<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K/A-2
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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
incorporation or organization) Identification No.)
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
----------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of Each Exchange
Title of Each Class on 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 ( )
- COVER PAGE 1 OF 2 -
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<PAGE>
The aggregate market value of the common stock held by non-affiliates of
the registrant at February 29, 1996 was $28,637,859 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 February 29, 1996, 9,448,000 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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. ( )
- COVER PAGE 2 OF 2 -
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)l. CONSOLIDATED FINANCIAL STATEMENTS
North Star Universal, Inc. and Subsidiaries
Consolidated Statements of Operations F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Shareholders' Equity F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statements F-5 to F-14
Report of Independent Certified Public Accountants F-15
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(i) North Star Universal, Inc. and Subsidiaries
Report of Independent Certified Public Accountants on Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
(ii) Unaudited Pro Forma Condensed Combined Financial Statements S-3
Unaudited Pro Forma Condensed Combined Balance Sheet S-4
Unaudited Pro Forma Condensed Combined Statements of Earnings S-5
Notes to the Unaudited Pro Forma Condensed Combined
Financial Statements S-6
(iii) Michael Foods, Inc. and Subsidiaries
Consolidated Balance Sheets S-7
Consolidated Statements of Earnings S-8
Consolidated Statements of Stockholders' Equity S-9
Consolidated Statements of Cash Flows S-10
Notes to Consolidated Financial Statements S-11 to S-18
Report of Independent Certified Public Accountants S-19
Report of Independent Certified Public Accountants on Schedule S-20
Schedule II - Valuation and Qualifying Accounts S-21
1
<PAGE>
(iv) ENStar (An Operating Unit of North Star Universal, Inc.)
Combined Statements of Operating Unit Income S-22
Combined Statements of Operating Unit Assets and Liabilities S-23
Combined Statements of Operating Unit Equity S-24
Combined Statements of Operating Unit Cash Flows S-25
Notes to Combined Financial Statements S-26 to S-31
Report of Independent Certified Public Accountants S-32
Report of Independent Certified Public Accountants on Schedule S-33
Schedule II - Valuation and Qualifying Accounts S-34
(v) CorVel Corporation
Consolidated Statements of Income S-35
Consolidated Balance Sheets S-36
Consolidated Statements of Stockholders' Equity S-37
Consolidated Statements of Cash Flows S-38
Notes to Consolidated Financial Statements S-39 to S-45
Report of Independent Auditors S-46
Schedule II - Valuation and Qualifying Accounts S-47
Unaudited Interim Consolidated Financial Statements CorVel Corporation
Consolidated Balance Sheets S-48
Income Statements -- Nine months S-49
Income Statements -- Third quarter S-50
Consolidated Statements of Cash Flows -- Nine months S-51
Notes to Consolidated Financial Statements S-52
2
<PAGE>
(vi) CorVel Corporation and Subsidiaries
Report of Independent Auditors S-53
Consolidated Statements of Income for the Fiscal Years Ended
March 31, 1994, 1995, and 1996 S-54
Consolidated Balance Sheets as of March 31, 1995 and 1996 S-55
Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended March 31, 1994, 1995, and 1996 S-56
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1994, 1995, and 1996 S-57
Notes to Consolidated Financial Statements S-58 to S-64
Schedule II - Valuation and Qualifying Accounts S-65
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
<PAGE>
3. EXHIBITS
2 Agreement and Plan of Reorganization, dated as of December 21,
1995, by and among North Star Universal, Inc., Michael Foods,
Inc. and NSU Merger Co. (filed as an exhibit to the Report on
Form 8-K filed by the Company on December 27, 1995 (schedules
omitted--the Registrant agrees to furnish a copy of any schedule
to the Commission upon request)).
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 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
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 Form of Second Supplemental Indenture, dated as of March 16,
1995, amending the Indenture described in Exhibit 4.1 above
(filed as Exhibit 4.3 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994 and incorporated
herein by reference).
4.4 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).
4.5 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).
+10.1 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).
+10.2 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).
4
<PAGE>
+10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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 10.5 above (filed as Exhibit 10.17 to Registration No.
33-26176 and incorporated herein by reference).
10.8 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).
10.9 Employment Agreement, dated April 1, 1993, between the Company,
Transition Engineering, Inc. and Peter E. Flynn (filed as
Exhibit 10.22 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 and incorporated herein by
reference).
10.10 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).
+10.11 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).
5
<PAGE>
10.12 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.)
10.13 Subordination Agreement executed by the Company and Americable
for the benefit of First Bank in connection with the loans
described in Exhibit 10.12 above (filed as Exhibit 10.25(b) to
Registration No. 33-26176 and incorporated herein by reference).
10.14 First Amendment to Amended and Restated Loan and Security
Agreement, dated November 29, 1993, among Americable, Inc.,
Transition Engineering, Inc., Cable Distributions Systems, Inc.
and First Bank National Association, amending the terms of the
Amended and Restated Loan and Security Agreement described in
10.12 above (filed as Exhibit 10.26 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, and
incorporated herein by reference).
10.15 Waiver and Second Amendment to Amended and Restated Loan and
Security Agreement, dated as of March 3, 1995, among Americable,
Inc., Transition Engineering, Inc., Cable Distributions Systems,
Inc. and First Bank National Association, amending the terms of
the Amended and Restated Loan and Security Agreement described
in 10.12 above (filed as Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, and
incorporated herein by reference).
10.16 Supplement A to 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, supplementing the terms of
the Amended and Restated Loan and Security Agreement described
in 10.12 above (filed as Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, and
incorporated herein by reference).
10.17 Stock Purchase Agreement dated May 5, 1995, by and between
Amdahl Corporation and North Star Universal, Inc. relating to
the sale of C.E. Services (filed as Exhibit 10.31 to the
Quarterly Report on Form 10-Q for North Star Universal, Inc. for
the quarter ending March 31, 1995)
6
<PAGE>
12.6 Computation of Ratio of Earnings to Fixed Charges for North
Star Universal, Inc. for each of the fiscal years ended
December 31, 1995.
21.1 Subsidiaries of the Company.
23.1 Consent of Grant Thornton LLP as independent public accountants
of the Company.
23.2 Consent of Ernst & Young LLP as independent public accountants
of CorVel Corporation.
*24.1 Consent of Independent Auditors - Ernst & Young
27.1 Financial Data Schedule.
- --------------------------
* Filed with this Amendment No. 2 to 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. One report for Form 8-k was filed by the Company
on December 27, 1995 to report the execution of an Agreement and Plan of
Reorganization dated December 21, 1995 between the Company and Michael
Foods, Inc. and to file such agreement thereunder.
(c) See the Exhibits set forth above.
(d) See the Financial Statement Schedules of the Company, the CorVel
Corporation Financial Statements and the CorVel Corporations Financial
Statement Schedules attached as a separate section of the Amendment
Number 2 to the Company's Annual Report on Form 10-K/A-2.
7
<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: June 28, 1996 NORTH STAR UNIVERSAL, INC.
By /s/ Jeffrey J. Michael
---------------------------------
Jeffrey J. Michael, President and
Chief Executive Officer
8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
CorVel Corporation
We have audited the accompanying consolidated balance sheets of CorVel
Corporation as of March 31, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended March 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and this schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of CorVel Corporation at March 31, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules
when considered in relationship to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
May 8, 1996
Orange County, California
S-53
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended March 31
------------------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES $80,619,000 $95,783,000 $109,052,000
COSTS AND EXPENSES
Cost of revenues 67,331,000 78,950,000 88,937,000
General and administrative 6,057,000 7,186,000 8,106,000
----------- ----------- ------------
73,388,000 86,136,000 97,043,000
----------- ----------- ------------
Income before income taxes 7,231,000 9,647,000 12,009,000
Income tax provision 2,821,000 3,762,000 4,684,000
----------- ----------- ------------
NET INCOME $ 4,410,00 $ 5,885,000 $ 7,325,000
=========== =========== ============
Net income per common and common
equivalent share $ 1.01 $ 1.30 $ 1.57
=========== =========== ============
Weighted average shares outstanding 4,369,000 4,542,000 4,674,000
</TABLE>
See accompanying notes to consolidated financial statements.
S-54
<PAGE>
CORVEL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31
---------------------------
1995 1996
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $13,211,000 $17,113,000
Accounts receivable (less allowance for
doubtful accounts of $825,000 in 1995 and
$1,268,000 in 1996) 15,868,000 18,394,000
Prepaid taxes and expenses 182,000 545,000
Deferred income taxes 1,809,000 2,032,000
----------- -----------
Total current assets 31,070,000 38,084,000
----------- -----------
PROPERTY AND EQUIPMENT, NET 8,872,000 11,468,000
OTHER ASSETS 4,023,000 4,432,000
----------- -----------
$43,965,000 $53,984,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts and taxes payable $ 2,357,000 $ 3,057,000
Accrued liabilities 4,628,000 4,246,000
----------- -----------
Total current liabilities 6,985,000 7,303,000
----------- -----------
Deferred income taxes 1,226,000 1,370,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
COMMON STOCK, $.0001 par value: 20,000,000 shares
authorized; 4,238,250 and 4,593,675 shares issued
and outstanding at March 31, 1995 and 1996,
respectively
PAID IN CAPITAL 24,169,000 26,401,000
RETAINED EARNINGS 11,585,000 18,910,000
----------- -----------
Total stockholders' equity 35,754,000 45,311,000
----------- -----------
$43,965,000 $53,984,000
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
S-55
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
AND TOTAL
COMMON STOCK - PAID IN RETAINED SHAREHOLDERS'
SHARES CAPITAL EARNINGS EQUITY
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance - March 31, 1993 3,706,649 $19,067,000 $ 1,290,000 $20,357,000
Stock issued under employee stock
purchase plan 20,448 295,000 295,000
Stock issued under employee stock
option plan and related income tax
benefits 344,098 2,263,000 2,263,000
Net income 4,410,000 4,410,000
---------- ----------- ----------- -----------
Balance - March 31, 1994 4,071,195 21,625,000 5,700,000 27,325,000
Stock issued under employee
stock purchase plan 19,634 374,000 374,000
Stock issued under employee stock
option plan and related income tax
benefits 147,421 2,170,000 2,170,000
Net income 5,885,000 5,885,000
---------- ----------- ----------- -----------
Balance - March 31, 1995 4,238,250 24,169,000 11,585,000 35,754,000
---------- ----------- ----------- -----------
Stock issued under employee stock
purchase plan 18,384 444,000 444,000
Stock issued under employee stock
option plan and related income tax
benefits, net of shares repurchased
upon exercise 337,041 1,788,000 1,788,000
Net income 7,325,000 7,325,000
---------- ----------- ----------- -----------
Balance - March 31, 1996 4,593,675 $26,401,000 $18,910,000 $45,311,000
========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
S-56
<PAGE>
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31
------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,410,000 $ 5,885,000 $ 7,325,000
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 2,363,000 2,335,000 3,048,000
Deferred income taxes 546,000 (44,000) (79,000)
Loss on write down and disposal of property and equipment 75,000 39,000 23,000
Changes in operating assets and liabilities
Accounts receivable (1,976,000) (2,657,000) (2,526,000)
Prepaid income taxes and expenses (144,000) 795,000 (363,000)
Accounts and taxes payable 378,000 27,000 700,000
Accrued liabilities 1,085,000 538,000 (382,000)
Other assets 33,000 (425,000) (511,000)
----------- ----------- -----------
Net cash provided by operating activities 6,770,000 6,493,000 7,235,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,406,000) (4,219,000) (5,565,000)
----------- ----------- -----------
Net cash used in investing activities
(4,406,000) (4,219,000) (5,565,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds and tax benefits from exercise of stock options 2,558,000 2,544,000 2,232,000
----------- ----------- -----------
Net cash provided by financing activities 2,558,000 2,544,000 2,232,000
----------- ----------- -----------
Increase in cash and cash equivalents 4,922,000 4,818,000 3,902,000
Cash and cash equivalents at beginning of year 3,471,000 8,393,000 13,211,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,393,000 $13,211,000 $17,113,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
S-57
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: CorVel Corporation (the Company) provides services and
programs nationwide that are designed to enable insurance carriers, third party
administrators and employers with self-insured programs to administer, manage
and control the cost of workers compensation benefits.
Basis of Presentation: The consolidated financial statements include
the accounts of CorVel Corporation and its subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements are presented on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of March 31, 1995 and 1996 and
revenues and expenses for the three years ending March 31, 1996. Estimates
made by the Company relate primarily to the valuation of accounts receivable
and estimation of accrued liabilities. Actual results could differ from those
estimates.
Cash and Cash Equivalents: Cash and cash equivalents consists of
short-term highly-liquid investments with maturities of 90 days or less when
purchased. The carrying amounts of the Company's financial instruments
approximate their relative fair values at March 31, 1995 and 1996.
Concentrations of Credit Risk: The Company performs periodic credit
evaluations of its customers' financial condition and does not require
collateral. No customer represented 10% of accounts receivable at March 31,
1995 and 1996. Receivables generally are due within 60 days. Credit losses
relating to customers in the workers compensation insurance industry
consistently have been within management's expectations.
Property and Equipment: Property and equipment is stated at cost.
Depreciation and amortization is provided using the straight-line and
accelerated methods over the estimated useful lives of the assets which range
from three to seven years.
Long-Lived Assets: The Company elected the early adoption of SFAS No.
121, "Accounting for the Impairement of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (Statement No. 121). In accordance with Statement
No. 121, long-lived assets and certain identifiable intangibles held and used
by the Company will be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
S-58
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Assets: Other assets consists primarily of the excess of the
purchase price over the estimated fair value of the net assets of businesses
acquired (goodwill) and is being amortized on a straight-line basis over
periods not exceeding 40 years. Goodwill amounted to $3,344,000 (net of
accumulated amortization of $652,000) at March 31, 1995 and $3,636,000 (net of
accumulated amortization of $754,000) at March 31, 1996.
Revenue Recognition: The Company's revenues are recognized primarily
as services are rendered based on time and expenses incurred. A certain
portion of the Company's revenues are derived from fee schedule auditing which
is based on the number of provider charges audited and, to a limited extent, on
a percentage of savings achieved for the Company's clients. Accounts
receivable includes $1,318,000 and $1,527,000 of unbilled receivables at March
31, 1995 and 1996, respectively. No one customer accounted for more than 10%
of consolidated revenues during the years ended March 31, 1994, 1995 and 1996.
Income Taxes: The consolidated financial statements reflect the
application of Statement of Financial Accounting Standards No. 109 -
"Accounting for Income Taxes".
Income Per Share: Income per share is computed by dividing net
income by the weighted average number of common and common equivalent shares
outstanding during the year.
Stock Options: The Company follows Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. The Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) in October
1995. SFAS No. 123 establishes financial accounting and reporting standards
for stock-based compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods and services from nonemployees.
The new accounting standards prescribed by SFAS No. 123 are optional, and the
Company may continue to account for its plans under previous standards. The
Company does not expect to adopt the new accounting standards, consequently,
SFAS No. 123 will not have an impact on the Company's consolidated results of
operations or financial position. However, proforma disclosures of net
earnings and earnings per share will made in fiscal 1997, as if the SFAS No.
123 accounting standards had been adopted.
S-59
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following at March 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Office equipment and computers $11,074,000 $15,542,000
Computer software 3,490,000 4,207,000
Leasehold improvements 356,000 613,000
----------- -----------
14,920,000 20,362,000
Less: accumulated depreciation and amortization 6,048,000 8,894,000
----------- -----------
$ 8,872,000 $11,468,000
=========== ===========
</TABLE>
NOTE C -- ACCRUED LIABILITIES
Accrued liabilities consists of the following at March 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Payroll and related benefits $2,327,000 $2,366,000
Self insurance reserves 1,017,000 737,000
Other 1,284,000 1,143,000
---------- ----------
$4,628,000 $4,246,000
========== ==========
</TABLE>
NOTE D -- INCOME TAXES
The income tax provision consists of the following for the three
years ended March 31:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ---------- -----------
<S> <C> <C> <C>
Current - Federal $ 1,903,000 $3,172,000 $ 3,670,000
Current - State 372,000 634,000 693,000
Tax benefits from option exercises (1,403,000) (991,000) (4,245,000)
Utilization of net operating loss (538,000)
----------- ---------- -----------
Subtotal 872,000 2,277,000 518,000
----------- ---------- -----------
Deferred - Federal 460,000 (37,000) (102,000)
Deferred - State 86,000 (7,000) 23,000
----------- ---------- -----------
Subtotal 546,000 (44,000) (79,000)
----------- ---------- -----------
Charge in lieu of income taxes
attributable to tax benefits from
stock option exercises and utilization
of net operating loss carryovers 1,403,000 1,529,000 4,245,000
----------- ---------- -----------
$ 2,821,000 $3,762,000 $ 4,684,000
=========== ========== ===========
</TABLE>
S-60
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D -- INCOME TAXES (CONTINUED)
The following is a reconciliation of the income tax provision from the
statutory federal income tax rate to the effective rate for the three years
ended March 31 (35% for the three fiscal years ended March 31, 1996):
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal statutory income tax rate $2,531,000 $3,377,000 $4,203,000
State income taxes, net of federal
benefit 300,000 399,000 446,000
Goodwill amortization 35,000 35,000 37,000
Other (45,000) (49,000) (2,000)
---------- ---------- ----------
$2,821,000 $3,762,000 $4,684,000
========== ========== ==========
</TABLE>
Income taxes paid totaled $925,000, $1,100,000 and $1,193,000 for the
years ended March 31, 1994, 1995, and 1996, respectively. At March 31, 1994,
the Company had net operating loss (NOL's) carryforwards of $1,600,000 for
income tax purposes, expiring in 2007 for financial reporting purposes. A
valuation allowance of $538,000 was recorded in 1994 to offset the deferred tax
assets related to the NOL's. This $538,000 valuation allowance was applied to
additional paid in capital in 1995 since the related NOL's were principally
attributable to deductions for the exercise of non qualified stock options in
1994.
Deferred taxes at March 31, 1995 and 1996 are:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities not currently deductible $ 1,525,000 $ 1,681,000
Allowance for doubtful accounts 284,000 495,000
Other 0 227,000
----------- -----------
Deferred assets 1,809,000 2,032,000
Deferred tax liabilities:
Excess of tax under book basis of fixed assets (1,226,000) (1,370,000)
----------- -----------
Deferred liability (1,226,000) (1,370,000)
----------- -----------
Net deferred tax asset $ 583,000 $ 662,000
=========== ===========
</TABLE>
S-61
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E -- STOCK OPTION PLAN
Under the Company's Restated 1988 Executive Stock Option Plan, as
amended, options for up to 1,335,000 shares of the Company's common stock may
be granted to key employees, nonemployee directors and consultants at prices
not less than 85% of the fair value of the stock at the date of grant as
determined by the Board. Options granted under the Plan may be either
incentive stock options or non-statutory stock options and are generally
exercisable beginning one year from the date of grant and vest monthly
thereafter for three years. Summarized information for this Plan follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Options outstanding at the
beginning of the year 687,980 444,040 404,539
Options granted 111,635 88,850 81,300
Options exercised 338,998 110,421 105,672
Options canceled 16,577 17,930 16,756
------- ------- -------
Options outstanding at the end
of the year 444,040 404,539 363,411
======= ======= =======
At the end of the year:
Prices of outstanding options $.01-$22.75 $.33-$26.50 $8.67-$31.50
Average price per share $11.36 $15.11 $18.33
Exercisable options 182,920 199,484 182,575
Options available for future grants 137,908 266,988 202,444
</TABLE>
In addition to options granted under the Plan, the Company's President
was issued an option to purchase 750,000 shares of common stock at an exercise
price of $.0001 per share in January 1988. Options to purchase 5,100, 37,000,
and 362,900 shares of common stock were exercised in fiscal 1994, 1995 and
1996, respectively. As of March 31, 1996, options to purchase 60,000 shares of
common stock were outstanding, all of which were exercisable at a nominal
price.
S-62
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F -- EMPLOYEE STOCK PURCHASE PLAN
In fiscal 1992, the Company's Board of Directors approved the 1991
Employee Stock Purchase Plan, as amended, that provides for the issuance of up
to 150,000 shares of the Company's common stock. Under the plan,
participating employees are granted nontransferable, six-month options on
October 1 and April 1 of each year. These options entitle employees to
purchase the number of whole shares that their individual payroll deduction
authorizations indicate can be purchased at the end of the six-month period at
85% of the fair market value of the Company's common stock at the date of grant
or on the last day of the six-month period, whichever is less. Employees are
allowed to participate up to 20% of their gross pay. Summarized plan
information is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Employee contributions $295,000 $374,000 $444,000
Shares acquired 20,448 19,634 18,384
Average purchase price $14.43 $19.02 $24.15
</TABLE>
NOTE G -- COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under noncancelable operating
leases. Future minimum rental commitments under operating leases at March 31,
1996 are $3,576,000 in fiscal 1997, $2,491,000 in fiscal 1998, $1,375,000 in
fiscal 1999, $793,000 in fiscal 2000, $256,000 in fiscal 2001, and none
thereafter. Total rental expense of $3,080,000, $3,559,000, and $3,901,000
was charged to operations for the years ended March 31, 1994, 1995, and 1996,
respectively.
The Company is involved in litigation arising in the normal course of
business. The Company believes that resolution of these matters will not
result in any payment that, in the aggregate, would be material to the
financial position and results of the operations of the Company.
NOTE H -- SAVINGS PLAN
The Company maintains a retirement savings plan for its employees
which is a qualified plan under section 401(k) of the Internal Revenue Code.
Full time employees that meet certain requirements are eligible to participate
in the plan. Contributions are made annually primarily at the discretion of
the Company's Board of Directors. Contributions of $133,000, $157,000, and
$50,000, were charged to operations for the years ended March 31, 1994, 1995,
and 1996, respectively.
S-63
<PAGE>
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I -- QUARTERLY RESULTS
The following is a summary of unaudited results of operations for the
two years ended March 31, 1995 and 1996:
<TABLE>
<CAPTION>
Net income per
Net common and common
Revenues Gross Profit income equivalent share
----------- ------------ ---------- -----------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1995:
First Quarter $22,071,000 $3,844,000 $1,344,000 $.30
Second Quarter 22,921,000 4,008,000 1,402,000 .31
Third Quarter 24,701,000 4,313,000 1,507,000 .33
Fourth Quarter 26,090,000 4,668,000 1,632,000 .35
FISCAL YEAR ENDED MARCH 31, 1996:
First Quarter $26,779,000 $4,856,000 $1,701,000 $.37
Second Quarter 26,863,000 4,989,000 1,818,000 .39
Third Quarter 27,082,000 5,127,000 1,887,000 .40
Fourth Quarter 28,328,000 5,143,000 1,919,000 .41
</TABLE>
S-64
<PAGE>
Schedule II
CORVEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended March 31, 1996: $825,000 $500,000 $ - $57,000 $1,268,000
Year Ended March 31, 1995: 725,000 100,000 - - 825,000
Year Ended March 31, 1994: 485,000 240,000 - - 725,000
</TABLE>
S-65
<PAGE>
EXHIBIT 24.1
Consent of Independent Auditors
We consent to the use of our report dated May 8, 1996, with respect to the
consolidated financial statements and schedules of CorVel Corporation included
in the Annual Report (Form 10-K/A-2) for the year ended December 31, 1995 of
North Star Universal, Inc.
/s/ Ernst & Young LLP
Orange County, California
June 28, 1996
