<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- -----------
Commission file number 0-29026
ENSTAR INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1831611
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6479 City West Parkway
Eden Prairie, Minnesota 55344
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (612) 941-3200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- --------
At October 31, 1997, 3,266,989 shares of common stock of the registrant were
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ENStar Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-----------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 12,507 $ 824
Accounts receivable, net 9,408 8,785
Inventories 5,459 5,706
Prepaid expenses and other current assets 262 481
--------------------------------
Total current assets 27,636 15,796
Property and equipment, net 2,016 1,742
Investment in unconsolidated subsidiary 11,116 13,519
Goodwill, net 4,682 4,801
Other assets 207 157
--------------------------------
$ 45,657 $ 36,015
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 2,280 $ 1,310
Current portion of long-term debt 30 28
Accounts payable 4,866 4,101
Accrued expenses 5,992 4,830
--------------------------------
Total current liabilities 13,168 10,269
Long-term debt, net of current maturities 15,663 1,150
Deferred income taxes 1,418 3,649
Shareholders' Equity
Common stock, $.01 par value
100,000,000 shares authorized,
issued and outstanding 3,266,989
shares in 1997 and 3,304,279 in 1996 33 33
Additional paid-in-capital 16,711 20,710
Retained earnings (deficit) (1,336) 204
---------------------------------
Total shareholders' equity 15,408 20,947
----------------------------------
$ 45,657 $ 36,015
==================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ENStar Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------
1997 1996 1997 1996
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 15,990 $ 17,358 $ 41,314 $ 49,151
Operating and product costs 11,764 12,644 29,717 36,147
-----------------------------------------------
Gross profit 4,226 4,714 11,597 13,004
Selling, general,
and administrative expenses 5,059 4,471 14,929 12,594
-----------------------------------------------
Operating income (loss) (833) 243 (3,332) 410
Interest expense, net (248) (51) (522) (191)
-----------------------------------------------
Income (loss) before income taxes
and equity in earnings of
unconsolidated subsidiary (1,081) 192 (3,854) 219
Income tax provision (benefit) (375) 70 (1,325) 122
-----------------------------------------------
Income (loss) before equity in
earnings of unconsolidated
subsidiaries (706) 122 (2,529) 97
Equity in earnings of
unconsolidated subsidiary 350 329 989 956
-----------------------------------------------
Net income (loss) (356) 451 (1,540) 1,053
===============================================
Net income (loss) per share $ (0.11) $ 0.14 $ (0.47) $ 0.32
===============================================
Weighted average shares
outstanding 3,279,419 3,313,266 3,295,999 3,307,300
===============================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ENStar Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
Net cash provided (used)
in operating activities $ (1,262) $ 640
Cash flows for investing activities
Capital expenditures (977) (693)
Collection of notes receivable --- 258
Other (50) (95)
--------------------------------
Net cash used in investing activities (1,027) (530)
--------------------------------
Cash flow from financing activities
Proceeds from long-term debt 14,536 ---
Payments on long-term debt (21) ---
Proceeds from notes payable 45,792 50,238
Payments on notes payable (44,822) (51,143)
Additional capital investment
(constructive dividends) (1,280) 723
Purchase of common stock (233) ---
--------------------------------
Net cash provided (used) by financing
activities 13,972 (182)
--------------------------------
Net increase (decrease) in cash and
cash equivalents 11,683 (72)
Cash and cash equivalents
at beginning of period 824 246
--------------------------------
Cash and cash equivalents
at end of period $ 12,507 $ 174
==================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ENStar Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
ENStar Inc. ("ENStar" or "the Company") is a holding company principally
comprised of two operating companies, Americable, Inc. ("Americable") and
Transition Networks, Inc. ("Transition"), and an equity investment in CorVel
Corporation ("CorVel"). ENStar was formerly an operating unit of North Star
Universal, Inc. ("North Star" or "NSU"). In November 1996, North Star
contributed the Operating Unit's assets to ENStar. On February 28, 1997,
North Star, in connection with its merger with Michael Foods, Inc. ("Michael
Foods"), distributed its ownership interest in ENStar to North Star's
Shareholders through a tax free dividend, thus causing ENStar to become a
publicly held company.
2. Basis of Presentation --
The accompanying consolidated financial statements prior to November 1996
were financial statements of the operating unit comprised of the entities and
assets described in Note 1. Operating unit equity was converted to
contributed capital at the time North Star contributed the capital stock of
Americable, Transition, and CorVel to ENStar. There was no change in the
historical cost basis of the assets and liabilities of any of the entities or
investment contributed to ENStar. The consolidated financial statements for
1996 include an allocation of general and administrative costs incurred by
North Star in the management of the operating companies. Management believes
these allocations are reasonable and present the operations of the Company
as though it had operated on a stand-alone basis. Previously, operating unit
equity included the historical equity of each entity, the net investment in
CorVel and intercompany payables owed to North Star. The net annual advances
between the former operating unit and North Star were considered additional
capital invested from, or constructive dividend to, North Star. Accordingly,
the accompanying consolidated financial statements may not necessarily be
indicative of the results that would have been obtained if the Company had
been operated as a stand-alone entity throughout all periods presented.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with regulation S-X, by ENStar without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The information furnished in the condensed consolidated financial statements
includes normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of such financial statements. Certain
information and footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although the
Company believes that the disclosures are adequate to make the information
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
presented not misleading, it is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements
and the notes thereto included in the Company's latest annual report on
Form 10-K.
Results for the nine months ended September 30 may not necessarily be
indicative of the results to be expected for the full year.
3. Investment in Unconsolidated Subsidiary --
The Company's unconsolidated subsidiary consists of its investment in
CorVel Corporation ("CorVel"). At September 30, 1997, ENStar owned 1,025,000
shares, or an approximate 24.5% ownership, in CorVel. The Company's investment
in CorVel is accounted for as an unconsolidated subsidiary using the equity
method of accounting. CorVel has a fiscal year ended March 31. The following
is summarized balance sheet and income statement information of the Company's
unconsolidated subsidiary as of, and for the nine month period ended September
30, 1997 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 37,166
Noncurrent assets 20,890
Current liabilities 11,086
Noncurrent liabilities 1,644
Revenues 100,400
Gross profit 18,764
Net income 6,861
</TABLE>
In January 1997, ENStar, at the direction of North Star, sold 200,000
shares of CorVel for approximately $5.1 million cash. The proceeds from the
sale were distributed to and retained by North Star. The book value of the
shares sold was approximately $1.4 million, net of deferred taxes, and has
been reflected as a dividend to North Star for the period ended September 30,
1997. In addition, as a result of other equity transactions of CorVel, ENStar
decreased its investment in unconsolidated subsidiary by approximately
$1.8 million, additional paid-in capital by $1.1 million, and deferred income
taxes by $740,000 for the nine months ended September 30, 1997. At September
30, 1997, the value of the Company's investment in CorVel, based on the closing
market price, was approximately $39.2 million.
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. Inventories --
Inventories are stated at the lower of average cost (first-in, first-out)
or market. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------------------------
<S> <C> <C>
Finished goods $ 3,823 $ 3,285
Purchased parts 1,636 2,421
--------------------------------
$ 5,459 $ 5,706
--------------------------------
--------------------------------
</TABLE>
5. Accrued Expenses -
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------------------------
<S> <C> <C>
Payroll and related benefits $ 963 $ 701
Insurance reserves 1,077 968
Discontinued operations 2,000 2,000
Other 1,952 1,161
--------------------------------
$ 5,992 $ 4,830
--------------------------------
--------------------------------
</TABLE>
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Net Income (Loss) Per Share --
Net income (loss) per share for 1997 was based on the average number of
shares outstanding during the period after giving effect to the assumed
exercise of outstanding stock options, except where the effects are
antidilutive.
Net income per share for the three and nine months ended September 30, 1996
was computed based on the 9,939,800 and 9,921,900 weighted average number of
shares of North Star common stock outstanding after giving effect to the assumed
exercise of North Star's outstanding stock options. This weighted average
number of shares was adjusted to reflect the distribution of ENStar common
stock to North Star shareholders whereby one share of ENStar common stock was
issued to each holder of three shares of North Star common stock.
7. New Accounting Pronouncement --
The FASB has issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which is effective for financial statements issued after
December 15, 1997. Early adoption of the new standard is not permitted. The
new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The effect on the
Company's financial statements of adopting this new standard has not been
determined.
8. Income Taxes --
Deferred income taxes arise from temporary differences between financial
and tax reporting. To the extent the Company's financial reporting basis in
its investment in unconsolidated subsidiary exceeds its tax basis, and is not
expected to be realized in a tax-free manner, the Company records a deferred
tax liability. At September 30, 1997, the deferred tax liability includes a
cumulative tax effect of approximately $4.2 million for the differences in the
financial reporting and tax basis of the Company's investment in CorVel.
9. Contingencies -
In connection with the merger of North Star and Michael Foods, ENStar,
through the operation of an indemnification agreement, is contingently liable
for any, and all, liabilities arising from the activities of North Star,
through, and including, the reorganization of North Star and Michael Foods.
Under the terms of the indemnification agreement, the Company is required to
maintain certain minimum levels of market capitalization or net worth for a
period of five years.
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. Reclassifications --
Certain 1996 amounts have been reclassified to conform with the financial
statement presentation used in 1997. Such reclassifications had no impact on
previously reported retained earnings or net income.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
Operations of the Company should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included
elsewhere in this report.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. These statements include
statements regarding intent, belief, or current expectations of the Company
and its management and are made in reliance upon the safe harbor provisions
of the Securities Litigation Reform Act of 1995. Shareholders and prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve a number of risks and uncertainties
that may cause the Company's actual results to differ materially from the
results discussed in the forward-looking statements. Among the factors that
could cause actual results to differ materially from those indicated by such
forward-looking statements are general economic conditions, computer and
computer networking industry conditions, risks associated with the cost
required for the development and offering of new products and services that
may not be commercially successful, the rapid technological changes occurring
in the markets in which the Company operates, failure to successfully execute
Americable's expansion strategy, dependence on and the need to recruit and
retain key personnel, the concentration of the Company's revenues with certain
customers, dependence on key suppliers and product supply, the substantial
competition in the markets in which the Company operates and certain
indemnification obligations relating to the Reorganization Transactions. Each
of these factors is more fully discussed in Exhibit 99 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
The market for Transition Network's products is characterized by rapid
technological change. The introduction of products embodying new technology
can render existing products obsolete. Transition has recently refined its
product strategy to focus more of its research and development efforts on
developing products facilitating the conversion from existing to new
technologies. This shift in product focus is expected to reduce future
sales of the Company's existing advanced LAN products as it focuses more of its
engineering, marketing, and sales resources on its conversion based products.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
GENERAL
ENStar Inc. is a holding company. Its principal subsidiaries are
Americable, Inc. ("Americable") and Transition Networks, Inc. ("Transition").
Americable's operations are organized into two primary business units, Enstar
Networking Corporation ("Enstar Networking") and Americable Distribution. As
a network integrator, Enstar Networking provides services designed to build,
maintain, and secure local area network ("LAN") and wide area network ("WAN")
infrastructures for large and medium sized end-users. As a value-added
distributor, Americable is a provider of networking and connectivity products,
cable assemblies, and custom OEM manufacturing solutions. Transition is a
manufacturer of connectivity devices used in LAN applications. At September 30,
1997, ENStar owned 1,025,000 shares of common stock of CorVel Corporation
("CorVel"), or an approximate 24.5% interest in CorVel, a provider of cost
containment and managed care services designed to address the medical costs of
workers' compensation. In January 1997, ENStar, at the direction of North Star,
sold 200,000 shares of CorVel for approximately $5.1 million cash. The proceeds
from the sale were distributed to and retained by North Star. ENStar's
investment in CorVel is accounted for as an unconsolidated subsidiary using
the equity method of accounting. The common stock of CorVel is included on the
Nasdaq National Market under the Symbol CRVL.
ENStar was formerly a wholly owned subsidiary of North Star. In
connection with the reorganization involving North Star and Michael Foods (the
"Reorganization Transactions"), North Star transferred to ENStar certain of
its assets, including its shares of common stock of Americable and Transition
and its shares of CorVel, and certain other assets. Pursuant to the
Reorganization Transactions, (i) North Star merged with Michael Foods and (ii)
the outstanding common stock of ENStar (the "ENStar Common Stock") was
distributed to the shareholders of North Star (the "Distribution"). As a
result of the Distribution, ENStar ceased to be a subsidiary of North Star and
became a publicly owned company. ENStar's Common Stock is included on the
Nasdaq National Market under the symbol "ENSR".
As described in Note 2 to the Consolidated Financial Statements of
ENStar, the Consolidated Statements of Operations of ENStar for 1996 include
an allocation of general and administrative costs incurred by North Star prior
to the consummation of the Reorganization Transactions in the management of
the operating companies, investment holding, and other assets of ENStar.
Management believes these allocations are reasonable and present the
operations of ENStar as though it has been operated on a stand-alone basis
prior to the consummation of the Reorganization Transactions.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following are unaudited summarized operating results for each of the
Company's continuing operations for the three and nine months ended September 30
(in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------
1997 1996 1997 1996
-------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Americable $ 11,906 $ 13,301 $ 29,843 $ 38,221
Transition 4,518 4,523 12,556 12,166
Eliminations (434) (466) (1,085) (1,236)
---------------------------------------------
$ 15,990 $ 17,358 $ 41,314 $ 49,151
=============================================
Gross Profit
Americable $ 2,481 $ 3,010 $ 6,665 $ 8,494
Transition 1,745 1,704 4,932 4,510
---------------------------------------------
$ 4,226 $ 4,714 $ 11,597 $ 13,004
=============================================
Selling, General and Administrative Expenses
Americable $ 3,132 $ 2,537 $ 9,106 $ 7,510
Transition 1,701 1,605 4,884 4,261
Corporate 226 329 939 823
----------------------------------------------
$ 5,059 $ 4,471 $ 14,929 $ 12,594
==============================================
Operating Income (Loss)
Americable $ (651) $ 473 $ (2,441) $ 984
Transition 44 99 48 249
Corporate (226) (329) (939) (823)
----------------------------------------------
$ (833) $ 243 $ (3,332) $ 410
==============================================
</TABLE>
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 vs. THREE MONTHS ENDED
SEPTEMBER 30, 1996
Consolidated revenues decreased $1.4 million, or 7.9%, to $16 million
from $17.4 million in 1996.
Revenues at Americable decreased approximately $1.4 million, or 10.5%, to
$11.9 million. Sales of networking products decreased approximately $1.9
million due primarily to lower customer demand at Enstar Networking. This
includes approximately $1.1 million in decreased sales of networking
products to three customers due to reduced demand which is expected to continue
for the remainder of the year. These customers accounted for approximately $2.5
million of revenues in 1996. In addition, sales of cable assemblies, bulk
cable, and other connectivity products decreased approximately $660,000,
primarily due to lower demand from contractors and resellers. Offsetting these
decreases was approximately $500,000 of increased service revenues from network
integration and structured wiring services and approximately $700,000 of higher
network security revenues at Enstar Networking as a result of its expanded
focus on new service offerings.
Revenues at Transition were $4.5 million; relatively unchanged from the
same period in 1996. Sales to domestic customers increased approximately
$60,000, or 2%, to $3.1 million, which primarily is a result of the addition
of new customers and higher demand from existing customers. Sales to
international customers were approximately $1.4 million, a decrease of 6.7%
from the previous year. Sales to international customers accounted for
approximately 31% and 33% of net sales for the period ended September 30,
1997 and 1996, respectively.
Consolidated gross profit, as a percent of revenues, decreased to 26.4%
in 1997 as compared to 27.2% in 1996. Margins at Americable decreased to 20.8%
from 22.6% due primarily to higher level of personnel, training, and other
related costs associated with the expansion of its cable assembly operation.
Margins at Transition increased to 38.6% from 37.7% due primarily to higher
sales of new product enhancements of its basic LAN products.
The Company's selling, general and administrative expenses increased
approximately $600,000, or 13%, to approximately $5.1 million from $4.5
million in 1996.
Operating expenses at Americable increased approximately $595,000 or
23.5% for the period which reflects approximately $240,000 of higher
engineering expense due to the addition of technical and engineering
personnel and higher training costs at Enstar Networking. In addition, this
increase reflects approximately $170,000 of increased selling expenses primarily
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
attributable to the addition of new sales personnel and related expenses.
General and administrative expenses increased approximately $185,000 due
primarily to higher facility related expenses and the addition of support
personnel associated with the increased level of sales and engineering
personnel.
Operating expenses at Transition increased approximately 6%, which
reflects increased sales and marketing expenses of approximately $90,000
associated with advertising and promotional activities along with the
addition of new product marketing personnel and related expenses This was
offset by approximately $60,000 of decreased engineering expenses which
reflects a reduction in development costs and personnel associated with
Transition's advanced LAN products.
Corporate expenses decreased approximately $103,000, or 31%, to $226,000
which reflects lower legal and professional costs.
Net interest expense increased $197,000 or 386% to $248,000 from $51,000
in 1996 due primarily to the higher levels of long-term debt related to the
subordinated debenture program which commenced in November 1996.
The income tax provision (benefit) reflects the Company's estimated
effective annual tax rate. The income tax benefit of $375,000 in 1997 relates
to the elimination of deferred tax liabilities that will reverse as net
operating losses available for carryforward are utilized in future periods.
To the extent loss carryforwards are realized in the future, deferred taxes
will be reinstated.
Equity in earnings of the Company's unconsolidated subsidiary increased
$21,000 to $350,000 from $329,000 in the previous year which reflects higher
earnings at CorVel, offset by ENStar's reduced ownership interest in CorVel
following the January 1997 sale of stock. Further information with respect
to the results of operations of CorVel is contained in the Management's
Discussion and Analysis of Financial Condition and Results of Operations
section on its Form 10-Q and Form 10-K as filed with the Securities and
Exchange Commission.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1997 vs. NINE MONTHS ENDED
SEPTEMBER 30, 1996
Consolidated revenues decreased $7.8 million, or 15.9%, to $41.3 million
from $49.1 million in 1996.
Revenues at Americable decreased approximately $8.4 million, or 21.9%, to
$29.8 million. Sales of networking products decreased approximately $7.7
million due primarily to lower demand at Enstar Networking. This includes
approximately $6.7 million in decreased sales of networking products to three
customers due to reduced demand which is expected to continue for the remainder
of the year. These customers accounted for approximately $9.6 million of
revenues in 1996. In addition, sales of bulk cable and other connectivity
products decreased approximately $2.6 million primarily due to lower demand
from contractors and resellers. Offsetting these decreases was increased
service revenues of approximately $680,000 from network integration and
structured wiring services and approximately $1.2 million due to higher network
security revenues at Enstar Networking as a result of its expanded focus on new
service offerings.
Revenues at Transition increased approximately $390,000, or 3.2%, to $12.6
million. Sales to domestic customers increased approximately $650,000, or 8.3%
to $8.5 million, which primarily is a result of the addition of new customers.
Sales to international customers were approximately $4.2 million, a decrease of
2.8% from the previous year. Sales to international customers accounted for
approximately 33% and 35% of net sales for the period ended September 30, 1997
and 1996, respectively.
Consolidated gross profit, as a percent of revenues, increased to 28% in
1997 as compared to 26.5% in 1996. Increased margins at Transition are
primarily due to higher sales of basic LAN products sold during the period.
Margins at Americable were relatively unchanged between years. ENStar expects
its gross profit margins to decline due to expected competitive pricing
pressures on products sold by both Americable and Transition.
The Company's selling, general and administrative expenses increased
approximately $2.3 million, or 18.5%, to $14.9 million from $12.6 million
in 1996.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
Operating expenses at Americable increased approximately $1.6 million,
or 21.1%, for the period which reflects approximately $705,000 of increased
selling expenses primarily attributable to higher promotional expenses
related to the introduction of Enstar Networking along with the addition of
new sales personnel and related expenses. In addition, this increase reflects
approximately $610,000 of higher engineering expense due to the addition of
technical and engineering personnel along with increased recruiting and training
costs. General and administrative expenses increased approximately $270,000
due primarily to higher facility related expenses associated with the increased
level of personnel.
Americable expects that its selling expenses, as a percentage of
revenues, will increase during the remainder of 1997 through the addition of
sales and technical personnel and their related expenses. These anticipated
increases in operating expenses may result in continued operating losses at
Americable, if the company is unable to increase its sales volume and/or
gross profit margins.
Transition had increased operating expenses of approximately $620,000, or
14.6%, which reflects increased sales and marketing expenses of approximately
$560,000 associated with advertising and promotional activities along with the
addition of new product marketing personnel and related expenses. In an effort
to successfully develop and launch new product enhancements, Transition
anticipates the increased levels of spending on engineering, marketing and
promotional costs to continue throughout 1997. If such increased level of
spending does not result in the timely introduction of commercially successful
products, Transition may experience significantly reduced levels of sales growth
and operating results during the remainder of 1997.
Corporate expenses increased approximately $116,000, or 14.1%, to $939,000,
which primarily reflects severance related costs associated with a former
executive of Americable, in addition to higher costs related to the subordinated
debenture program.
Net interest expense increased $331,000, or 173%, to $522,000 from $191,000
in 1996, due primarily to higher levels of long-term debt related to the
subordinated debenture program which commenced in November 1996.
The income tax provision (benefit) reflects the Company's estimated
effective annual tax rate. The income tax benefit of approximately $1.3
million in 1997 relates to the elimination of deferred tax liabilities that
will reverse as net operating losses available for carryforward are utilized
in future periods. To the extent loss carryforwards are realized in the future,
deferred taxes will be reinstated.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
Equity in earnings of the Company's unconsolidated subsidiary increased
$33,000 to $989,000 from $956,000 in the previous year which reflects higher
earnings at CorVel, offset by ENStar's reduced ownership interest in CorVel
following the January 1997 sale of stock. Further information with respect to
the results of operations of CorVel is contained in the Management's Discussion
and Analysis of Financial Condition and Results of Operations section on its
Form 10-Q and Form 10-K as filed with the Securities and Exchange Commission.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
CAPITAL RESOURCES AND LIQUIDITY
ENStar has experienced cash flow deficits from operations and has
experienced fluctuations in its working capital, which are primarily
attributable to the change in receivables and inventories associated with
the fluctuation in sales and timing of payments on accounts payable. Cash
used in operations was approximately $1.3 million for the nine months ended
September 30, 1997, versus cash provided in operations of $640,000 in 1996.
ENStar does not have the use of cash generated by CorVel. Also, since
its initial public offering in 1991, CorVel has not declared any dividends and
has indicated that it does not anticipate doing so for the foreseeable future.
ENStar may from time to time, depending on market conditions and other factors,
sell a portion of its CorVel holdings. The ability of ENStar to sell its CorVel
holdings is limited, however, to sales pursuant to Rule 144 of the Securities
Act and the volume limitations thereof, and to private negotiated sales, which
may adversely affect the ability of ENStar to sell a large portion of the CorVel
holdings at a given time.
In November 1996, ENStar commenced a program (the "Debenture Program")
whereby it sells subordinated debentures of various maturities primarily to
individual investors. The debentures are offered on a continuous basis at
interest rates that change from time to time depending on market conditions.
Proceeds from long-term debt of approximately $14.5 million represent sales of
debentures under this program. At September 30, 1997, the Company had $15.5
million principal amount of subordinated debentures outstanding with a
weighted average interest rate of 9.7%.
Americable and Transition maintain revolving line of credit facilities
with their principal bank to provide borrowings up to $4 million and $4 million,
respectively, due in June 1998. Borrowings under these facilities are based on
eligible accounts receivable and inventory with interest at prime (8.5%) with
optional fixed rate advances at the London Interbank Offered Rate ("LIBOR") plus
2.5%. At September 30, 1997, there was approximately $2.3 million of
outstanding borrowings and approximately $3.1 million of available borrowings
under these credit facilities. In September 1997, Americable obtained the
necessary waivers from its bank to waive its compliance with certain financial
covenants and amend the terms of its credit agreement. Under the terms of the
amended credit agreement, ENStar is required to make capital contributions to
Americable to the extent Americable incurs pretax losses in excess of specified
levels.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
CAPITAL RESOURCES AND LIQUIDITY (Continued)
In June 1997, the Company commenced a modified "Dutch Auction" self-
tender offer for the repurchase of up to 600,000 shares of its common stock.
This tender offer expired in July 1997, resulting in the Company's purchase
and retirement of 37,290 shares of its common stock at $6.25 per share or an
aggregate cost of approximately $233,000.
At November 10, 1997, ENStar had approximately $12.4 million of cash and
cash equivalents, excluding cash of its operating subsidiaries. The Company
believes that its available cash and cash equivalents along with the amounts
available under the credit facilities of its operating companies, will be
adequate to meet expected cash requirements, including capital expenditures and
potential acquisitions, for the remainder of the year.
<PAGE>
PART II - OTHER INFORMATION
ENStar Inc. and Subsidiaries
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 5. OTHER MATTERS
On June 16, 1997, the Company disclosed that Americable incurred a
potential loss of approximately $900,000 in late May as a result of a fraudulent
scheme by a group of persons who falsely claimed to be employees of a large
company in connection with the purchase of products from Americable.
The Company has been notified by its insurance carrier that it has agreed to
provide coverage related to the loss. To date, Americable has been reimbursed
for this loss and the Company does not expect to record any significant losses
in connection with this claim.
<PAGE>
PART II - OTHER INFORMATION
ENStar Inc. and Subsidiaries
(Continued)
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is being filed with this report on
Form 10-Q.
Exhibit 10.11 Second Amendment to Loan and Security Agreement,
dated September 30, 1997, among Transition Networks, Inc., and
First Bank National Association, amending the terms of the Loan
and Security Agreement dated August 9, 1996.
Exhibit 10.12 Eighth Amendment to Amended and Restated Loan and
Security Agreement, dated September 30, 1997, among Americable,
Inc., Cable Distribution Systems, Inc., and First Bank National
Association, amending the terms of the Amended and Restated Loan
and Security Agreement dated August 9, 1996.
Exhibit 27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENSTAR INC.
--------------------------
(Registrant)
Date November 14, 1997 by /s/ Jeffrey J. Michael
--------------------------- --------------------------
Jeffrey J. Michael
President and Chief Executive Officer
Date November 14, 1997 by /s/ Thomas S. Wargolet
--------------------------- --------------------------
Thomas S. Wargolet
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- --------
10.11 Second Amendment To Loan And Security Agreement
For Transition Networks, Inc.
10.12 Eighth Amendment To Amended And Restated Loan And
Security Agreement For Americable, Inc. And Cable
Distribution Systems, Inc.
27.1 Financial Data Schedule
SECOND AMENDMENT TO
LOAN AND SECURITY AGREEMENT AND CONSENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT AND CONSENT (the
"Amendment") is dated as of September 30, 1997, and is by and between
TRANSITION NETWORKS, INC., a Minnesota corporation (the "Borrower") and FIRST
BANK NATIONAL ASSOCIATION, a national banking association (the "Bank").
Capitalized terms not otherwise expressly defined herein shall have the meanings
set forth in the Loan Agreement.
RECITALS
WHEREAS, the Borrower and the Bank are parties to a Loan and Security
Agreement, dated as of August 9, 1996 as amended by a First Amendment dated as
of May 29, 1997 (as so amended, the "Loan Agreement");
WHEREAS, the Borrower and the Bank desire to further amend the terms of
the Loan Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I - AMENDMENTS TO THE LOAN AGREEMENT
1.1 Amendments to Loan Agreement. The last sentence of Section 5.5 of
the Loan Agreement is hereby amended in its entirety to read as follows:
"Any and all such inspections and/or audits shall be at the
Borrowers' expense and the Bank may charge a Disbursement Account or any
other account of the Borrowers with the Bank or advance the amount
thereof to the Borrowers as a Revolving Loan; provided that, so long as
no Event of Default or Unmatured Event of Default has occurred and is
continuing, the Borrowers' obligations to reimburse the Bank for its
inspections and/or audits shall be limited to $450 per day, plus, in all
cases, the Bank's out-of-pocket costs and expenses for one inspection
and/or audit per calendar year, provided, further that any such
inspection and/or audit made while any Even of Default or Unmatured Event
of Default has occurred and is continuing shall not be subject to such
limitation."
1.2 Construction. All references in the Loan Agreement to "this
Agreement," "herein" and similar references shall be deemed to refer to the
Loan Agreement as amended by this Amendment.
<PAGE>
CERTIFICATE
I, , do hereby certify that I am the duly
-----------------------
appointed or elected and qualified Secretary and the
------------------------
keeper of the records of Transition Networks, Inc., a corporation organized
and existing under the laws of the State of Minnesota (the "Corporation") and
that the following is a true and correct copy of resolutions duly adopted by
unanimous written action of the Borrower's Board of Directors on the day
------
of September, 1997;
and that such resolutions are now in full force and effect, unamended,
unaltered, and unrepealed:
WHEREAS, there has been presented to the directors a form of Second
Amendment (the "Second Amendment") to that certain Loan and Security Agreement
dated as of August 9, 1996, between this Corporation and Second Bank National
Association (the "Bank") as amended by a First Amendment dated as of May 29,
1997 (as so amended, the "Loan Agreement").
NOW, THEREFORE, BE IT RESOLVED, that any one of the President, Vice
President or Vice President-Finance of this Corporation is authorized to
execute, in the name and on behalf of this Corporation, and deliver to the
Bank the Second Amendment and any promissory note or other instrument,
document or agreement required by the Bank in connection with such Second
Amendment, substantially in the form of that reviewed by the directors, except
for such changes, additions or deletions as such officer(s) shall deem proper;
execution by such officer(s) of an amendment and related documents to be
conclusive evidence that such officer(s) deem(s) all of the terms and
provisions thereof to be proper (the executed Second Amendment is hereafter
called the "Amendment");
FURTHER RESOLVED, that any one of the President, Vice President or Vice
President-Finance of this Corporation be and hereby is authorized on behalf of
this Corporation to borrow from time to time under the Loan Agreement as
amended by the Amendment, to agree to rates of interest and other terms of
loans, and to repay all amounts so borrowed;
FURTHER RESOLVED, that each officer of this Corporation be and hereby is
authorized to take such action from time to time on behalf of this Corporation
as he/she may deem necessary, advisable or proper in order to carry out and
perform the obligations of this Corporation under the Loan Agreement as
amended by the Amendment and all related instruments, documents, and
agreements;
FURTHER RESOLVED, that all authority conferred by these resolutions shall
be deemed retroactive and any and all acts authorized hereunder performed
prior to the adoption of this resolution are hereby ratified, affirmed,
adopted, and approved;
<PAGE>
FURTHER RESOLVED, that the Secretary or any other officer of this
Corporation is authorized to certify to said Bank a copy of these resolutions
and the names and signatures of this Corporation's officers or employees
hereby authorized to act, and the Bank is hereby authorized to rely upon such
certificate until formally advised by a like certificate of any change
therein, and is hereby authorized to rely on any such additional certificates.
I FURTHER CERTIFY THAT the Bylaws and Articles of Incorporation
previously delivered by this Corporation to said Bank have not been amended,
modified, or restated after the date of such delivery.
I FURTHER CERTIFY THAT the following persons have been appointed or
elected and are now acting as officers or employees of said Corporation in the
capacity set before their respective names:
TITLE NAME SIGNATURE
President Peter E. Flynn
----------------------------
Vice President Jeffrey J. Michael
----------------------------
Vice President, Thomas S. Wargolet
Finance and Secretary ----------------------------
IN WITNESS WHEREOF, I have subscribed my name as
---------------------
Secretary this day of September, 1997.
--------
----------------------------
Secretary
<PAGE>
EIGHTH AMENDMENT TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AND WAIVER
THIS EIGHTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT AND WAIVER (the "Amendment") is dated as of September 30, 1997,
and is by and among AMERICABLE, INC., a Minnesota corporation ("Americable"),
and CABLE DISTRIBUTION SYSTEMS, INC., a Georgia corporation ("Cable")
(Americable and Cable are hereinafter each individually referred to as a
"Borrower" and collectively as the "Borrowers") and FIRST BANK NATIONAL
ASSOCIATION, a national banking association (the "Bank"). Capitalized terms
not otherwise expressly defined herein shall have the meanings set forth in
the Loan Agreement.
RECITALS
WHEREAS, the Borrowers and the Bank are parties to an Amended and
Restated Loan and Security Agreement, dated as of June 1, 1993, as amended by
a First Amendment dated as of November 29, 1993, a Waiver, a Second Amendment
dated March 3, 1995, a Third Amendment dated May 31, 1996, a letter amendment
dated June 28, 1996, a letter amendment dated July 31, 1996, a Sixth Amendment
dated as of August 9, 1996 and a Seventh Amendment dated as of May 29, 1997
(as so amended, the "Loan Agreement");
WHEREAS, the Borrowers and the Bank desire to further amend the terms of
the Loan Agreement;
WHEREAS, the Bank desires to waive the Borrowers' compliance with certain
provisions of the Loan Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I - AMENDMENTS TO THE LOAN AGREEMENT
1.1 Amendments to Loan Agreement. The Loan Agreement is hereby amended
as follows:
(a) Section 1.1 of the Loan Agreement is amended to delete the
definitions of "Additional Availability" and "Approved Acquisition".
<PAGE>
SUPPLEMENT A
to
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
Dated as of JUNE 1, 1993 Among
FIRST BANK NATIONAL ASSOCIATION (the "Bank") and
AMERICABLE, INC.
and CABLE DISTRIBUTION SYSTEMS, INC.
(collectively, the "Borrowers")
(AMENDED 9/97)
1. Loan Agreement Reference. This Supplement A, as it may be amended or
modified from time to time, is a part of the Amended and Restated Loan and
Security Agreement, dated as of June 1, 1993, among the Borrowers and the
Bank (together with all amendments, modifications and supplements thereto,
the "Loan Agreement"). Terms used herein which are defined in the Loan
Agreement shall have the meanings given such terms in the Loan Agreement
unless the context otherwise requires.
2. Credit Amount; Borrowing Base.
2.1 Credit Amount. The maximum amount of Revolving Loans which
the Bank will make available tot he Borrowers shall not exceed FOUR
MILLION AND NO/100 DOLLARS ($4,000,000) (such amount is herein called
the "Credit Amount") (unless such amount is increased by the Bank in
its sole and absolute discretion).
2.2 Borrowing Base.
The term "Borrowing Base," as used herein, shall mean:
(a) an amount of up to 85% of the net amount (as determined by
the Bank after deduction of such reserves and allowances as the Bank
deems proper and necessary) of the Borrowers' Eligible Accounts
Receivable; plus
(b) an amount of up to the lesser of (i) 40% of the net value
(the lower of the cost or market value of such Inventory as determined
by the Bank on a first in first out basis and after deduction of such
reserves and allowances as the Bank deems proper and necessary) of the
Borrowers' Eligible Inventory or (iii) $1,500,000.
2.3 Bank's Rights. The Borrowers agree that nothing contained in
this Supplement A (a) shall be construed as the Bank's agreement to
resort or look to a particular type or item of Collateral as security
for any specific Loan or advance or in any way limit the Bank's right to
resort to any or all of the Collateral as security for any of the
obligations, (b) shall be deemed to limit or reduce any lien on or any
security interest in or upon any portion of the Collateral or other
security for the Obligations or (c) shall supersede Section 2.10 of the
Loan Agreement.
<PAGE>
3. Interest
3.1 Revolving Loans. The unpaid balance of the Revolving Loans
shall bear interest to maturity as follows:
(a) Eurodollar Advances. The unpaid principal amount of each
Eurodollar Advance shall bear interest prior to maturity at a rate per
annum equal to the Eurodollar Rate (Reserve Adjusted) in effect for
each Interest Period for such Eurodollar Advanceplus 2.50% per annum.
(b) Reference Rate Advances. The unpaid principal amount of
Revolving Loans accruing interest as Reference Rate Advances shall
bear interest prior to maturity as follows: (i) on that portion of the
aggregate outstanding principal of the Revolving Loans which is equal
to or less than $2,500,000, at a rate per annum equal to the Reference
Rate; and (ii) on that portion of the aggregate outstanding principal
of the Revolving Loans which exceeds $2,500,000, at a rate per annum
equal to the sum of the Reference Rate plus one-half of one percent
(0.50) per annum.
3.2 Default Rate. If any amount of the Loans is not paid when
due, whether by acceleeration or otherwise, the entire unpaid principal
balance of the Loans (other than overdraft Loans and Over Advances)
shall bear interest until paid at a rate per annum equal to the greater
of (i) the Reference Rate from time to time in effect plus four percent
(4%) or (ii) two percent (2%) above the rate in effect at the time such
amount became due for such past due amount.
3.3 Overdraft Loans; Over Advances. Overdraft Loans and Over
Advances shall bear interest at the rate(s) determined pursuant to
Section 2.8 or Section 2.9 of the Credit Agreement, as applicable.
4. Eligible Account Receivable Data
(a) The Account Receivable must not be unpaid on the date that is
90 days after the date of the invoice evidencing such Account Receivable.
(b) If invoices representing 10% or more of the unpaid net amount of
all Accounts Receivable from any one Account Debtor are unpaid more than
90 days after the dates of the invoices evidencing such Accounts
Receivable, then all Accounts Receivable relating to such Account Debtor
shall cease to be Eligible Accounts Receivable.
<PAGE>
5. Additional Covenants. From the date of the Loan Agreement and thereafter
until all of the Borrowers' Obligations under the Loan Agreement are paid in
full, the Borrowers agree that, unless the Bank shall otherwise consent in
writing, it will not, and will not permit any Subsidiary to, do any of the
following:
5.1 Tangible Capital Base. During each of the periods set forth
below, permit the Tangible Capital Base to be less than the amount set
forth below opposite such period at any time:
Period Tangible Capital Base
------ ---------------------
June 1, 1996 through and
including December 30, 1996 $3,300,000
December 31, 1996 through and
including June 30, 1997 $3,500,000
5.2 Leverage Ratio. During each of the periods set forth below,
permit the ratio of (a) the total of (i) Americable's unconsolidated
Indebtedness, minus (ii) Americable's unconsolidated Subordinated Debt,
minus (iii) the aggregate unpaid accrued interest on all Subordinated
Debt of Americable owing to NSU, to (b) Tangible Capital Base to be
greater than: (x) 2.5:1 during the period on and after June 30, 1996 to
and including December 30, 1996; or (y) 2.2:1 at any time thereafter
through June 30, 1997.
5.3 Interest Coverage Ratio. Permit the ratio, as of any
Measurement Date for the period commencing on the first day of
Americable's fiscal year through and including such Measurement Date,
of (a) Americable's unconsolidated EBITDA to (b) the total of (i)
Americable's unconsolidated interest expense (including, without
limitation, imputed interest expense on Capitalized Leases) minus (ii)
the aggregate unpaid accrued interest on all Subordinated Debt of
Americable owing to NSU, to be less than: (r) 2:1 for any Measurement
Date occurring prior to January 1, 1997.
5.4 Capital Expenditures. Make Capital Expenditures in an
amount exceeding the following amounts determined on a consolidated basis
for the Borrowers only (excluding Transition): (a) $600,000 during
Americable's fiscal year ending December 31, 1996; (b) $1,250,000 during
Americable's fiscal year ending December 31, 1997; and (c) $600,000 during
any fiscal year thereafter.
<PAGE>
5.5 Year-to-date Loss. Sustain, at any fiscal month-end, a fiscal
year-to-date loss before taxes computed in accordance with GAAP greater
than (i.e., a greater negative number than) the amount set forth below
opposite the relevant fiscal month:
Month Loss
----- ----
July 31, 1997 ($2,179,000)
August 31, 1997 ($2,387,000)
September 30, 1997 ($2,523,000)
October 31, 1997 ($2,987,000)
November 30, 1997 ($3,161,000)
December 31, 1997 ($3,351,000)
January 31, 1998 ($242,000)
February 28, 1998 ($307,000)
March 31, 1998 ($269,000)
April 30, 1998 ($251,000)
May 31, 1998 ($218,000)
June 30, 1998 ($105,000);
provided, however, that:
(a) the permitted maximum fiscal year-to-date loss for the
months ending October 31, 1997, November 30,1 997, and December 31,
1997, shall be reduced (i.e., made a less negative number) by the
amount of any insurance recoveries in excess of $650,000 (the amount
presently recovered) on Americable's fraud claim of approximately
$950,000; and
(b) if the fiscal year-to-date loss as of any fiscal month-end
exceeds the maximum permitted fiscal year-to-date loss, then
Borrowers, by no later than 10 days after submitting its financial
statements for such fiscal month to Bank, shall obtain a capital
contribution from ENStar in the amount of such excess.
Borrowers' Initials
----------
----------
Bank's Initials
----------
Date: , 19
------------------, ---
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