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 connectivity and networking products and services. Transition Engineering is a manufacturer of connectivity devices and equipment used in local area network ("LAN") applications. C.E. Services is a third-party provider of systems, parts and services for mainframe computers and peripherals.
Additionally, at December 31, 1994, 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, 1994, the Company's ownership in CorVel was approximately 37%.
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 operating in four basic areas--eggs and egg products, distribution of refrigerated grocery products, refrigerated and frozen potato products and dairy products. 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, margarine, muffins, potato products, juices and ethnic foods. The potato products
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division processes and distributes refrigerated and frozen potato products for foodservice and retail markets throughout the United States. The dairy products division processes and distributes soft serve mix, ice cream mix, frozen yogurt mix and extended shelf-life, ultrapasteurized milk and specialty dairy products to fast food businesses and other foodservice outlets, independent retailers, ice cream manufacturers and others.
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 escalating medical costs. CorVel's services include preferred provider organizations, automated medical fee auditing, medical case management, independent medical examinations, utilization review and vocational rehabilitation services. Such services are provided to insurance companies, third party administrators and employers to assist them in managing the medical costs and monitoring the quality of care associated with medical claims.
OPERATING SUBSIDIARIES
GENERAL.
AMERICABLE. Americable provides products 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 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.
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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 Bay Networks, Chipcom, Transition Engineering, Belden, Berktek and Amp Incorporated. In addition, in an effort to reduce its inventory levels, Americable purchases a number of networking products through large distributors such as Tech Data and Ingram Micro.
Americable also maintains an integrated, real-time, on-line computerized system for order entry and fulfillment and inventory control. 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 1994 was approximately $470. Americable's distribution business (including sales of cable assemblies) constituted approximately 82% of its net sales in 1994.
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 such as copper, fiber-optic, IBM Bus and Tag and AS/400 cable assemblies and sub-assemblies. During 1994, sales of custom and specialty cable assemblies and sub-assemblies consisted of approximately 20% 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 1995, Americable expects to complete the process of implementing the quality standards of ISO 9002 which it began in
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1993. 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 generally range in size from $5,000 to $500,000. 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 1994, sales derived from value-added projects and services consisted of approximately 18% of net sales. Value-added projects and services sales include sales of products such as bulk cable, cable assemblies and networking devices and services such as training and installation.
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, hubs, 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 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").
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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 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; 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 and enhancements accounted for approximately $3.3 million or 28% of net sales at Transition Engineering in 1994.
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 1994, new distributors and VAR's accounted for approximately $650,000 or 5% of 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 complementary to, and compete with those of Transition Engineering. Transition Engineering's international sales have accounted for a substantial portion of its
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growth. International sales come primarily from the United Kingdom and Germany. During 1994, sales outside of the United States accounted for approximately 35% 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 1994, research and development expenses totaled less than 10% of net sales. Transition Engineering intends to make a similar investment in research and development during 1995.
C.E. SERVICES. C.E. Services is a third-party provider of systems, parts and services for mainframe computers and peripherals. 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.
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
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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.
During 1994, C.E. Services' revenues declined by $15.6 million, or 26%, from 1993. This decline was attributable primarily to a dramatic reduction in the domestic and international demand for used mainframes and peripherals along with a significant decline in the market value of certain used equipment. Net sales from the remarketing of computer systems, features and parts accounted for approximately 83% of the company's total net sales during 1994. C.E. Services does not expect demand for its products and services to measurably improve in 1995.
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 7% of the company's net sales in 1994.
C.E. Services conducts its international sales from a facility in Basingstoke, England (41,000 square feet). C.E. Services has twenty-two (22) employees based in the U.K.
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 3% of C.E. Services' net sales during 1994.
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 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
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C.E. Services' maintenance business constituted approximately 7% percent of the company's net sales during 1994.
In 1994, C.E. Services established a new computer services business to provide mainframe computer access and processing services to its customers. The business consists of Bridging Solutions Corporation ("Bridging"), an entity formed in 1994, and Commercial Computer Services, Inc. ("CCS"), a Texas corporation acquired by C.E. Services in 1994. In connection with the organization of this new business group, C.E. Services formed Dalworth Holdings, Inc., a holding company, which is now the parent company of C.E. Services, Bridging and CCS. Bridging and CCS are located in Fort Worth, Texas, and, at March 17, 1995, employed a combined total of seventeen (17) people.
FOREIGN OPERATIONS. The Company's foreign operators consist of C.E. Services' United Kingdom subsidiary, C.E. Services (Europe) Limited. Prior to December 1993, the Company's foreign operations also included Americable's Canadian subsidiary, Adanac Cable, Ltd. 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. The Company's foreign operations consisted of revenues of $8 million and $17.8 million, operating losses of $1.1 million and $26,000, and total assets of $2 million for each of the years ended December 31, 1994 and 1993, respectively.
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 two- tiered. A national effort is centered on telemarketing though Americable's national distribution sales unit in Minneapolis. In addition, Americable has four regional centers that provide traditional distribution and assembly products along with an array of value-added network technology products and services. The regional centers include Atlanta, Chicago, Dallas and Minneapolis. Americable has eleven (11) outside sales representatives in addition to forty-two(42) telemarketing and sales support representatives. The sales force is supplemented by nineteen (19) regional technical service engineers and technicians and two (2) 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
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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 regionally based domestic and international volume distributors and, to a lesser extent, VAR's. In 1994, Transition Engineering's largest domestic customer accounted for approximately 16% of domestic net sales (10% overall). The company's largest international customer accounted for approximately 14% of international net sales (5% 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 1994. 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 nine (9) 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 twelve (12) representatives in its three major locations. This staff directly handles orders from customers for warehouse and refurbishment services,
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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.
C.E. Services' ten largest customers in 1994 represented approximately 48% 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
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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.
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 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, 1994, Americable, Transition Engineering and C.E. Services (including Bridging and CCS) employed 160, 57 and 162 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.
NET ASSETS HELD FOR SALE
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 38 President and Chief Executive Officer
Peter E. Flynn 35 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.
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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. 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. The current officers of the Company are expected to be re-elected to serve in the same positions for the coming year.
ITEM 2.
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), London, U.K. (41,000 square feet) and Fort Worth, Texas (12,000 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5.
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, 1994.
ITEM 6.
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, 1994.
ITEM 7.
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, 1994.
ITEM 8.
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, 1994.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
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 1995 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission on or before April 30, 1995, which information is incorporated herein by reference.
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ITEM 11.
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 1995 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission on or before April 30, 1995, which information is incorporated herein by reference.
ITEM 12.
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 1995 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission on or before April 30, 1995, which information is incorporated herein by reference.
ITEM 13.
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 1995 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission on or before April 30, 1995, which information is incorporated herein by reference.
PART IV
ITEM 14.
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, 1994 and 1993 and for the three years ended December 31, 1994 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, 1994.
2. FINANCIAL STATEMENTS AND SCHEDULES
(i) North Star Universal, Inc. and Subsidiaries
Report of Independent Certified Public Accountants on Schedule
Schedule II -- Valuation and Qualifying Accounts
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.
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(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 Schedule
Schedule II - Valuation and Qualifying Accounts
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 Amended and Restated Bylaws of the Company.
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.
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).
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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).
+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 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).
10.6 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).
10.7 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).
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10.8 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).
10.9 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).
*10.10 Fourth Amendment to Restated and Amended Revolving Credit Loan Amendment, dated January 3, 1994, 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.
*10.11 Waiver and Fifth Amendment to Restated and Amended Revolving Credit Loan Amendment, dated March 16, 1994, 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.
*10.12 Sixth Amendment to Restated and Amended Revolving Credit Loan Amendment, dated January 31, 1995, 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.
10.13 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).
10.14 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).
10.15 Guaranty Agreement, dated as of May 1, 1989, executed by the Company as guarantor, pursuant to which the Company guaranties the
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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).
+10.16 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).
+10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
+10.22 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).
10.23 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).
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10.24 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.)
10.25 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).
*10.26 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 10.24 above.
*10.27 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 10.24 above.
*10.28 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 10.24 above.
*10.29 Amended, Restated and Consolidated Credit Agreement, dated as of August 1, 1994, by and between C.E. Services, Inc. and Texas Commerce Bank National Association.
*10.30 First Amendment to Amended, Restated and Consolidated Credit Agreement, dated as of December 27, 1994, by and between C.E. Services, Inc. and Texas Commerce Bank National Association, amending the Amended and Restated Consolidated Credit Agreement described in 10.28 above.
*10.31 Continuing Guaranty by North Star Universal, Inc., dated December 1994, to Texas Commerce Bank National Association, for indebtedness of C.E. Services, Inc., relating to the Amended and Restated Consolidated Credit Agreement described in 10.28 above.
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
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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).
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 (filed as Exhibit 12.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference).
*12.5 Computation of Ratio of Earnings to Fixed Charges for North Star Universal, Inc. for the year ended December 31, 1994.
*13.1 1994 Annual Report to Shareholders of North Star Universal, Inc.
*21.1 Subsidiaries of the Registrant
*23.1 Consent of Independent Certified Public Accountants-Grant Thornton LLP.
*27.1 Financial Data Schedule ____________________________ * 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.
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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 15, 1995 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.
Signature Title Date
/s/ Miles E. Efron Chairman of the Board March 15, 1995 - ----------------------------- Miles E. Efron
/s/ James H. Michael Director March 15, 1995 - ----------------------------- James H. Michael
/s/ Jeffrey J. Michael President, Chief Executive March 15, 1995 - ----------------------------- Officer and Director Jeffrey J. Michael (principal executive officer)
/s/ Peter E. Flynn Executive Vice President, March 15, 1995 - ----------------------------- Chief Financial Officer Peter E. Flynn (principal financial and accounting officer), Secretary and Director
Director - ----------------------------- Fred E. Stout
/s/ Richard J. Braun Director March 15, 1995 - ----------------------------- Richard J. Braun
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors North Star Universal, Inc.
In connection with our audit of the consolidated financial statements of North Star Universal, Inc. and Subsidiaries referred to in our report dated February 21, 1995, which is included in the Annual Report to Shareholders and incorporated by reference in Part II of this form, we have also audited Schedule II for each of the three years in the period ended December 31, 1994. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota February 21, 1995
North Star Universal, Inc. and Subsidiaries
SCHEDULE II--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 of Year ---------- ---------- ---------- ----- -------
Allowance of Doubtful Accounts - -----------------
1992 $ 384 $ 277 $ (346) $ -- $ 315
1993 315 270 (92) (34) 459
1994 459 49 (126) -- 382
CONSOLIDATED BALANCE SHEETS MICHAEL FOODS, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS MICHAEL FOODS, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY MICHAEL FOODS, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS MICHAEL FOODS, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTE A
SUMMARY OF ACCOUNTING POLICIES Michael Foods, Inc. (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. At December 31, 1994, 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.
1. PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated. Beginning in 1994, the Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest to December 31.
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:
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. Estimated service lives range from 10-40 years for buildings and improvements and 3-10 years for machinery and equipment.
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 $7,330,000 and $5,925,000 at December 31, 1994 and 1993, 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 C for an impairment identified during 1993.
NOTE B
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. Due to significant continuing losses and lack of adequate market acceptance, the Company decided in December 1993 to cause early termination of this joint venture. Consequently, the Company accrued $11,500,000 in 1993 to acquire the interest of its joint venture partner and $1,202,000 to cover other costs associated with the termination and recorded a one-time charge of approximately $22,769,000 and a related income tax benefit of $8,485,000. The Company recorded the acquired partnership assets at their appraised value and included them in net assets held for sale in the consolidated balance sheet.
During 1994, the Company completed the acquisition of the joint venture partner interest for $11,500,000 and liquidated the joint venture. Certain of the net assets held for sale were sold during 1994. The remaining net assets held for sale are expected to be sold in 1995. 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.
NOTE C
RESTRUCTURING CHARGES During the fourth quarter of 1993, the Company recorded a restructuring charge to provide for the significant reorganization of the operations of Sunnyside Vegetable Packing, Inc. ("Sunnyside"). Sunnyside had incurred losses since its acquisition in 1991. The restructuring charge included $5,129,000 for the elimination of unamortized goodwill and $2,108,000 for site abandonment, relocation and other costs. In the fourth quarter of 1994, the Company ceased its efforts to restructure these operations and completed a sale of Sunnyside's remaining assets. During the fourth quarter of 1993, in conjunction with restructuring its egg operations, the Company recorded restructuring charges of $3,927,000, primarily related to certain egg production facilities held for sale to reflect their current net realizable value. At December 31, 1994, one of these production facilities remained held for sale.
NOTE D
LONG-TERM DEBT Long-term debt consists of:
Under the discounted cash flow method, the fair value of total long-term debt approximates $99,325,000 and $108,221,000 at December 31, 1994 and 1993, respectively. Aggregate minimum annual principal payments of long-term debt maturing in years subsequent to December 31, 1994 are as follows:
(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, 1994, the Company had $1,400,000 outstanding at the reference rate of 8.5% and $28,000,000 outstanding at an average variable rate of 6.4%. This revolving line of credit, which matures on March 31, 1997, contains certain restrictive covenants similar to the covenants contained in the senior promissory notes. At December 31, 1994, $25,600,000 of this line was unused.
(b) The 9.5% senior promissory notes are due in varying semi-annual installments of $3,000,000 to $5,000,000 from June, 1995 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 from October 1995 through 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, 1995 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.
NOTE E
INCOME TAXES The provision for income taxes consists of the following:
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. 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:
The following is a reconciliation of the Federal statutory income tax rate to the consolidated effective tax rate:
NOTE F 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 $1,256,000, $1,088,000 and $1,204,000 were charged to operations for the years ended December 31, 1994, 1993 and 1992, respectively.
NOTE G STOCKHOLDERS' EQUITY During 1994, the Company purchased 14,562 shares of its common stock for $300,000 under the terms of a put agreement that was part of a business acquisition completed in 1989. In 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. 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 typically the fair market value at the date of grant. Option transactions under the Plan during each of the three years ended December 31, are summarized as follows:
Options to purchase 1,477,161 shares were exercisable at December 31, 1994. 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. The Company's Non-Qualified Stock Option Plan for Non-Employee Directors (the "Director Plan") was approved by the Stockholders on April 27, 1993. The Director Plan provides for 150,000 shares reserved for grant. All options are exercisable one year from the date of grant and have a term of ten years. Previous to adopting the Director Plan, the Company had a policy of granting options to non-employee directors upon election or appointment. Option transactions under the Director Plan during each of the three years ended December 31, are summarized as follows:
NOTE H
MAJOR CUSTOMER Sales to one customer accounted for 10% of consolidated net sales in 1994.
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, 1994 and 1993 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. 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, 1994 and 1993 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota February 15, 1995
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors Michael Foods, Inc.
In connection with our audit of the consolidated financial statements of Michael Foods, Inc. and Subsidiaries referred to in our report dated February 15, 1995, 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, 1994, we have also audited Schedule II, of Michael Foods, Inc. and Subsidiaries for each of the three years in the period ended December 31, 1994. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota February 15, 1995
SCHEDULE II
MICHAEL FOODS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
EXHIBIT INDEX
Exhibit Page Number Number - ------- ------
3.2 Amended and Restated Bylaws of the Company
4.3 Form of Second Supplemental Indenture
10.10 Fourth Amendment to Restated and Amended Revolving Credit Loan Amendment, dated January 3, 1994, between the Company and First Bank National Association
10.11 Waiver and Fifth Amendment to Restated and Amended Revolving Credit Loan Amendment, dated March 16, 1994, between the Company and First Bank National Association
10.12 Sixth Amendment to Restated and Amended Revolving Credit Loan Amendment, dated January 31, 1995, between the Company and First Bank National Association
10.26 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
10.27 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
10.28 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
10.29 Amended, Restated and Consolidated Credit Agreement, dated as of August 1, 1994, by and between C.E. Services, Inc. and Texas Commerce Bank National Association
10.30 First Amendment to Amended, Restated and Consolidated Credit Agreement, dated as of December 27, 1994, by and between C.E. Services, Inc. and Texas Commerce Bank National Association
10.31 Continuing Guaranty by North Star Universal, Inc., dated December 1994, to Texas Commerce Bank National Association, for indebtedness of C.E. Services, Inc.
12.5 Computation of Ratio of Earnings to Fixed Charges
13.1 1994 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Certified Public Accountants
27.1 Financial Data Schedule