTIZATION
Goodwill has resulted from various acquisitions made by the Company. All
acquisitions were accounted for as purchases and the excess of the total
acquisition cost over the fair value of the net assets acquired was recorded as
goodwill. Currently, goodwill is being amortized on the straight-line basis over
40 years. Accumulated amortization was $5,925,000 and $5,393,000 at December 31,
1993 and 1992, respectively. The Company maintains separate financial records
for each of its acquired entities and performs periodic strategic and long-range
planning for each entity. The Company 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 modifies the
life or adjusts the value of a subsidiary's goodwill if an impairment is
identified. See Note D for an impairment identified during 1993.
6. RECLASSIFICATIONS
Certain reclassifications have been made to the 1992 and 1991 consolidated
financial statements to conform to the 1993 presentation.
NOTE C
DISPOSAL OF PRODUCT LINE
The Company invested in a joint venture with an unrelated company for the
purpose of producing reduced cholesterol liquid whole eggs. The Company owns 50%
of the joint venture and recognizes one half of the profit or loss which results
from the joint venture. Under the terms of the joint venture agreement, the
Company paid a processing toll to the joint venture equal to the costs of
production plus an amount to provide a return on each partner's investment.
In 1993, the revenues and expenses directly attributable to the
discontinued product line were net sales of $4,664,000, cost of sales of
$10,545,000, selling, general and administrative expenses of $2,505,000 and
interest income of $697,000. In 1992, the revenues and expenses directly
attributable to the discontinued product line were net sales of $2,397,000, cost
of sales of $3,926,000, selling, general and administrative expenses of
$3,722,000 and interest income of $349,000. The Company thus recorded pre-tax
losses directly attributable to the discontinued product line in 1993 and 1992
of approximately $7,689,000 and $4,902,000, respectively.
Due to the significant continuing losses and lack of adequate market
acceptance, the Company decided in December 1993 to cause the early termination
of its joint venture for the reduced cholesterol liquid whole eggs product.
As a result of the disposal of this product line and the decision to
terminate the joint venture, the Company has accrued $11,500,000 to acquire the
interest of its joint venture partner and $1,202,000 to cover other costs
associated with the termination. Management believes these accruals will be
adequate to complete the purchase and liquidate the joint venture in early 1994.
The Company is also acquiring a building from the joint venture for $1,000,000.
The Company has reduced its investment in and advances to the joint venture to
the expected proceeds from the sale of the remaining partnership assets based on
their appraised value of $6,000,000, which is included in net assets held for
sale in the consolidated balance sheet at December 31, 1993. Consequently, in
1993 the Company recorded a one-time charge of approximately $22,769,000 and a
related income tax benefit of $8,485,000.
NOTE D
RESTRUCTURING CHARGES
Sunnyside has sustained significant losses since its acquisition in May 1991.
Management has determined that Sunnyside's operations require significant
restructuring and modification, including the physical relocation of its
production facility. In the opinion of management, these factors are so
significant to the enterprise that the goodwill relating to Sunnyside at the
time of acquisition has been permanently impaired and should be eliminated. The
unamortized goodwill of approximately $5,129,000 and the anticipated site
abandonment, relocation and other costs of approximately $2,108,000 have been
included in the restructuring charge related to Sunnyside, since these amounts
were not expected to be recovered from its undiscounted future cash flows.
In addition, the Company has recorded other restructuring charges of
$3,927,000, primarily related to certain small egg production facilities held
for sale to reflect their current net realizable value at December 31, 1993, in
conjunction with restructuring within its egg operations.
The determination to record these restructuring charges was made during the
fourth quarter of 1993.
NOTE E
LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
December 31, 1993 1992
- -----------------------------------------------------------------
<S> <C> <C>
Revolving line of credit (a) $23,100,000 $ 48,550,000
9.5% senior promissory
notes (b) 42,000,000 46,000,000
9.85% senior promissory
notes (c) 20,000,000 20,000,000
10.4% senior promissory
notes (d) 15,000,000 17,500,000
Other 3,908,000 3,748,000
----------- -----------
104,008,000 135,798,000
Less current maturities 9,814,000 6,943,000
----------- -----------
$94,194,000 $128,855,000
----------- -----------
----------- -----------
</TABLE>
Under the discounted cash flow method, the fair value of total long-term
debt approximates $108,221,000 and $140,800,000 at December 31, 1993 and 1992,
respectively.
Aggregate minimum annual principal payments of long-term debt maturing in
years subsequent to December 31, 1993 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
- -------------------------------------------
<S> <C>
1994 $ 9,814,000
1995 11,833,000
1996 34,958,000
1997 13,849,000
1998 13,682,000
1999 and subsequent 19,872,000
-------------
$ 104,008,000
-------------
-------------
<FN>
(a) The Company has an unsecured revolving line of credit with its principal
banks for $55,000,000 with interest at the principal banks' reference rate, or
alternative variable rates, at the Company's option. At December 31, 1993, the
Company had $6,100,000 outstanding at the reference rate of 6.0% and $17,000,000
outstanding at an average variable rate of 4.0%. This revolving line of credit,
which matures on January 31, 1996, contains certain restrictive covenants
similar to the covenants contained in the senior promissory notes. At
December 31, 1993, $31,900,000 of this line was unused.
(b) The 9.5% senior promissory notes are due in varying semi-annual
installments of $2,000,000 to $5,000,000 from June, 1994 through December, 1999.
Interest is payable semi-annually. The notes are unsecured and contain certain
restrictive covenants. The most significant covenants are: minimum net worth
requirements, limitations on additional indebtedness and liens, minimum interest
coverage and limitations on a change in control of the Company.
(c) The 9.85% senior promissory notes are due in annual installments of
$2,800,000 beginning October, 1994 to October, 1999, with the remaining
principal of $3,200,000 due in October, 2000. Interest is payable quarterly. The
notes are unsecured and contain certain restrictive covenants similar to the
covenants contained in the 9.5% senior promissory notes.
(d) The 10.4% senior promissory notes are due in annual installments of
$2,500,000 from December, 1994 through December, 1999, with interest payable
semi-annually. The notes are unsecured and contain certain restrictive covenants
similar to the 9.5% senior promissory notes.
</TABLE>
NOTE F
INCOME TAXES
The Company files a consolidated Federal income tax return. The Company's
Federal income tax returns through December 31, 1989 have been examined by the
IRS which resulted in no material changes. The Company's Federal income tax
returns for the years ended December 31, 1990 through December 31, 1992 are
currently under examination by the IRS. No significant adjustments are expected
from this examination.
<PAGE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years ended
December 31, 1993 1992 1991
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 1,968,000 $ 2,390,000 $ 6,929,000
State 412,000 425,000 1,186,000
------------ ------------ ------------
2,380,000 2,815,000 8,115,000
Deferred
Federal (6,746,000) (544,000) 2,524,000
State (914,000) (96,000) 431,000
------------ ------------ ------------
(7,660,000) (640,000) 2,955,000
------------ ------------ ------------
$(5,280,000) $ 2,175,000 $ 11,070,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Included in the 1993 provision for deferred income taxes is a $1,200,000
expense resulting from the increase in enacted Federal income tax rates.
For tax purposes, the Company has alternative minimum tax credit
carryforwards ("AMT") of $3,275,000. These amounts have been recognized for
financial reporting purposes.
Deferred income taxes arise from temporary differences between financial
and tax reporting. The tax effects of the cumulative temporary differences
resulting in the deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31, 1993 1992
- ---------------------------------------------------
<S> <C> <C>
Depreciation $ 31,609,000 $ 29,288,000
Farm inventory
accounting 2,349,000 2,583,000
AMT credit (3,275,000) (2,450,000)
Disposal of
product line (8,485,000) -
Other (3,768,000) (3,331,000)
------------ ------------
$ 18,430,000 $ 26,090,000
------------ ------------
------------ ------------
</TABLE>
The following is a reconciliation of the Federal statutory income tax rate
to the consolidated effective tax rate:
<TABLE>
<CAPTION>
Years ended December 31, 1993 1992 1991
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate (35.0)% 34.0% 34.0%
State tax effect (1.5) 3.6 3.5
Goodwill 10.8 7.4 4.8
Tax rate change 5.6 - -
Other (4.3) (9.0) (6.3)
----- ---- ----
(24.4)% 36.0% 36.0%
----- ---- ----
----- ---- ----
</TABLE>
NOTE G
EMPLOYEE RETIREMENT PLANS
Full-time employees of the Company who meet service requirements are eligible to
participate in the Michael Foods, Inc. Retirement Savings Plan. The Company will
match up to 4% of each participant's eligible compensation. Contributions of
$1,088,000, $1,204,000 and $818,000 were charged to operations for the years
ended December 31, 1993, 1992 and 1991, respectively.
NOTE H
STOCKHOLDERS' EQUITY
During 1993, the Company purchased 220,600 shares of its common stock for
$1,828,000 on the open market under a stock repurchase plan. These shares are
held as treasury stock.
On April 15, 1991, the Company declared a three-for-two stock split in the
form of a stock dividend. The financial statements, earnings per share,
dividends per share and information relating to stock options have been
retroactively restated to reflect the split.
The Company's Non-Qualified Stock Option Plan (the "Plan") was adopted by
the Board of Directors on March 20, 1987. The Plan provides for the grant of
options to officers and other key employees of the Company and its subsidiaries.
The ten-year options are generally not exercisable in the first year and vest
ratably over the first five years. The exercise price of the options granted is
the fair market value at the date of grant.
Option transactions under the Plan during each of the three years ended
December 31, 1993 are summarized as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
------------ -------------------
<S> <C> <C>
Outstanding at
January 1, 1991 1,498,476 $ 7.11- -- $13.33
Granted 152,942 13.08- -- 18.63
Exercised (110,450) 7.11- -- 12.42
Cancelled (22,507) 7.11- -- 12.25
---------
Outstanding at
December 31, 1991 1,518,461 7.11- -- 18.63
Granted 83,252 8.38- -- 18.88
Exercised (26,500) 7.11- -- 12.42
Cancelled (75,599) 8.58- -- 17.83
---------
Outstanding at
December 31, 1992 1,499,614 7.11- -- 18.88
Granted 226,847 8.00- -- 10.13
Cancelled (50,231) 9.33- -- 18.88
---------
Outstanding at
December 31, 1993 1,676,230 $ 7.11- -- $18.88
---------
---------
</TABLE>
Options to purchase 1,361,553 shares were exercisable at December 31, 1993.
The Company also has an Incentive Stock Option Plan (the "ISO Plan");
however, no shares have been granted under its provisions. The Company has
reserved 2,142,500 shares for the Plan and the ISO Plan.
During 1993, the stockholders approved a Stock Option Plan for Non-Employee
Directors (the "Director Plan"). Under the Director Plan 150,000 shares were
reserved for grant. All options are exercisable one year from the date of grant
and have a term of ten years. Stock options for 20,000 shares were granted
during 1993, options for 16,250 shares were cancelled and none were exercised.
Previous to adopting the Director Plan, the Company had a policy of granting
options to non-employee directors. During 1992, options for 45,000 shares of
common stock were exercised and options for 45,000 shares remained outstanding
at December 31, 1992, under the Company's old policy. At December 31, 1993
options for 48,750 shares with exercise prices ranging from $7.63 to $14.67 per
share were outstanding and options for 101,250 shares were available for grant.
-29-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Michael Foods, Inc.
We have audited the accompanying consolidated balance sheets of Michael
Foods, Inc. and Subsidiaries as of December 31, 1993 and 1992 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1993. 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 the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Michael Foods,
Inc. and Subsidiaries as of December 31, 1993 and 1992 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota /s/ Grant Thornton
February 16, 1994
-30-
<PAGE>
REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULES
Board of Directors
Michael Foods, Inc.
In connection with our audits of the consolidated financial statements
of Michael Foods, Inc. and Subsidiaries referred to in our report dated
February 16, 1994, which is included in Part IV of the Annual Report on Form
10-K of North Star Universal, Inc. for the year ended December 31, 1993, we
have also audited Schedules II, V, VI, VIII, IX and X of Michael Foods, Inc.
and Subsidiaries for each of the three years in the period ended December 31,
1993. In our opinion, these schedules present fairly, in all material respects,
the information required to be set forth therein.
/s/ GRANT THORNTON
Minneapolis, Minnesota
February 16, 1994
-31-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
MICHAEL FOODS, INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES
- ------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- ------------------------------------------------------------------------------------------------------------------
Deductions
----------------------------
Balance at (1) (2)
Beginning of Amounts Amounts Balance at End of
Name of Debtor Period Additions Collected Written Off Period-Current
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1991:
Cholorex Company $0 $2,959,000 $2,009,000 $0 $950,000
For the Year Ended
December 31, 1992:
Cholorex Company $950,000 $2,033,000 $2,969,000 $0 $14,000
For the Year Ended
December 31, 1993:
Cholorex Company $14,000 $1,874,000 $1,840,000 $0 $48,000
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE V
MICHAEL FOODS, INC. AND SUBSIDIARIES
PROPERTY, PLANT AND EQUIPMENT
- ------------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E Col. F
- ------------------------------------------------------------------------------------------------------------------------
Other
Balance at Changes Add
Beginning of Additions at (Deduct) Balance at
Classification Period Cost Retirements Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1991
Land $ 4,030,000 $ 429,000 $ 10,000 $ 0 $ 4,449,000
Buildings and Improvements 69,935,000 12,598,000 1,495,000 243,000 81,281,000
Machinery and Equipment 118,711,000 35,389,000 846,000 1,912,000 155,166,000
------------ ----------- ---------- ----------- ------------
$192,676,000 $48,416,000 $2,351,000 $ 2,155,000 $240,896,000
------------ ----------- ---------- ----------- ------------
------------ ----------- ---------- ----------- ------------
(a)
For the Year Ended
December 31, 1992:
Land $ 4,449,000 $ 458,000 $ 2,000 $ 0 $ 4,905,000
Buildings and Improvements 81,281,000 10,970,000 1,008,000 0 91,243,000
Machinery and Equipment 155,166,000 20,185,000 3,711,000 0 171,640,000
------------ ----------- ---------- ----------- ------------
$240,896,000 $31,613,000 $4,721,000 $ 0 $267,788,000
------------ ----------- ---------- ----------- ------------
------------ ----------- ---------- ----------- ------------
For the Year Ended
December 31, 1993:
Land $ 4,905,000 $ 0 $ 4,000 $( 700,000) $ 4,201,000
Buildings and Improvements 91,243,000 3,327,000 3,694,000 ( 896,000) 89,980,000
Machinery and Equipment 171,640,000 8,344,000 5,710,000 (7,619,000) 166,655,000
------------ ----------- ---------- ----------- ------------
$267,788,000 $11,671,000 $9,408,000 $(9,215,000) $260,836,000
------------ ----------- ---------- ----------- ------------
------------ ----------- ---------- ----------- ------------
(b)
<FN>
- ------------------------
(a) Property, plant and equipment acquired - business acquisitions
(b) Reclassification to Net Assets Held for Sale
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI
MICHAEL FOODS, INC. AND SUBSIDIARIES
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E Col. F
- ---------------------------------------------------------------------------------------------------------------------------------
Additions Other
Balance at Charged to Changes Add Balance at
Beginning of Costs and (Deduct) End of
Classification Period Expenses Retirements Describe Period
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1991:
Buildings and Improvements $ 6,974,000 $ 3,826,000 $ 414,000 $ 0 $10,386,000
Machinery and Equipment 21,173,000 13,777,000 404,000 0 34,546,000
------------ ------------ ------------ ------------ -----------
$ 28,147,000 $ 17,603,000 $ 818,000 $ 0 $44,932,000
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
For the Year Ended
December 31, 1992:
Buildings and Improvements $ 10,386,000 $ 4,459,000 $ 119,000 $ 0 $14,726,000
Machinery and Equipment 34,546,000 16,995,000 1,712,000 0 49,829,000
------------ ------------ ------------ ------------ -----------
$ 44,932,000 $ 21,454,000 $ 1,831,000 $ 0 $64,555,000
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
For the Year Ended
December 31, 1993:
Buildings and Improvements $ 14,726,000 $ 4,671,000 $ 217,000 $ (519,000) $18,661,000
Machinery and Equipment 49,829,000 17,775,000 3,110,000 (2,757,000) 61,737,000
------------ ------------ ----------- ------------ -----------
$ 64,555,000 $ 22,446,000 $ 3,327,000 $(3,276,000) $80,398,000
------------ ------------ ----------- ------------ -----------
------------ ------------ ----------- ------------ -----------
(a)
<FN>
- ------------------------
(a) Reclassification to Net Assets Held for Sale
Lives used in computing depreciation, principally on a straight line basis:
Buildings and Improvements...........10-40 years
Machinery and Equipment...............3-10 years
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VIII
MICHAEL FOODS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- -------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------------
(2)
(1) Charges to
Balance at Charged to Other
Beginning of Cost and Accounts- Deductions- Balance at End
Description Period Expenses Describe Describe (a) of Period
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1991:
Allowance for
Doubtful Accounts $233,000 $712,000 $0 $547,000 $398,000
For the Year Ended
December 31, 1992:
Allowance for
Doubtful Accounts $398,000 $380,000 $0 $332,000 $446,000
For the Year Ended
December 31, 1993:
Allowance for
Doubtful Accounts $446,000 $756,000 $0 $319,000 $883,000
<FN>
- ------------------------
(a) Write-offs of accounts deemed uncollectible.
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IX
MICHAEL FOODS, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
- ---------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E Col. F
- ---------------------------------------------------------------------------------------------------------------
Maximum Average Weighted
Amount Amount Average
Weighted Outstanding Outstanding Interest Rate
Category of Aggregate Balance at End Average During the During the During the
Short-term Borrowings of Period Interest Rate Period Period (b) Period (c)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1991:
Bank Demand Notes (a) $27,840,000 5.83% $37,437,000 $4,823,000 7.70%
For the Year Ended
December 31, 1992:
Bank Demand Notes (d) NONE
For the Year Ended
December 31, 1993:
Bank Demand Notes (d) NONE
<FN>
- ------------------------
(a) Bank lines of credit payable on demand with an interest rate floating with
the bank's reference rate or other variable rates.
(b) The average amount outstanding during the period was computed by dividing
the total of daily outstanding principal balances by 365 days.
(c) The weighted average interest rate during the period was computed by
dividing the total of daily average interest rates by the total number of
days debt was outstanding during the year.
(d) The Company's revolving line of credit was refinanced into a long-term
facility in February 1992.
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE X
MICHAEL FOODS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
- --------------------------------------------------------------------------------
Column A - Column B -
Item Charged to Costs and Expenses
- --------------------------------------------------------------------------------
<S> <C>
For the Year Ended
December 31, 1991:
1. Maintenance and Repairs...........................................$6,333,000
For the Year Ended
December 31, 1992:
1. Maintenance and Repairs...........................................$7,111,000
5. Advertising costs.................................................$4,940,000
For the Year Ended
December 31, 1993:
1. Maintenance and Repairs...........................................$6,688,000
</TABLE>
-37-
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Number
- ------ ------
10.22 Flynn Employment Agreement
12.4 Computation of Ratio of Earnings to Fixed Charges
13.1 1993 Annual Report to Shareholders
22.1 Subsidiaries of the Registrant
23.1 Consent of Independent Certified Public
Accountants
-38-
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made this first day of April, 1993 by and between
Peter E. Flynn (executive) and Transition Engineering, Inc. ("Transition") and
North Star Universal, Inc. ("Employer" or "NSU").
The parties desire by this Agreement to completely supersede and replace
all employment Agreements between them heretofore made, whether written or oral.
Now, therefore, it is agreed:
1. EMPLOYMENT. The Employer hereby employs Executive, and Executive
accepts such employment and agrees to perform services for the Employer, for the
period and upon the other terms and conditions set forth in this Agreement.
2. TERM. Unless terminated at an earlier date in accordance with Article
5 of this Agreement the term of Executive's employment hereunder shall commence
on the date of this Agreement and shall expire on December 31, 1997 subject to
the terminating and severance provisions set forth in this Agreement.
Thereafter, the term of this Agreement shall be automatically extended for
successive one (1) year periods unless either party notifies the other in
writing of its desire to terminate this Agreement within ninety (90) days of
the end of the of the fifth anniversary or the end of each such calendar year
thereafter.
3. POSITION AND DUTIES.
<PAGE>
3.01 SERVICE WITH EMPLOYER. During the term of this Agreement,
Executive agrees to perform such reasonable employment duties as the Board of
Directors of the Employer shall assign to him from time to time.
3.02 PERFORMANCE OF DUTIES. Executive agrees to serve the Employer
faithfully and to the best of his ability and to devote his full time,
attention and efforts to the business and affairs of the Employer during the
term of this Agreement. Executive hereby confirms that he is under no
contractual commitments inconsistent with his obligations set forth in this
Agreement, and that he will not render or perform services for any other
corporation, firm, entity or person which are inconsistent with the provisions
of this Agreement.
4. COMPENSATION.
4.01 BASE SALARY. As base compensation for all services to be rendered
by the Executive under this Agreement during the term of this Agreement, the
Employer shall pay to Executive an annual salary of One Hundred Thirty Thousand
and no/100 dollars ($130,000.00), which shall be paid on a bi-weekly basis in
accordance with the Employer's normal payroll procedures and policies.
4.02 ADDITIONAL COMPENSATION. For services rendered by the Executive
for the benefit of NSU, Employer shall pay Executive the annual amount of
$25,000, payable in four equal installments on the first day of each calendar
quarter. In the event this Agreement is terminated for any reason, Employer
agrees to pay Executive a pro-rata portion of the payment next due and payable.
-2-
<PAGE>
4.03 INCENTIVE COMPENSATION. The Employer agrees, for each of the
calendar years during the term of this Agreement, that Executive shall be
entitled to receive an annual bonus, payable on or before March 31 of the next
succeeding calendar year which shall be based on the performance of Transition.
The amount of the bonus payable to Executive for each such calendar year shall
be an amount equal to (i) 25% of his base annual salary if the "minimum targeted
performance" is achieved, (ii) 50% of his base annual salary if the "budgeted
targeted performance" is achieved and (iii) 75% of his base annual salary if the
"superior targeted performance" is achieved. Prior to each calendar year,
Executive and the Employer shall determine the minimum, budgeted and superior
targeted performance criteria based on budgets prepared by Transition for such
upcoming calendar year. In the event this Agreement is terminated pursuant to
Article 5.01 of this Agreement, other than under the provision of Paragraph (E)
of Article 5.01, Employer agrees to pay Executive a pro rata portion of the
annual bonus that Executive would otherwise be entitled to receive pursuant to
this Article 4.03, based upon the actual performance achieved for such calendar
year. The pro rata portion of the annual bonus to be paid to Executive in the
event of his termination pursuant to Article 5.01 of this Agreement shall be
determined based on the proportionate part of the current calendar year during
which he was employed by the Employer.
4.04 PARTICIPATION IN BENEFIT PLANS. Executive shall also be entitled
to participate in all employee benefit plans or programs (including vacation
time) of the Employer to the extent that his position, title, tenure, salary,
age, health and
-3-
<PAGE>
other qualifications make him eligible to participate. The Employer does not
guarantee the adoption or continuance of any particular employee benefit plan
or program during the term of this Agreement, and Executive's participation in
any such plan or program shall be subject to the provisions, rules and
regulations applicable thereto.
4.05 EXPENSES. The Employer will pay or reimburse Executive for all
reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, subject to the presentment of
appropriate vouchers in accordance with the Employer's normal policies for
expense verification.
5. TERMINATION
5.01 EVENTS OF TERMINATION The employment of Executive by Employer
hereunder shall continue as provided in Paragraph 2 of this Agreement unless
earlier terminated as follows:
A. By mutual written agreement of the parties;
B. Upon the death of Executive;
C. Upon ninety (90) days advance written notice by Executive to
Employer;
D. For cause under the control of Employer, upon thirty (30) days
advance written notice by Executive to Employer, with Employer
having fifteen (15) days from receipt of such notice to correct
said cause;
-4-
<PAGE>
E. At the option of Employer, upon the occurrence of any of the
following events: (i) If Executive shall materially neglect his
duties or devote a substantial portion of his time or attention to
other business or nonbusiness interests resulting in Executive's
neglect of his duties to Employer and the same shall continue for a
period of more than thirty (30) days following receipt by Executive
of written notice from Employer specifying such neglect; or (ii)
Upon the expiration of six (6) consecutive months after the
occurrence of physical or mental disability of Executive to such an
extent that he is unable to carry on a substantial portion of his
usual and customary duties.
F. At the election of Executive in the event that: (i) There shall
occur a material, adverse change in the title, duties or
responsibilities of Executive; or
(ii) The actual termination of Executive's employment by Employer
or any threatened or attempted termination of Executive's
employment by Employer other than under the provisions of paragraph
(E) of this Article.
(iii) Sale, merger, consolation, liquidation, exchange (stock for
stock or otherwise), sale of assets or other similar transaction or
-5-
<PAGE>
series of transactions (whether or not such transaction involves a
business combination) involving a majority interest in NSU or its
combined holdings.
5.02 SEVERANCE PAY. In the event of Executive's voluntary termination
of employment prior to expiration of the term hereof, Executive shall be
entitled to severance pay in an amount equal to one hundred percent (100%) of
his then annual base salary as provided for in Article 4.01 of this Agreement
plus $25,000, payable within thirty (30) days of such termination. In the event
Executives' termination of employment shall be involuntary or shall occur by
reason of the election on the part of the Executive due to an event described in
Paragraph (F) of Article 5.01, Executive shall be entitled to severance pay in
an amount equal to two hundred percent (200%) of his then annual base salary as
provided for in Article 4.01 of this Agreement plus $25,000. Severance pay shall
be payable within thirty (30) days of the earlier of the effective date of such
termination or the written notice of election by Executive to Employer as
provided for in said Paragraph (F) of Article 5.01.
6. STOCK OPTIONS.
6.01 SHARES OF EMPLOYER. All previous grants to Executive to purchase
shares of the Employer as attached hereto shall continue to be in effect.
However, if Executive is terminated then such options shall immediately vest.
7. MISCELLANEOUS
-6-
<PAGE>
7.01 AMENDMENTS. No amendment or modification of this Agreement shall
be deemed effective unless made in writing and signed by Executive and the
Employer.
7.02 WITHHOLDING TAXES. The Employer may withhold from any compensation
or other benefits payable under this Agreement all federal, state, city or other
taxes as shall be required pursuant to any law or governmental regulation or
ruling.
7.03 ASSIGNMENT. This Agreement shall not be assignable, in whole or in
part, by either party without the written consent of the other party.
7.04 SEVERABILITY. To the extent that any provision of this Agreement
shall be determined to be invalid or unenforceable, the invalid or unenforceable
portion of such provision shall be deleted from this Agreement, and the validity
and enforceability of the remainder of such provision and of this Agreement
shall be unaffected.
7.05 DISCLOSURE. Executive agrees to treat all proprietary information
relating to Employer's business in a confidential manner and will not make any
disclosure of information which would adversely affect Employer.
7.06 ARBITRATION. In the event that any matter of disagreement shall
arise in connection with this Agreement, such disagreement shall be promptly
settled by arbitration in Minneapolis, Minnesota, pursuant to the rules of the
American Arbitration Association.
-7-
<PAGE>
The parties have executed this agreement on the date above written.
Executive:
/s/ Peter E. Flynn
- -----------------------------------
Peter E. Flynn
Employer:
NORTH STAR UNIVERSAL, INC.
By /s/Jeffrey J. Michael
---------------------------------
Its President & CEO
--------------------------------
TRANSITION ENGINEERING, INC.
By /s/ Jeffrey J. Michael
---------------------------------
Its VP Finance
--------------------------------
-8-
<PAGE>
Exhibit I
Summary of Stock Options Granted to Peter E. Flynn
<TABLE>
<CAPTION>
Number Date Expiration
of Shares Price Exercisable Date of
--------- ----- ----------- -------
<S> <C> <C> <C>
25,000 $ 9.75 5-12-92 5-12-97
19,500 $ 4.00 4-17-92 4-17-97
15,000 $ 10.125 4-29-92 4-29-97
15,000 $ 10.125 4-29-93 4-29-98
10,000 $ 4.625 8-3-93 8-3-98
15,000 $ 10.125 4-29-94 4-29-99
10,000 $ 4.625 8-3-94 8-3-99
15,000 $ 10.125 4-29-95 4-29-2000
10,000 $ 4.625 8-3-95 8-3-2000
</TABLE>
-9-
<PAGE>
North Star Universal, Inc.
Computation of ratio of earnings to fixed charges
For the Twelve Months ended December 31, 1993
Earnings:
Loss from continuing operations before
income taxes and minority interest (3,615)
Fixed charges 5,021
------
Income from continuing operations before
income taxes, minority interest and fixed charges 1,406
------
------
Fixed Charges:
Interest expense 4,266
Interest portion of rentals 755
Amortization of debt expense 0
------
5,021
------
------
Ratio of earnings to fixed charges 0.28
<PAGE>
NORTH STAR UNIVERSAL, INC.
1993 ANNUAL REPORT
<PAGE>
COMPANY PROFILE
As a parent company, North Star Universal, Inc. provides management and
financial resources for the development and growth of its operating businesses.
North Star's direct and indirect wholly owned subsidiaries include Americable,
Transition Engineering and C.E. Services. 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 applications. C.E. Services remarkets, reconfigures, refurbishes and
warehouses mainframe computers and peripherals and provides related technical
and maintenance services. As of December 31, 1993, North Star also owned a
38 percent interest in Michael Foods, Inc. (NASDAQ:MIKL), and a 40 percent
interest in CorVel Corporation (NASDAQ:CRVL).
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1993 1992 1991
- -------------------------------------------------------------------------------
OPERATIONS:
<S> <C> <C> <C>
Revenues $107,485 $86,363 $71,575
Operating income (loss) 651 (585) (1,356)
Income (loss) from continuing operations (11,872) (1,637) 10,899
Discontinued operations -- -- (598)
Net income (loss) (11,872) (1,637) 10,301
---------------------------------
---------------------------------
Income (loss) per share:
Continuing operations $ (1.26) $ (.17) $ 1.07
Discontinued operations -- -- (.06)
---------------------------------
Net income (loss) $ (1.26) $ (.17) $ 1.01
---------------------------------
---------------------------------
FINANCIAL POSITION:
Long-term debt $43,194 $41,849 $41,451
Shareholders' equity 34,675 61,083 63,246
---------------------------------
---------------------------------
</TABLE>
North Star believes that a significant portion of its shareholder value will
ultimately be derived from the value of its subsidiaries and holdings in Michael
Foods and CorVel. The following summarizes the net book value of the Company as
of the end of the past three years along with the market value of its
investments in Michael Foods and CorVel. The market value of the Company's
Michael Foods and CorVel investments is based on the closing market price and
share holdings as of the respective dates.
<TABLE>
<CAPTION>
As of December 31,
(In thousands) 1993 1992 1991
- -------------------------------------------------------------------------------
BOOK VALUE
Assets -
<S> <C> <C> <C>
Michael Foods $ 59,025 $ 66,654 $ 66,629
CorVel 10,083 8,159 7,133
Computer group 18,352 17,117 18,179
Cash and other, net 7,059 9,657 11,225
---------------------------------
94,519 101,587 103,166
Liabilities -
Subordinated debentures (39,579) (38,899) (37,567)
Deferred income taxes(1) (20,265) (1,605) (2,353)
---------------------------------
Net book value $ 34,675 $ 61,083 $ 63,246
---------------------------------
---------------------------------
MARKET VALUE(2)
Michael Foods $ 58,840 $ 74,469 $109,405
CorVel 41,344 21,656 37,013
---------------------------------
---------------------------------
<FN>
(1) At December 31, 1993, the Company recorded an $18.7 million deferred
income tax liability relating to temporary differences between the financial and
tax reporting of its investment in Michael Foods. (See Note 9 to Consolidated
Financial Statements.)
(2) The market value of the Company's holdings in Michael Foods and CorVel does
not take into account any income taxes on the gain that may be recognized upon a
taxable disposition of such shares.
</TABLE>
<PAGE>
TO OUR SHAREHOLDERS
North Star's businesses were characterized by a year of transition.
Good overall operating results were overshadowed by Michael Foods decision to
discontinue its reduced cholesterol liquid whole egg joint venture. Apart from
this one time event, there were many positive developments within our companies
that bode well for the future.
Since 1990, and particularly following the CorVel Corporation public
offering in 1991, we have focused on strengthening our financial position and
building our three computer businesses -- Americable, C.E. Services and
Transition Engineering. Each of these businesses increased their revenue base
during a difficult and competitive period for the computer industry. Again in
1993, each of these companies has demonstrated an adaptability to market changes
and has found new opportunities amidst the challenges.
During 1993, C.E. Services contributed the greatest revenue and profit
gains within our computer group. These results are due largely to the strong
growth in its remarketing business for computer systems, features and parts.
Traditionally engaged in providing technical services to large computer leasing
customers, C.E. Services is using its technical expertise to carve out a
leadership role in the large secondary market for IBM mainframe equipment. This
knowledge provides it with a competitive advantage in adapting to the rapidly
changing mainframe market. As this market evolves, C.E. Services is well
positioned to fulfill the needs of customers who are downsizing their systems or
converting to alternative hardware solutions.
Americable posted improved operating results in its domestic market,
but was challenged by an extremely competitive market in Canada. In response,
the company scaled back and consolidated its Canadian operations into its
Minneapolis region. This consolidation resulted in restructuring charges in the
fourth quarter of approximately $1.9 million. Despite this setback, Americable
built upon its reputation for superior service across a broad product line with
its "One Company, One Call" approach. With an experienced technical staff, the
company made progress in extending its core distribution business into more
value-added products and services within its U.S. operations. These include
custom cable assemblies for the OEM market and value added projects involving
the design and implementation of local (LAN) and wide (WAN) area networks. The
company continues to work closely with its customers in providing new products
and services based upon their changing requirements.
Our third computer company, Transition Engineering, enjoyed another
year of sustained growth in sales and earnings. A good measure of this growth
came from international sales. As the year progressed, Transition made
significant investments in sales and engineering personnel. These investments
have started to yield a stream of new product introductions targeting the
hardware market for local area networks. This market is growing and changing
technologically at a phenomenal rate. Transition's strategy is to introduce new
products in a timely manner, taking advantage of opportunities to improve upon
the quality and performance of competing products. This strategy is working as
Transition adds more products to broaden its product line.
Michael Foods, which represents North Star's largest equity holding,
experienced a year of mixed results in 1993. On the positive side, the company
advanced its strategic thrust to convert from a commodity processor to a value-
added producer serving foodservice, retail and industrial ingredient markets.
Michael Foods posted strong volume and earnings gains in a number of product
lines, including Easy Eggs(TM) and refrigerated potato products. These gains,
however, were offset in the fourth quarter by charges of $34 million to write-
off its investment in its reduced cholesterol liquid whole egg joint venture and
other restructuring charges. Despite this disappointment, Michael Foods remains
focused on the innovation and development of value-added food products. Its
financial position after the restructuring is sound, with good cash flow.
Operationally, we believe its modern processing facilities and direct sales
organization provide a solid basis for achieving improved results.
<PAGE>
North Star's other investment interest is CorVel Corporation. During
1993, CorVel made considerable progress integrating its many cost containment
and patient management services for the workers compensation marketplace. These
efforts culminated with the launch of Advocacy(TM), a program that ties together
CorVel's component services into a managed care continuum. An important element
in CorVel's strategy is the expansion of its preferred provider organization.
Now operating in 20 states, this organization contributed significantly to
CorVel's earnings momentum in the past year. As in 1993, the coming years are
expected to bring fundamental changes to the health care industry. With
national marketing programs and dynamic information systems, CorVel is prepared
to aggressively participate in this changing market.
North Star remains committed to its number one priority -- improving
long term shareholder value. We are fortunate to have many enterprising people
throughout our companies who look for opportunities and are excited about
meeting new challenges. We are confident that we can succeed in guiding our
businesses through a competitive era and achieve our goals. As much as ever, we
are grateful for your continued support.
Sincerely,
/s/ Jeffrey J. Michael
Jeffrey J. Michael
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MARCH 14, 1994
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATION AND FINANCIAL CONDITION
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. Michael
Foods is a food processing and distribution company founded by North Star in
1987. Following a series of public offerings by Michael Foods and stock sales
by North Star, the Company owned a 38 percent interest in Michael Foods at
December 31, 1993. CorVel is a provider of managed care services founded by
North Star in 1988. Following an initial public offering in 1991, and other
equity transactions of CorVel, the Company's ownership interest in CorVel is
approximately 40 percent at December 31, 1993. 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 years ended December 31, 1993 (in
thousands).
<TABLE>
<CAPTION>
Years ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
C.E. Services $ 60,729 $ 44,338 $ 34,568
Americable 38,266 35,885 34,005
Transition Engineering 10,025 7,062 3,841
Eliminations (1,535) (922) (839)
---------------------------------
$107,485 $ 86,363 $ 71,575
---------------------------------
---------------------------------
Gross Profit
C.E. Services $ 11,669 $ 9,216 $ 7,697
Americable 10,254 9,648 9,947
Transition Engineering 3,903 2,701 1,599
---------------------------------
$ 25,826 $ 21,565 $ 19,243
---------------------------------
---------------------------------
Operating Income (Loss)
C.E. Services $ 2,794 $ 1,024 $ 118
Americable 179 (466) 331
Transition Engineering 918 533 380
Restructuring charges (1,953) -- --
Corporate expenses (1,287) (1,676) (2,185)
---------------------------------
$ 651 $ (585) $(1,356)
---------------------------------
---------------------------------
</TABLE>
<PAGE>
RESULTS OF OPERATION --
1993 VERSUS 1992
Consolidated revenues increased $21.1 million or 24.5% to $107.5
million from $86.4 million in 1992. The $16.4 million or 37% net increase in
revenues at C.E. Services includes approximately $19.2 million of higher sales
resulting from its expanded selling efforts and higher demand of used mainframe
systems and features, particularly IBM 4381 and 3090 product lines. Sales from
the remarketing of used mainframes and peripherals consisted of 84% and 72% of
C.E. Services' revenues in 1993 and 1992, respectively. This increase was offset
by decreased sales of approximately $2.8 million in technical service and
warehousing revenues due primarily to reduced pricing resulting from maturing
product life cycle of certain IBM mainframes. Sales from C.E. Services' European
operations increased approximately $5.1 million or 64% to $13.2 million for the
year. C.E. Services' ability to maintain its historical levels of sales growth
is dependent upon its ability to adapt to changing technologies and the
availability of products within the secondary mainframe market.
Revenues at Americable's U.S. operations increased $3.7 million or
12.4% to $33.6 million due primarily to higher demand of networking products and
services. This was offset by decreased sales of approximately $1.3 million in
its Canadian operations. Sales from Canadian operations consisted of 12% and
17% of Americable's revenues in 1993 and 1992, respectively. During the past
three years, Americable's Canadian operations have experienced significant
competition which has adversely impacted its sales. In December 1993,
Americable implemented a restructuring plan involving the consolidation of its
Canadian sales and customer support activities into its U.S. operations.
Americable believes that its revenues will be adversely impacted through the
loss of a substantial portion of these revenues.
Revenues at Transition Engineering increased approximately $3 million,
or 42%. This includes approximately $1.3 million of sales resulting from new
product introductions and approximately $500,000 of sales from new customers.
Sales to international customers were approximately $3.1 million in 1993, an
increase of $1.3 million or 71% from the previous year. Transition
Engineering's ability to maintain its present level of sales and its continued
sales growth is highly dependent upon its ability to offer new products that
meet customer's demands in a rapidly changing market, particularly in light of
the relatively short life cycle of its products.
Consolidated gross profit, as a percent of revenues, decreased to 24%
in 1993 as compared to 25% in 1992. The 1992 amount reflects charges of
$490,000 related to inventory writedowns at Americable and Transition
Engineering. Margins at Americable, exclusive of these charges, decreased to
26.8% in 1993, from 28% in 1992, due primarily to increased competition
particularly within its Canadian operations. In addition, margins at C.E.
Services decreased slightly due primarily to reduced pricing of technical
services resulting from increased competition and maturing product life cycle of
certain IBM mainframes. North Star expects the declining trends in consolidated
gross margins to continue in 1994 due to increased competition within each of
its computer businesses.
The Company's selling, general and administrative expenses increased
$1.1 million, or 5%, to $23.2 million from $22.1 million in 1993. This includes
increased expenses of approximately $800,000 at Transition Engineering due
primarily to the addition of sales and engineering personnel and increased
research and development expenses related to new product introductions and
additional administrative and support personnel needed to support overall
growth. In addition, general and administrative expenses at C.E. Services
increased approximately $600,000 due primarily to higher selling expenses
associated with the expanded
<PAGE>
remarketing efforts of used mainframe systems and higher facility costs related
to its expanded United Kingdom operation. These increases were offset by a
decrease in corporate costs of approximately $400,000.
Selling, general and administrative expenses at Americable's U.S.
operations increased approximately $600,000 due primarily to the addition of
sales and technical personnel. This was offset by decreased expenses of
approximately $650,000 at its Canadian operations which was primarily a result
of the downsizing of administrative and support staff and to a lesser extent,
savings incurred from the closure of its Canadian facilities during the year.
The consolidation of Americable's Canadian operations resulted in a
restructuring charge of approximately $1.9 million. This charge includes
approximately $600,000 for the write-off of goodwill and other noncurrent
assets, $700,000 for the reassessment of carrying values of inventory and
receivables and $600,000 for lease and severance obligations and other related
expenses.
During 1992, C.E. Services recorded foreign currency gains of
approximately $100,000. Foreign currency transactions were not significant in
1993. The Company does not believe that the reasonable likely future effects of
changes in currency exchange rates will have a significant impact on its results
of operations or financial position.
Net interest expense was relatively unchanged between years.
The Company's effective consolidated income tax rate was (19.6)% in
1993 and (23.4)% in 1992. See Note 9 to the Consolidated Financial Statements.
Equity in earnings (loss) of unconsolidated subsidiaries was a loss of
$8,967,000 in 1993 versus income of $2,055,000 in 1992. Included in the 1993
amount is a loss of $6.2 million for the Company's share of Michael Foods' net
loss for the year and a $3.7 million net deferred tax provision. For 1993,
Michael Foods recorded a net loss of $16.3 million which included charges for
the disposal of its reduced cholesterol liquid whole egg product line and other
restructuring charges. This loss was offset by an increase in the Company's
equity in earnings of CorVel of approximately $350,000 due to increased profits
at that company.
In the fourth quarter of 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. Previously, the Company did not record this potential deferred tax
liability as it expected any future dispositions of its Michael Foods holdings
would be completed in a tax-free manner. While a tax-free disposition of its
Michael Foods holdings continues to be the Company's preferred course of action,
North Star has recorded the deferred tax liability since it may have taxable
dispositions in future periods.
North Star currently has no plans to sell its Michael Foods holdings.
However, depending on market conditions, North Star's strategic objective and
other factors, the Company may from time-to-time sell all or a portion of its
Michael Foods holdings. Further, the recording of this liability in no way
precludes North Star from completing a tax-free transaction and has no cash flow
impact on the Company. The portion of this liability related to the Company's
share of Michael Foods public offering proceeds and other equity transactions of
$15 million, was charged to additional paid-in capital and the portion related
to Michael Foods unremitted earnings of $3.7 million, was charged to equity in
earnings (loss) of unconsolidated subsidiaries.
1992 VERSUS 1991
Consolidated revenues increased $14.8 million, or 20.7%, to $86.4
million from $71.6 million in 1991. Revenues at C.E. Services increased $9.7
million, or 28.3%, to $44.3 million from $34.6 million in the previous year.
This was primarily a result of C.E. Services' expanded selling efforts in the
remarketing of mainframe computer systems, features and parts, particularly IBM
4381 and 3090 product lines. Substantially
<PAGE>
all of this increase was due to higher sales from its domestic operations. Sales
from European operations consisted of 18% and 25% of C.E. Services' revenues in
1992 and 1991, respectively.
Americable's revenues increased $1.9 million, or 5.5%, to $35.9
million from $34 million in 1991. This includes increased sales of
approximately $2.9 million attributed to higher demand for networking products
at its U.S. operations. This increase was offset by lower domestic sales of
bulk cable and cable assembly products of approximately $500,000 and a $500,000
decrease in sales at its Canadian operations, due primarily to the overall weak
economic conditions in Canada. Sales from Canadian operations consisted of 17%
and 19% of Americable's sales in 1992 and 1991, respectively. Revenues at
Transition Engineering increased $3.2 million, or 84%, to approximately
$7.1 million in 1992. This increase includes approximately $700,000 of sales
resulting from new product introductions and approximately $1 million of sales
from new customers.
Consolidated gross profit, as a percent of revenue, decreased to 25%
in 1992 as compared to 26.9% in 1991. This decrease reflects charges of
$490,000 related to inventory write-downs at Americable and Transition
Engineering. Margins at Americable, exclusive of these write-downs, decreased
slightly due to increased competition. In addition, margins at C.E. Services
decreased because of a higher mix of lower margin computer feature and part
sales, reduced pricing of technical services and the maturing product cycle of
certain IBM mainframes.
The Company's selling, general and administrative expenses increased
$1.5 million, or 7.5%, to $22.1 million from $20.6 million in 1991. This
includes increases of approximately $950,000 at Transition Engineering due to
the addition of sales and engineering personnel and expenses related to new
product introductions. Selling expenses at Americable's distribution business
increased $500,000 due primarily to new sales personnel and costs associated
with its new catalog and direct mail programs. In addition, general and
administrative expenses at C.E. Services increased approximately $600,000 due to
higher facility costs related to its Chicago facility and the addition of
support personnel. These increases were offset by a decrease in corporate costs
of $500,000 due to the downsizing of the North Star corporate office effected in
1991.
Net interest expense decreased $205,000 to $4,237,000 from $4,442,000
in 1991, primarily from lower debenture interest rates between years.
Investment income of $8,564,000 in 1991 was a result of the sale of
1,172,550 shares of Michael Foods stock in January 1991.
Equity in earnings of unconsolidated subsidiaries decreased $6,888,000
to $2,055,000 from $8,943,000 in the previous year. The Company's equity in
earnings of Michael Foods decreased approximately $6.5 million in 1992, due
primarily to lower profits at that company in addition to North Star's reduced
ownership position between years. Michael Foods' net earnings for 1992 were
$3,850,000, a decrease of $15,817,000, or 80%, from the previous year. In
addition, the Company's equity in earnings of CorVel decreased approximately
$400,000 due primarily to the Company's reduced ownership position between
years.
CAPITAL RESOURCES AND LIQUIDITY
Historically, the Company has experienced cash flow deficits from
operations. Cash used in operations was $2.8 million in 1993 and $3.9 million
in 1992. 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 1993 and 1992, the Company
received dividends of $1,471,000. There can be no assurance that Michael Foods
will continue to declare such dividends.
<PAGE>
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 as
indicated in the table below. At December 31, 1993 and 1992, the Company had
$39.6 million and $38.9 million principal amount of subordinated debentures
outstanding. The weighted average interest of 10.4% and 10.8% at December 31,
1993 and 1992, respectively, accrues annually and is payable monthly, quarterly,
or at maturity. The Company's experience with its debenture program for the
three years ended December 31, 1993, is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Net
New Debentures
Debentures Debentures Debentures Sold
Redeemed Reinvested Sold (Redeemed)*
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1993 $ 5,758 46% $ 6,689 54% $ 6,438 $ 680
1992 5,917 48 6,422 52 7,249 1,332
1991 6,397 48 6,796 52 6,084 (313)
<FN>
*Represents the difference between new debentures sold and debentures redeemed.
</TABLE>
The Company is highly dependent on the continued sales of debentures
under its debenture program. In the event that redemptions substantially exceed
reinvested and newly sold debentures or the program is interrupted for an
extended period, the Company would be required to fund maturities through its
existing cash on hand, bank borrowings and asset sales. The Company believes
that the balance of outstanding debentures will remain relatively unchanged
during 1994. However, there can be no assurance that future reinvested and
newly sold debentures will equal or exceed redemptions. Approximately $12.1
million of debentures are scheduled to mature during 1994.
Long-term debt repayments for the year ended December 31, 1993,
include approximately $5.8 million of scheduled maturities of subordinated
debentures and $700,000 of other debt repayments of Americable and C.E.
Services. Proceeds from long-term debt for the year ended December 31, 1993,
include $4.4 million of new debentures sold along with $2 million of compounded
interest on debentures.
In May 1991, Americable established a $2 million revolving line of
credit and a $3 million term loan with North Star's principal bank. This
facility was used to finance its working capital requirements and reduce North
Star's investment. In June 1993, Americable amended its revolving line of
credit and term loan facility to provide 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% (7.5% at
December 31, 1993). At December 31, 1993, $1,893,000 was outstanding under the
term loan which bears interest at 10.665%. The term loan is payable in monthly
principal installments of $36,000 with a final installment of $893,000 due in
May 1996. In addition, at December 31, 1993, there was $1.4 million outstanding
under the revolving line of credit.
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 (6.5% and 7% at December 31, 1993). During 1993, C.E. Services
used bank borrowings of approximately $4.7 million to finance its working
capital requirements, principally the purchase of inventory related to its
remarketing of mainframe systems. At December 31, 1993, there were no
borrowings outstanding under these facilities.
<PAGE>
North Star maintains a $6.5 million revolving credit facility with
its principal bank that bears interest at the bank's reference rate (6% at
December 31, 1993). At December 31, 1993 and February 28, 1994, the Company had
no borrowings outstanding under this facility. In addition, at December 31,
1993, North Star had approximately $6 million of cash and cash equivalents,
excluding cash of its operating subsidiaries.
During 1994, the Company does not anticipate any significant
acquisitions and its operating plans call for approximately $1 million in
capital expenditures. 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.
<PAGE>
Consolidated Statements of Operations
NORTH STAR UNIVERSAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except per share amounts) 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 107,485 $ 86,363 $ 71,575
OPERATING AND PRODUCT COSTS 81,659 64,798 52,332
-------------------------------
Gross profit 25,826 21,565 19,243
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 23,222 22,150 20,599
RESTRUCTURING CHARGES 1,953 -- --
-------------------------------
Operating income (loss) 651 (585) (1,356)
OTHER INCOME (EXPENSE)
Interest expense (4,472) (4,738) (4,946)
Interest income 206 501 504
-------------------------------
(4,266) (4,237) (4,442)
Investment income -- -- 8,564
-------------------------------
Income (loss) from continuing operations
before income taxes and equity in
earnings (loss) of unconsolidated subsidiaries (3,615) (4,822) 2,766
INCOME TAX PROVISION (BENEFIT) (710) (1,130) 810
-------------------------------
Income (loss) from continuing operations
before equity in earnings (loss) of
unconsolidated subsidiaries (2,905) (3,692) 1,956
EQUITY IN EARNINGS (LOSS) OF
UNCONSOLIDATED SUBSIDIARIES (8,967) 2,055 8,943
-------------------------------
Income (loss) from continuing operations (11,872) (1,637) 10,899
DISCONTINUED OPERATIONS
Loss from operations -- -- (598)
-------------------------------
NET INCOME (LOSS) $ (11,872) $ (1,637) $ 10,301
-------------------------------
-------------------------------
INCOME (LOSS) PER SHARE
Continuing operations $ (1.26) $ (.17) $ 1.07
Discontinued operations -- -- (.06)
-------------------------------
NET INCOME (LOSS) $ (1.26) $ (.17) $ 1.01
-------------------------------
-------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
Consolidated Balance Sheets
NORTH STAR UNIVERSAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
(Dollars In thousands) 1993 1992
- ----------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 6,981 $ 9,380
Accounts receivable, net of allowances 7,617 8,267
Inventories 10,800 8,448
Prepaid expenses and other 452 482
Net assets of businesses held for sale 857 907
---------------------------
Total current assets 26,707 27,484
PROPERTY AND EQUIPMENT, NET 3,429 2,807
OTHER ASSETS
Goodwill 7,275 8,222
Investment in unconsolidated subsidiaries 69,108 74,813
Other 2,088 2,547
---------------------------
$108,607 $115,873
---------------------------
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to bank $ -- $ 1,300
Current maturities of long-term debt 12,799 12,871
Accounts payable 5,315 5,868
Accrued expenses
Payroll related 1,186 754
Other 3,692 3,158
Income taxes payable 280 256
---------------------------
Total current liabilities 23,272 24,207
LONG-TERM DEBT, LESS CURRENT MATURITIES 30,395 28,978
DEFERRED INCOME TAXES 20,265 1,605
COMMITMENTS -- --
SHAREHOLDERS' EQUITY
Common stock, authorized 100,000,000 shares of
$.25 par value; issued and outstanding
9,438,000 shares in 1993 and 1992 2,360 2,360
Additional paid-in capital 30,937 45,593
Foreign currency translation adjustment (245) (365)
Retained earnings 1,623 13,495
---------------------------
Total shareholders' equity 34,675 61,083
---------------------------
$108,607 $115,873
---------------------------
---------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
<PAGE>
Consolidated Statements of Shareholders' Equity
NORTH STAR UNIVERSAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Preferred Stock Common Stock Foreign
------------------ ------------------- Additional Currency
Years ended December 31, 1993, 1992 and 1991 Shares Shares Paid-In Translation Retained
(Dollars in thousands) Issued Amount Issued Amount Capital Adjustment Earnings
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1990 28,829 $ 2,883 9,219,100 $ 2,305 $ 28,636 $ 206 $ 5,193
Exercise of stock options to
acquire common stock -- -- 218,900 55 1,460 -- --
Initial public offering of CorVel -- -- -- -- 3,948 -- --
Effect of equity transactions
of Michael Foods -- -- -- -- 11,484 -- --
Translation adjustment -- -- -- -- -- 20 --
Redemption of preferred stock (28,829) (2,883) -- -- -- -- --
Cash dividends paid on preferred
stock--$14.00 per share -- -- -- -- -- -- (362)
Net income -- -- -- -- -- -- 10,301
------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1991 -- -- 9,438,000 2,360 45,528 226 15,132
Effect of equity transactions of
unconsolidated subsidiaries -- -- -- -- 65 -- --
Translation adjustment -- -- -- -- -- (591) --
Net loss -- -- -- -- -- -- (1,637)
------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 -- -- 9,438,000 2,360 45,593 (365) 13,495
Effect of equity transactions of
unconsolidated subsidiaries -- -- -- -- 344 -- --
Deferred income tax adjustment -- -- -- -- (15,000) -- --
Translation adjustment -- -- -- -- -- (198) --
Effect of restructuring charges -- -- -- -- -- 318 --
Net loss -- -- -- -- -- -- (11,872)
------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 -- $ -- 9,438,000 $ 2,360 $ 30,937 $ (245) $ 1,623
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
Consolidated Statements of Cash Flows
NORTH STAR UNIVERSAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1993 1992 1991
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(11,872) $(1,637) $10,301
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Equity in (earnings) loss of unconsolidated subsidiaries 8,967 (2,055) (8,943)
Investment income -- -- (8,564)
Non-cash restructuring charges 1,596 -- --
Discontinued operations -- -- 273
Depreciation and amortization 1,646 1,811 1,559
Deferred income taxes (730) (1,150) (500)
Foreign currency translation adjustment (198) (591) 20
Changes in operating assets and liabilities,
net of effects of restructuring charges
Accounts receivable 482 295 1,049
Inventories (2,863) (1,245) 72
Accounts payable, accruals and other 148 711 (1,131)
--------------------------------------
NET CASH used in operating activities (2,824) (3,861) (5,864)
--------------------------------------
CASH FLOWS FOR INVESTING ACTIVITIES
Capital expenditures (1,920) (617) (1,496)
Proceeds from divestitures -- -- 1,655
Proceeds from sale of Michael Foods stock -- -- 16,318
Change in control of subsidiaries to
equity method of accounting -- -- (4,307)
Other 829 186 350
--------------------------------------
NET CASH provided by (used in) financing activities (1,091) (431) 12,520
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 29,704 7,249 10,984
Payments on long-term debt (29,659) (6,851) (9,923)
Proceeds from notes payable 4,750 5,745 1,820
Payments on notes payable (4,750) (4,445) (12,820)
Proceeds from CorVel initial public offering -- -- 9,900
Proceeds from exercise of stock options -- -- 1,515
Redemption of preferred stock -- -- (2,883)
Preferred stock investment in CorVel -- -- (1,364)
Cash dividends paid on preferred stock -- -- (362)
Cash dividends received from Michael Foods 1,471 1,471 1,471
Other -- -- (76)
--------------------------------------
NET CASH provided by (used in) financing activities 1,516 3,169 (1,738)
--------------------------------------
NET INCREASE (DECREASE) in cash and cash equivalents (2,399) (1,123) 4,918
--------------------------------------
CASH AND CASH EQUIVALENTS at beginning of year 9,380 10,503 5,585
--------------------------------------
CASH AND CASH EQUIVALENTS at end of year $ 6,981 $ 9,380 $10,503
--------------------------------------
--------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
North Star Universal, Inc. ("North Star" or "the Company") is a holding company.
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 Company maintains a minority ownership position in Michael Foods, Inc.
("Michael Foods"). In March 1987, the Company founded Michael Foods to
consolidate and focus development of the Company's food businesses. Michael
Foods is engaged principally in the food processing and distribution business.
At the time Michael Foods was organized, the Company was issued 9,000,000 shares
(after giving retroactive effect to a 3-for-2 stock split in May 1991) of
Michael Foods common stock. In September 1990 and January 1991, the Company
sold 472,500 and 1,172,550 shares of its Michael Foods stock, respectively. As
a result of these transactions and other equity transactions of Michael Foods,
the Company's ownership interest in Michael Foods was approximately 38% at
December 31, 1993. The Company's investment in Michael Foods is accounted for
as an unconsolidated subsidiary using the equity method of accounting.
The Company also owns a 40% minority ownership in CorVel Corporation ("CorVel",
formerly FORTIS Corporation) as of December 31, 1993. In January 1988, the
Company founded CorVel to integrate and develop the operations of a number of
health care service companies previously acquired by North Star. In June 1991,
CorVel completed an initial public offering of 1,600,000 shares of its common
stock. Net proceeds from the offering were approximately $14.4 million of which
$9.9 million was received by North Star. The Company's investment in CorVel is
accounted for as an unconsolidated subsidiary using the equity method of
accounting.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The Company consolidates the accounts of its
majority-owned subsidiaries. All significant intercompany transactions have been
eliminated. Certain of the 1992 and 1991 amounts have been reclassified to
conform with the financial statement presentation used in 1993.
CASH AND CASH EQUIVALENTS The Company considers its highly liquid temporary
investments with original maturities of three months or less to be cash
equivalents.
INVENTORIES Inventories are stated at the lower of average cost (determined on
a first-in, first-out basis) or market. At December 31, inventories consist of
the following (in thousands):
<TABLE>
<CAPTION>
1993 1992
- -------------------------------------------------------------------------
<S> <C> <C>
Work in process and finished goods $ 8,741 $ 6,513
Purchased parts 2,059 1,935
-----------------------
$ 10,800 $ 8,448
-----------------------
-----------------------
</TABLE>
<PAGE>
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
PROPERTY AND EQUIPMENT Property and equipment are stated 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. Major
repairs and improvements are capitalized and depreciated. Maintenance and
repairs are charged to expense as incurred.
At December 31, property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C>
Buildings and improvements $ 1,025 $ 703
Machinery and equipment 6,330 5,242
-------------------------
7,355 5,945
Less-accumulated depreciation and amortization 3,926 3,138
-------------------------
$ 3,429 $ 2,807
-------------------------
-------------------------
</TABLE>
GOODWILL The excess of cost over net assets of purchased businesses is being
amortized on a straight-line basis over periods not exceeding 40 years.
Accumulated amortization was $2,506,000 at December 31, 1993 and $2,033,000 at
December 31, 1992. 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 modifies the life or adjusts the value of a
subsidiary's goodwill if an impairment is identified. See Note 3 for an
impairment identified during 1993.
INCOME TAXES The consolidated financial statements reflect the implementation
of Statement of Financial Accounting Standards No. 109--Accounting for Income
Taxes ("SFAS 109"), as of January 1, 1993. See Note 9.
EARNINGS PER SHARE Earnings per share are based upon the weighted average
number of shares outstanding during each period (9,438,000 in 1993, 9,438,000 in
1992, and 9,888,000 in 1991) after giving effect to the assumed exercise of
outstanding stock options, except where the effects are antidilutive. Earnings
in 1991 have been adjusted for preferred dividends of $362,000 to arrive at
earnings attributable to common shareholders.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The Company increased its
investment in unconsolidated subsidiaries by $396,000, $467,000 and $18,285,000
and additional paid-in capital by $344,000, $65,000 and $15,432,000 during 1993,
1992 and 1991, respectively, as a result of equity transactions of Michael Foods
and CorVel. During 1991, the Company decreased its net property by $2,386,000
and long-term debt by $2,520,000 through the sale of land and a building with
the buyer assuming the related debt obligation of the property.
Additional disclosures of cash flow information is as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1993 1992 1991
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid (received) during the year for:
Interest $ 4,506 $ 4,806 $ 4,937
Income taxes -- (574) (248)
</TABLE>
NOTE 3 - RESTRUCTURING CHARGES
In December 1993, Americable implemented a restructuring plan involving the
closure of its Canadian facilities, operated by Adanac Cable, Ltd., and
consolidation of its Canadian sales and customer support activities within its
U.S. operations. In connection with this consolidation, Americable recorded a
restructuring charge of approximately $1.9 million. This charge includes
approximately $600,000 for the write-off of goodwill and other non-current
assets, $700,000 for the reassessment of the carrying value of inventory and
receivables, and $600,000 for lease and severance obligations and other related
expenses. See Note 15.
NOTE 4 - INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company's unconsolidated subsidiaries consist of its investments in Michael
Foods and CorVel. The following is summarized balance sheet information of the
Company's unconsolidated subsidiaries as of December 31, 1993. The summarized
income statement information for Michael Foods is for the year ended
December 31, 1993. CorVel has a fiscal year end of March 31. The
<PAGE>
summarized income statement information for CorVel is for the twelve month
period ended December 31, 1993 (in thousands):
<TABLE>
<CAPTION>
Michael Foods CorVel
- -----------------------------------------------------------------
<S> <C> <C>
Current assets $ 83,727 $ 21,096
Noncurrent assets 245,360 9,655
Current liabilities 61,460 5,365
Noncurrent liabilities 112,624 --
Revenues 474,783 76,432
Gross profit 59,818 12,096
Net income (loss) (16,320) 3,882
</TABLE>
At December 31, 1993, CorVel had stock options outstanding to purchase
approximately 968,000 shares of its common stock at various exercise prices.
Assuming the exercise of all these options, the Company's ownership would be
reduced to approximately 32%. If the exercise of these options had occurred at
December 31, 1993, it would have decreased the Company's investment in
unconsolidated subsidiaries, deferred income taxes and additional paid-in
capital by approximately $1,985,000, $794,000 and $1,191,000, respectively.
At December 31, 1993, consolidated retained earnings includes
approximately $7.5 million of unremitted earnings related to the Company's
investment in unconsolidated subsidiaries.
NOTE 5 - DISCONTINUED OPERATIONS
In December 1992, the Company completed the sale of Universal Press & Label. In
March 1991, the Company completed the sale of Whirltronics and announced its
intention to sell its remaining non-computer related manufacturing company,
Eagle Engineering and Manufacturing, Inc. ("Eagle Engineering"). Revenues and
operating income of discontinued operations, including Eagle Engineering, were
$4.4 million and $92,000 in 1993, $6.2 million and $129,000 in 1992 and $6.5
million and $13,000 in 1991, respectively.
NOTE 6 - NOTES PAYABLE
The Company has a revolving credit agreement with its principal bank which
provides for borrowings up to $6.5 million due in January 1995. Borrowings
under the revolving line of credit bear interest at the bank's reference rate
(6.0% at December 31, 1993), and are collateralized by the Company's shares of
Michael Foods common stock. The credit agreement also includes certain
restrictive covenants including limitations on senior indebtedness and business
acquisitions and prohibits cash dividends to common shareholders. The Company
had no borrowings under its it line of credit during the year ended December 31,
1993.
C.E. Services maintains revolving credit facilities with its principal bank
which provide for borrowings up to $3.5 million due May 1994, based on available
eligible accounts receivable and inventory. Borrowings under these revolving
credit facilities bear interest at 1/2% and 1% over the bank's reference rate
(6.5% and 7% at December 31, 1993) and are used to finance the working capital
requirements of C.E. Services. At December 31, 1993, there were no borrowings
outstanding under these facilities.
NOTE 7 - LONG-TERM DEBT
At December 31, long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
1993 1992
- -----------------------------------------------------------------
<S> <C> <C>
Subordinated debentures $ 39,579 $ 38,899
Revolving line of credit 1,408 --
Term note payable 1,893 2,321
Notes payable for business acquisitions 173 368
Other 141 261
------------------------
43,194 41,849
Less current maturities 12,799 12,871
------------------------
$ 30,395 $ 28,978
------------------------
------------------------
</TABLE>
Aggregate minimum annual principal payments of long-term debt at December 31,
1993, are as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31,
- --------------------------------------------------
<S> <C>
1994 $ 12,799
1995 11,278
1996 6,618
1997 3,672
1998 4,465
1999 and thereafter 4,362
---------
$43,194
---------
---------
</TABLE>
<PAGE>
Subordinated debentures are unsecured and due in varying monthly installments
through 2002. Weighted average interest of 10.4% and 10.8% at December 31, 1993
and 1992, respectively, is payable monthly, quarterly or at maturity.
In May 1991, Americable established a $2 million revolving line of credit
and a $3 million term loan with North Star's principal bank. This facility was
used to finance its working capital requirements and reduce North Star's
investment. In June 1993, Americable amended its revolving line of credit and
term loan facility to provide 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% (7.5% at December 31,
1993). The term loan bears interest at 10.665% and is payable in monthly
principal installments of $36,000 with a final installment of $893,000 due in
May 1996. The credit agreement includes certain restrictive covenants including
minimum net worth requirements, limitations on additional indebtedness and
minimum interest coverage.
Notes payable for business acquisitions are due in varying monthly and
annual installments through January 1994 with interest ranging from 8% to 10%.
NOTE 8 - PREFERRED STOCK
In August 1991, the Company completed the redemption for cash of all of its
outstanding preferred stock at a redemption price of $100 per share plus accrued
but unpaid dividends through the date of redemption.
NOTE 9 - INCOME TAXES
The Company and its consolidated subsidiaries file a consolidated federal income
tax return and separate state income tax returns, where legally required.
Effective June 28, 1991, CorVel has filed its own consolidated federal and state
income tax returns. The provision (benefit) for consolidated income taxes
pertaining to continuing operations, consists of the following (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ -- $ -- $ 880
State 20 20 430
--------------------------------
20 20 1,310
Deferred
Federal (625) (912) (550)
State (105) (238) 50
--------------------------------
(730) (1,150) (500)
--------------------------------
$(710) $(1,130) $ 810
--------------------------------
--------------------------------
</TABLE>
The following is a reconciliation of income taxes at the federal statutory rate
to the effective rate:
<TABLE>
<CAPTION>
Years ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate (34.0)% (34.0)% 34.0%
State income taxes,
net of federal tax benefit (1.6) (3.0) 11.5
Gain on sale of Michael Foods stock -- -- 96.1
Effect of net operating loss carryforwards -- -- (106.8)
Losses producing no current benefit 17.1 10.9 --
Reinstatement of deferred taxes -- -- 5.6
Prior year overaccruals (3.5) -- (23.2)
Goodwill amortization 2.0 1.5 3.4
Dividends from unconsolidated subsidiaries -- 2.1 3.6
Other .4 (.9) 5.1
-----------------------------------
(19.6)% (23.4)% 29.3%
-----------------------------------
-----------------------------------
</TABLE>
Effective January 1, 1993, the Company was required under SFAS 109 to
record deferred income taxes related to the current years' unremitted earnings
or loss from Michael Foods. Deferred income taxes are not required to be
recorded for unremitted earnings and equity transactions which arose prior to
1993 and are expected to be realized in a tax-free manner. In the fourth
quarter of 1993, the Company determined that all future dispositions of Michael
Foods holdings may not be completed in a tax-free manner. Accordingly, 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. The portion of this liability related to the
Company's share of Michael Foods public offering proceeds and other equity
transactions of $15 million, was charged to additional paid-in capital and the
portion related to Michael Foods unremitted earnings of $3.7 million, was
charged to equity in earnings (loss) of unconsolidated subsidiaries. The $3.7
million net deferred tax provision includes a $2.8 million deferred tax benefit
related to the current year loss and $6.5 million of deferred tax expense
related to prior year earnings.
<PAGE>
In addition, at December 31, 1993, the deferred tax liability includes the
initial tax effect of $2.7 million for the difference in the financial reporting
and tax basis of the Company's investment in CorVel following its initial public
offering along with income taxes recorded on the equity in earnings of CorVel of
$690,000 in 1993, $402,000 in 1992 and $153,000 in 1991, respectively.
The tax effects of the cumulative temporary differences resulting in the
net deferred tax liability at December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1992
- ------------------------------------------------------------------
<S> <C> <C>
Investment in Michael Foods $(18,700) $ --
Investment in CorVel (3,945) (3,255)
Depreciation (99) (379)
Accrued expenses not
deductible until paid 1,826 1,440
Other (346) (751)
Net operating loss carryforwards 1,664 1,320
State taxes 125 20
-----------------------
(19,475) (1,605)
Valuation allowance (790) --
-----------------------
$(20,265) $(1,605)
-----------------------
-----------------------
</TABLE>
At December 31, 1993, the valuation allowance represents a reserve for
foreign net operating loss carryforwards which are not expected to be realized
in the future. In addition, at December 31, 1993, the Company had federal net
operating loss carryforwards for income tax purposes of approximately $2.5
million. This amount has been recognized for financial reporting purposes.
NOTE 10 - STOCK OPTION PLANS
In 1986, the Company established an incentive stock option plan and a non-
qualified stock option plan for various executive officers (none of whom are
presently officers of the Company). The Company also maintains a non-qualified
stock option plan for other officers, directors and key employees.
Activity under the stock option plans for the years ended December 31, is
as follows:
<TABLE>
<CAPTION>
1993 1992 1991
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, beginning of year 656,600 615,400 769,000
Granted:
$4.63/share -- 48,700 --
$10.12 to $10.25/share -- -- 67,500
Exercised:
$.94/share -- -- (205,000)
$8.75/share -- -- (13,900)
Cancelled:
$8.75/share -- -- (2,200)
$10.25/share -- (7,500) --
-----------------------------------
Outstanding, end of year 656,600 656,600 615,400
-----------------------------------
-----------------------------------
Exercisable, end of year:
Number of shares 634,140 631,900 497,400
Exercise price per share $.94 $.94 $.94
to $10.12 to $10.12 to $8.75
</TABLE>
<PAGE>
NOTE 11 - COMMITMENTS
The Company leases certain equipment and facilities under operating leases.
Minimum rental payments under such leases which expire at various dates through
2008 are as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31,
- ---------------------------------------------------
<S> <C>
1994 $ 2,465
1995 2,253
1996 1,896
1997 1,827
1998 1,828
1999 and thereafter 7,925
---------
$ 18,194
---------
---------
</TABLE>
Certain of the leases provide for payment of taxes and other expenses by
the Company. Total rent expense on all leases including month-to-month leases
was $2,517,000 in 1993, $2,542,000 in 1992, and $2,229,000 in 1991.
NOTE 12 - EMPLOYEE RETIREMENT PLAN
The Company maintains an incentive savings plan for its employees and employees
of its wholly owned subsidiaries. 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 $267,000, $239,000, and $190,000, were charged to operations
in the years ended December 31, 1993, 1992 and 1991, respectively.
NOTE 13 - RELATED PARTY TRANSACTION
The Company has an unsecured note receivable from its majority shareholder and
former chairman of the board of $457,872 at December 31, 1993. The note bears
interest at the Company's principal bank's reference rate plus 1% (7% at
December 31, 1993). A principal payment of $50,000 was made in December 1993.
NOTE 14 - FOURTH QUARTER RESULTS
In the fourth quarter of 1993, the Company recorded losses of approximately $7.7
million along with a net deferred tax provision of approximately $3.1 million
related to its investment in Michael Foods and $1.9 million of restructuring
charges in connection with the consolidation of Americable's Canadian
operations. In the fourth quarter of 1992, the Company recorded non-recurring
charges of $490,000 related to inventory write-offs and an income tax benefit
adjustment of $570,000 to adjust to the Company's annual effective tax rate. The
net effect of these adjustments in the fourth quarter was to increase the net
loss in 1993 by $12.8 million, or $1.36 per share, and increase net income in
1992 by $80,000, or $.01 per share.
NOTE 15 - BUSINESS SEGMENT INFORMATION
The Company's foreign operations consist of C.E. Services' United Kingdom
subsidiary, C.E. Services (Europe) Limited and Americable's Canadian subsidiary,
Adanac Cable, Ltd. As discussed in Note 3, Americable has consolidated its
Canadian sales and customer support activities within its U.S. operations.
Summary financial information by geographic area is as follows:
<TABLE>
<CAPTION>
Years ended December 31, (in thousands) 1993 1992 1991
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
United States $ 89,662 $ 72,334 $ 56,361
Canada 4,616 5,957 6,428
United Kingdom 13,207 8,072 8,786
Operating income (loss)
United States 677 (80) (947)
Canada (195) (219) 174
United Kingdom 169 (286) (583)
Identifiable assets
United States 106,612 111,937 112,093
Canada 137 2,409 2,698
United Kingdom 1,858 1,527 1,564
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of North Star Universal, Inc.
We have audited the accompanying consolidated balance sheets of North Star
Universal, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1993. 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 the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of North Star
Universal, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1993, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for income taxes.
Minneapolis, Minnesota /s/ Grant Thornton
February 24, 1994
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
Year ended December 31,
(In thousands, except per share amounts and ratios) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA(1),(2)
<S> <C> <C> <C> <C> <C>
Revenues $ 107,485 $ 86,363 $ 71,575 $ 553,022 $ 315,074
Operating income (loss) 651 (585) (1,356) 41,038 9,912
Interest expense, net (4,266) (4,237) (4,442) (16,022) (6,223)
Income (loss) from continuing operations before
income taxes, minority interest, and equity in
earnings (loss) of unconsolidated subsidiaries (3,615) (4,822) 2,766 27,109 3,689
Income (loss) from continuing operations (11,872) (1,637) 10,899 5,643 94
Income (loss) from discontinued operations -- -- (598) (1,832) (2,448)
-----------------------------------------------------------------
Net income (loss) $ (11,872) $ (1,637) $ 10,301 $ 3,811 $ (2,354)
-----------------------------------------------------------------
-----------------------------------------------------------------
Income (loss) per common and
common equivalent share:
Income (loss) from continuing operations $ (1.26) $ (.17) $ 1.07 $ .54 $ (.03)
Discontinued operations -- -- (.06) (.19) (.25)
-----------------------------------------------------------------
Net income (loss) $ (1.26) $ (.17) $ 1.01 $ .35 $ (.28)
-----------------------------------------------------------------
-----------------------------------------------------------------
Ratio of earnings to fixed charges .28x .02x 1.53x 2.46x 1.50x
BALANCE SHEET DATA (1),(2)
Total assets $ 108,607 $ 115,873 $ 116,355 $ 354,473 $ 247,364
Long-term debt, including current maturities 43,194 41,849 41,451 149,353 125,399
Shareholders' equity 34,675 61,083 63,246 39,223 35,555
-----------------------------------------------------------------
-----------------------------------------------------------------
<FN>
(1) Amounts in 1991, 1990 and 1989 have been reclassified to give effect to
discontinued operations in those years.
(2) 1990 and 1989 include the consolidated results and balances of Michael
Foods and CorVel. Beginning in 1991, these investments were accounted for under
the equity method of accounting as discussed in Note 1 to the Consolidated
Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited, in thousands,
except per share amounts) First Second Third Fourth(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993
Revenues $ 26,354 $ 29,774 $ 24,047 $ 27,310
Operating income (loss) (156) 774 662 (629)
Interest expense, net (1,032) (1,084) (1,096) (1,054)
Net income (loss) $ (497) $ 573 $ 288 $ (12,236)
---------------------------------------------------
---------------------------------------------------
Income (loss) per share $ (.05) $ .06 $ .03 $ (1.30)
---------------------------------------------------
---------------------------------------------------
1992
Revenues $ 19,001 $ 20,319 $ 22,516 $ 24,527
Operating income (loss) (173) (222) 111 (301)
Interest expense, net (1,110) (1,083) (1,088) (956)
Net income (loss) $ (719) $ (990) $ (135) $ 207
---------------------------------------------------
---------------------------------------------------
Income (loss) per share $ (.07) $ (.10) $ (.01) $ .02
---------------------------------------------------
---------------------------------------------------
<FN>
(1)See Notes 3 and 14 to the Consolidated Financial Statements.
</TABLE>
STOCK INFORMATION
North Star Universal, Inc.'s common stock is traded on the Pacific Stock
Exchange under the symbol NSU and on the National Market System of NASDAQ under
the symbol NSRU since June 19, 1987. The following stock prices were obtained
from NASDAQ reports:
<TABLE>
<CAPTION>
(By Quarter)
1993 Low High
- ---------------------------------------------------------------------------
<S> <C> <C>
First 4 1/2 7 1/8
Second 3 7/8 5 1/2
Third 4 3/4 6 1/2
Fourth 4 1/2 6 7/8
1992 Low High
- ---------------------------------------------------------------------------
First 9 7/8 13 3/4
Second 5 1/8 11 1/8
Third 4 1/4 6 3/8
Fourth 4 3/8 7 5/8
</TABLE>
The number of common shareholders of record as of December 31, 1993, was 263. In
addition, the Company estimates that an additional 1,000 shareholders own stock
held for their accounts at brokerage firms and financial institutions. There
were no cash dividends paid in 1993 or 1992 on North Star's common stock.
Management does not anticipate that cash dividends will be paid in the
foreseeable future.
<PAGE>
CORPORATE INFORMATION
CORPORATE ADDRESS
North Star Universal, Inc./610 Park National Bank Building/5353 Wayzata
Boulevard/Minneapolis, Minnesota 55416/(612) 546-7500
BOARD OF DIRECTORS
MILES E. EFRON/Chairman of the Board of the Company
PETER E. FLYNN/Executive Vice President, Chief Financial Officer and Secretary
of the Company
JAMES H. MICHAEL/Retired Chairman of the Board of the Company
JEFFREY J. MICHAEL/President and Chief Executive Officer of the Company
DAVID Z. JOHNSON/Retired Chairman of the Board of Johnson Printing Company
FRED E. STOUT/Retired Chief Executive Officer Superior Water Light & Power
Company
CORPORATE OFFICERS
JEFFREY J. MICHAEL/President and Chief Executive Officer
PETER E. FLYNN/Executive Vice President, Chief Financial Officer and Secretary
SHAREHOLDER INFORMATION
TRANSFER AGENT AND REGISTRAR/Norwest Bank Minneapolis, N.A./161 North Concord
Exchange/P.O. Box 738/South St. Paul, Minnesota 55075
INVESTOR INQUIRIES/Attention:Investor Relations/North Star Universal, Inc./610
Park National Bank Building/5353 Wayzata Boulevard/Minneapolis, Minnesota
55416/(612) 546-7500
FORM 10-K/North Star's Form 10-K report is filed with the Securities and
Exchange Commission and is available to shareholders without charge by writing
to the Company.
<PAGE>
Exhibit 22.1
SUBSIDIARIES OF NORTH STAR UNIVERSAL, INC.
Name State of Incorporation
- ---- ----------------------
Americable, Inc. Minnesota
Adanac Cable, Ltd. Canada
Cable Distribution Systems, Inc. Georgia
Transition Engineering Minnesota
C.E. Services, Inc. Texas
C.E. Services (Europe) Limited United Kingdom
Eagle Engineering & Manufacturing, Inc. Minnesota
(Inactive subsidiaries are omitted)
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 24, 1994 accompanying the
consolidated financial statements and schedules of North Star Universal, Inc.
and Subsidiaries incorporated by reference or included in the Annual Report on
Form 10-K of North Star Universal, Inc. for the year ended December 31, 1993.
We hereby consent to the incorporation by reference of said reports in the
Registration Statements of North Star Universal, Inc. on Form S-2 (File No. 33-
46418) and on Forms S-8 (File No. 33-15257, effective July 19, 1987, File No.
33-15258, effective July 19, 1987 and File No. 33-34748, effective May 29,
1990).
We have issued our reports dated February 16, 1994 accompanying the
consolidated financial statements and schedules of Michael Foods, Inc. and
Subsidiaries which are included in the Annual Report on Form 10-K of North Star
Universal, Inc. for the year ended December 31, 1993. We hereby consent to the
incorporation by reference of said reports in the Registration Statements of
North Star Universal, Inc. on Form S-2 (File No. 33-46418) and on Forms S-8
(File No. 33-15257, effective July 19, 1987, File No. 33-15258, effective July
19, 1987 and File No. 33-34748, effective May 29, 1990).
/s/ Grant Thornton
Minneapolis, Minnesota
February 24, 1994
