<PAGE>
UNITED STATES
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 June 30, 1998
[ ] 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 July 31, 1998, 3,175,156 shares of common stock of the registrant were
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 12,071 $ 12,609
Accounts receivable, net 10,715 7,086
Inventories 4,289 5,145
Prepaid expenses and other current assets 225 316
--------------------------------
Total current assets 27,300 25,156
Property and equipment, net 2,403 2,164
Investment in unconsolidated subsidiary 11,666 11,170
Goodwill, net 4,565 4,642
Other assets 163 183
--------------------------------
$ 46,097 $ 43,315
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 2,790 $ 2,680
Current portion of long-term debt 4,498 165
Accounts payable 6,821 4,200
Accrued expenses 5,970 5,165
--------------------------------
Total current liabilities 20,079 12,210
Long-term debt, net of current maturities 13,787 16,168
Commitments and contingencies --- ---
--------------------------------
Shareholders' Equity
Common stock, $.01 par value 100,000,000
shares authorized, issued and outstanding
3,235,356 shares in 1998 and 3,266,989 in
1997 32 33
Additional paid-in-capital 16,264 16,961
Retained deficit (4,065) (2,057)
--------------------------------
Total shareholders' equity 12,231 14,937
--------------------------------
$ 46,097 $ 43,315
================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------
1998 1997 1998 1997
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 17,098 $ 13,392 $ 31,229 $ 25,324
Operating and product costs 12,412 9,647 22,759 18,010
---------------------------------------------
Gross profit 4,686 3,745 8,470 7,314
Selling, general,
and administrative expenses 5,424 4,987 10,582 9,813
---------------------------------------------
Operating loss (738) (1,242) (2,112) (2,499)
Interest expense, net (347) (190) (630) (274)
---------------------------------------------
Loss before income taxes
and equity in earnings of
unconsolidated subsidiary (1,085) (1,432) (2,742) (2,773)
Income tax provision (benefit) --- (500) --- (950)
---------------------------------------------
Loss before equity in earnings
of unconsolidated subsidiary (1,085) (932) (2,742) (1,823)
Equity in earnings of
unconsolidated subsidiary 390 330 735 639
---------------------------------------------
Net loss $ (695) $ (602) $ (2,007) $ (1,184)
=============================================
Basic and diluted loss per share $ (.21) $ (.18) $ (.62) $ (.36)
=============================================
Weighted average shares
outstanding 3,245,900 3,304,279 3,256,445 3,304,279
=============================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ENStar Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Net cash used in operating activities $ (1,502) $ (656)
Cash flows from investing activities
Capital expenditures (908) (641)
Other 20 (63)
--------------------------------
Net cash used in investing activities (888) (704)
--------------------------------
Cash flow from financing activities
Proceeds from long-term debt 1,966 13,492
Payments on long-term debt (14) (14)
Proceeds from notes payable 30,755 29,556
Payments on notes payable (30,645) (28,634)
Additional capital invested
(constructive dividends) --- (1,280)
Purchase of common stock (210) ---
--------------------------------
Net cash provided by financing
activities 1,852 13,120
--------------------------------
Net increase (decrease) in cash and
cash equivalents (538) 11,760
Cash and cash equivalents
at beginning of period 12,609 824
--------------------------------
Cash and cash equivalents
at end of period $ 12,071 $ 12,584
==================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ENStar Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business --
ENStar Inc. ("ENStar" or the "Company") is a holding company principally
comprised of three operating companies, Americable, Inc. ("Americable"), Enstar
Networking Corporation ("Enstar Networking") 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"). 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.
Americable is a provider of premise wiring, connectivity products, and
low-end networking electronics. Enstar Networking is a network integrator that
provides services to design, build, maintain, and protect corporate network
infrastructures. Transition designs, manufactures and markets connectivity
devices and network applications. CorVel is a health care services company.
At June 30, 1998 and 1997, the Company's ownership interest in CorVel was
approximately 25% and 24%, respectively. The Company's investment in CorVel
is accounted for as an unconsolidated subsidiary using the equity method of
accounting.
2. Principals of Consolidation and Basis of Presentation --
PRINCIPALS OF CONSOLIDATION The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
BASIS OF PRESENTATION The accompanying unaudited condensed consolidated
financial statements have been prepared 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
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 six months ended June 30 may not necessarily be
indicative of the results to be expected for the full year.
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Investment in Unconsolidated Subsidiary --
The Company's unconsolidated subsidiary consists of its investment in
CorVel Corporation ("CorVel"). At June 30, 1998, ENStar owned 1,025,000
shares, or an approximate 25% 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 six month period ended June 30,
1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 36,659
Noncurrent assets 24,498
Current liabilities 11,428
Noncurrent liabilities 3,366
Revenues 39,552
Gross profit 7,210
Net income 2,501
</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 was
reflected as a dividend to North Star during the period ended March 31, 1997.
In addition, as a result of other equity transactions of CorVel, ENStar
decreased its investment in unconsolidated subsidiary by approximately
$730,000, additional paid-in capital by $438,000, and deferred income taxes by
$283,000 for the six months ended June 30, 1998. At June 30, 1998, the value
of the Company's investment in CorVel, based on the closing market price, was
approximately $40 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>
June 30, December 31,
1998 1997
--------------------------------
<S> <C> <C>
Finished goods $ 2,910 $ 3,934
Purchased parts 1,379 1,211
--------------------------------
$ 4,289 $ 5,145
--------------------------------
--------------------------------
</TABLE>
5. Net Loss Per Share --
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128 - "Earnings per Share". All current and prior year
income (loss) per share data have been restated to conform to the provisions
of SFAS 128.
The Company's basic and diluted net loss per share was computed by dividing
the net loss by the weighted average number of outstanding common shares, as all
common share equivalents relating to stock options were antidilutive during the
periods presented. Options to purchase 348,250 and 78,250 shares of common
stock with weighted average exercise prices of $7.74 and $9.00 were outstanding
during the three and six months ended June 30, 1998 and 1997, but were excluded
from the computation of common share equivalents because they were antidilutive.
6. New Accounting Pronouncements --
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive
income includes certain changes in equity that are excluded from net earnings.
The adoption of this statement did not impact the Company's consolidated
financial statements; historically there have been no differences between net
earnings and comprehensive income.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." This
statement requires companies to disclose financial and other information about
its business segments as part of their consolidated financial statements. The
Company will include the required business segment disclosures in its 1998
annual report.
<PAGE>
ENStar, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. 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 June 30, 1998, the deferred tax liability includes a
cumulative tax effect of approximately $4.4 million for the differences in the
financial reporting and tax basis of the Company's investment in CorVel. This
deferred tax liability is offset by deferred tax assets related to accrued
expenses not deductible until paid and net operating loss carryforwards. No
tax benefit has been recorded in the current period due to the additional
valuation allowance recorded against the net deferred tax asset generated in
the period.
8. 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.
9. Use of Estimates --
In the preparation of the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
10. Reclassification --
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
<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 Condensed
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 and are made in reliance under the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements include statements regarding intent, belief or current
expectations of the Company and its management. 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 Enstar
Networking'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 merger of North Star and Michael
Foods. 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, 1997.
GENERAL
ENStar is a holding company. Its principal subsidiaries are Americable,
Enstar Networking and Transition. ENStar also owns 1,025,000 shares of common
stock of CorVel Corporation ("CorVel"), or an approximate 25% interest in
CorVel. 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.
Prior to 1997, Enstar Networking operated as the network integration
business of Americable. Enstar Networking was organized in April 1997 to
distinctly focus the networking service activities from the traditional
distribution and manufacturing operations of Americable. Enstar Networking
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
was incorporated on January 1, 1998. The separate results of operations for
Enstar Networking have been prepared from the books and records of Americable
for all periods presented. The results of operations include an allocation of
general and administrative expenses for certain items such as accounting, human
resources and information systems along with facility related expenses.
Management believes these allocations are reasonable and present the operations
of Enstar Networking and Americable as though they had operated as separate
businesses.
During 1997, Enstar Networking made significant investments in new sales,
consulting, engineering and technical personnel as part of its effort to build a
network services organization. As part of this strategy, Enstar Networking has
shifted its focus from historical commodity-based networking and connectivity
hardware sales towards more service oriented solutions. As part of this
change, the company has experienced an increase in operating expenses resulting
in operating losses in 1997 and the first half of 1998. Enstar Networking
expects to incur an operating loss for the remainder of 1998 as it continues to
build its network service and security consulting practice.
Historically, in excess of 90% of Transition's revenues have been derived
from the sale of its media conversion and related LAN products. These products
have life cycles of 18 to 36 months and are generally sold based on price,
availability and functionality. More recently, Transition has focused its
product development and marketing efforts on expanding its conversion technology
based products. In addition, the company provides related LAN products, such as
hubs and transceivers, that integrate with the conversion technologies to enable
network expansion. Transition's future operations are highly dependent on its
ability to introduce conversion technology based products on a timely basis, at
competitive prices that meet customer demands.
YEAR 2000 COMPLIANCE
The Company's operating subsidiaries have made a preliminary assessment of
its computer systems and equipment with respect to Year 2000 compliance. Based
on assessments to date, the Company does not believe the cost of addressing any
potential systems issues will have a material impact on its results of
operations or financial position. However, the Company could be adversely
impacted if Year 2000 compliance is not properly completed by the Company, its
vendors, or any entity with whom its operating companies conduct business.
<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 six months ended June 30 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Americable $ 4,574 $ 4,482 $ 8,462 $ 8,340
Enstar Networking 7,241 6,070 13,613 11,449
Transition 5,772 4,163 10,471 8,038
Eliminations (489) (1,323) (1,317) (2,503)
-------------------------------------------------
$ 17,098 $ 13,392 $ 31,229 $ 25,324
=================================================
Gross Profit
Americable $ 1,011 $ 923 $ 1,789 $ 1,777
Enstar Networking 1,291 1,158 2,495 2,350
Transition 2,384 1,664 4,186 3,187
-------------------------------------------------
$ 4,686 $ 3,745 $ 8,470 $ 7,314
=================================================
Selling, General and Administrative Expenses
Americable $ 927 $ 766 $ 1,867 $ 1,593
Enstar Networking 2,107 2,397 4,103 4,324
Transition 2,148 1,467 4,135 3,183
Corporate 242 357 477 713
-------------------------------------------------
$ 5,424 $ 4,987 $ 10,582 $ 9,813
=================================================
Operating Income (Loss)
Americable $ 84 $ 157 $ (78) $ 184
Enstar Networking (816) (1,239) (1,608) (1,974)
Transition 236 197 51 4
Corporate (242) (357) (477) (713)
-------------------------------------------------
$ (738) $ (1,242) $ (2,112) $ (2,499)
=================================================
</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 JUNE 30, 1998 vs. THREE MONTHS ENDED JUNE 30, 1997
Consolidated revenues increased $3.7 million or 28%, to $17.1 million
from $13.4 million in 1997. This includes decreased intercompany sales
eliminations of approximately $800,000, which is primarily due to reduced
sales of structured wiring products from Americable to Enstar Networking.
Revenues at Americable increased approximately $100,000 to $4.6 million,
primarily due to the increased focus on fiber related products.
Revenues at Enstar Networking increased approximately $1.2 million, or
19.3%, to $7.2 million. This includes increased sales of networking and network
security products of approximately $1.6 million and $260,000 of higher network
and security integration service revenues, due primarily to higher demand.
Offsetting these increases was approximately $700,000 of lower structured
wiring services and products due to lower demand in certain regional locations.
Revenues at Transition increased $1.6 million, or 39%, to $5.8 million.
Sales of Transition's media and rate conversion products increased approximately
$2.2 million, or 102%, to $4.3 million, reflecting additional revenues from new
products and product enhancements introduced during 1997 and 1998. Sales from
new product introductions and enhancements accounted for approximately 13% of
net sales for 1998 versus 2% for 1997. Sales of supporting LAN products
decreased approximately $600,000, or 26%, to $1.6 million due primarily to
reduced sales of Ethernet hubs and switches which reflects Transition's shift in
product strategy towards conversion type products. Sales to domestic customers
increased approximately $1 million, or 35%, to $3.9 million. Sales to
international customers increased approximately $600,000, or 45%, to $1.9
million. Sales to international customers accounted for approximately 34% and
33% of net sales in 1998 and 1997, respectively. Transition's ability to
maintain its present level of sales and sales growth is highly dependent upon
its ability to offer new products that meet customer's demands in a rapidly
changing market, particularly in light of the relatively short life cycle of
its products.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Consolidated gross profit, as a percent of revenues, decreased to 27.4% in
1998 as compared to 28% in 1997. Margins at Transition increased to 41.3%
from 40% due to growth in media conversion products which have higher margins
than switching products. Margins at Americable increased to 22.1% in 1998, as
compared to 20.6% in 1997, primarily due to growth in fiber related products.
Margins at Enstar Networking decreased to 17.8% from 19.1% primarily due to
increased competition for structured wiring services and network hardware
products. ENStar expects its gross profit margins to continue to decline in
1998 due to expected competitive pricing pressures on products and services
sold by each of its operating companies.
ENStar's selling, general and administrative expenses increased
$437,000, or 9%, to approximately $5.4 million from $5 million in 1997.
Operating expenses at Americable increased $161,000 to approximately $930,000,
due to the expansion of its fiber optic operations. Enstar Networking's
operating expenses decreased $290,000, or 12%, to approximately $2.1 million,
due primarily to cost reductions effected through the elimination of
personnel and consolidation of certain regional offices. Transition had
increased operating expenses of approximately $681,000, or 46%, which reflects
the addition of European sales facilities and related personnel. Enstar's
research and development expenses (incurred exclusively within Transition) were
approximately $267,000 and $292,000 for 1998 and 1997, respectively. The
decrease in corporate expenses primarily reflects lower costs associated with
the debenture program and reduction in corporate personnel between years.
Net interest expense increased $157,000 to $347,000 from $190,000 in 1997,
due primarily to the higher level of ENStar subordinated debentures in addition
to higher borrowings under the Americable credit facility.
The income tax benefit in 1997 reflects ENStar's estimated effective annual
tax rate. No tax benefit has been recorded in the current period due to the
Company's recording an additional valuation allowance against a net deferred
tax asset generated in the period. See Note 7 to the Condensed Consolidated
Financial Statements of ENStar.
Equity in earnings of unconsolidated subsidiary increased $60,000 to
$390,000, which is a result of higher earnings at CorVel. CorVel's net earnings
for the three months ended June 30, 1998 were approximately $2.5 million, an
increase of approximately $225,000 or 10% from the previous year. 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 of its annual and Quarterly reports as filed on Forms 10-K
and 10-Q with the Securities and Exchange Commission.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
SIX MONTHS ENDED JUNE 30, 1998 vs. SIX MONTHS ENDED JUNE 30, 1997
Consolidated revenues increased $5.9 million, or 23%, to $31.2 million
from $25.3 million in 1997. This includes decreased intercompany sales
eliminations of approximately $1.2 million which is primarily due to reduced
sales of structured wiring products from Americable to Enstar Networking.
Revenues at Americable increased $122,000 to approximately $8.5 million,
primarily due to the increased focus on fiber related products.
Revenues at Enstar Networking increased approximately $2.2 million, or
19%, to $13.6 million. This includes increased sales of networking and network
security products of approximately $3 million and $500,000 of higher network
and security integration service revenues, due primarily to higher demand.
Offsetting these increases was approximately $1.3 million of lower structured
wiring services and products due to lower demand in certain regional locations.
Revenues at Transition increased approximately $2.4 million, or 30%,
to $10.5 million. Sales of Transition's media and rate conversion products
increased approximately $3.5 million, or 86%, to $7.5 million, reflecting
additional revenues from new products and product enhancements introduced during
1997 and 1998. Sales from new product introductions and enhancements accounted
for approximately 10% of net sales for 1998 versus 2% for 1997. Sales of
supporting LAN products decreased approximately $1.1 million, or 26%, to $3
million due primarily to reduced sales of Ethernet hubs and switches which
reflects Transition's shift in product strategy towards conversion type
products. Sales to domestic customers increased approximately $1.4 million, or
27%, to $6.8 million. Sales to international customers increased approximately
$1 million, or 35%, to $3.7 million. Sales to international customers accounted
for approximately 36% and 34% of net sales in 1998 and 1997, respectively.
Transition's ability to maintain its present level of sales and sales growth is
highly dependent upon its ability to offer new products that meet customer's
demands in a rapidly changing market, particularly in light of the relatively
short life cycle of its products.
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Consolidated gross profit, as a percent of revenues, decreased to 27.1% in
1998 as compared to 28.9% in 1997. Margins at Transition were 40%, relatively
unchanged between periods. Margins at Americable were 21.1%, also relatively
unchanged between periods. Margins at Enstar Networking decreased to 18.3% from
20.5% primarily due to increased competition for structured wiring services
and network hardware products. ENStar expects its gross profit margins to
continue to decline in 1998 due to expected competitive pricing pressures on
products and services sold by each of its operating companies.
ENStar's selling, general and administrative expenses increased $769,000,
or 8%, to approximately $10.6 million from $9.8 million in 1997. Operating
expenses at Americable increased $274,000, to approximately $1.9 million, or
17%, from $1.6 million in 1997, due to the expansion of its fiber optic
operations. Enstar Networking's operating expenses decreased $221,000, or 5%,
to approximately $4.1 million from $4.3 million in 1997. This reflects
approximately $471,000 of cost reduction effected through the elimination of
personnel and consolidation of certain regional offices. This was offset by
approximately $250,000 of increased salaries, benefits, training and other
related expenses due to the addition of new network security consulting
personnel. Transition had increased operating expenses of approximately
$950,000, or 30%, which reflects the addition of European sales facilities
and related personnel. Enstar's research and development expenses (incurred
exclusively within Transition) were approximately $654,000 and $723,000 for
for 1998 and 1997, respectively. The decrease in corporate expenses reflects
severance related costs in 1997 associated with a former executive of Americable
and lower costs associated with the debenture program.
Net interest expense increased $356,000 to $630,000 from $274,000 in 1997,
due primarily to the higher level of ENStar subordinated debentures in addition
to higher borrowings under the Americable credit facility.
The income tax benefit in 1997 reflects ENStar's estimated effective annual
tax rate. No tax benefit has been recorded in the current period due to the
Company's recording an additional valuation allowance against a net deferred
tax asset generated in the period. See Note 7 to the Condensed Consolidated
Financial Statements of ENStar.
Equity in earnings of unconsolidated subsidiary increased $96,000 to
$735,000, which is a result of higher earnings at CorVel. CorVel's net earnings
for the six months ended June 30, 1998 were approximately $4.9 million, an
increase of approximately $427,000 or 9% from the previous year. Further
information with respect to the results of operations of CorVel is contained
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
in the Management's Discussion and Analysis of Financial Condition and Results
of Operations section of its annual and Quarterly reports as filed on Forms 10-K
and 10-Q with the Securities and Exchange Commission.
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 $1.5 million and $656,000 for the six month
periods ended June 30, 1998 and 1997, respectively.
ENStar does not have the use of cash generated by CorVel and its
subsidiaries. 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.
The Company maintains 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 $2 million represent sales of debentures under this program.
At June 30, 1998, the Company had $18.1 million principal amount of
subordinated debentures outstanding with a weighted average interest rate of
9.61%.
The companies maintain revolving line of credit facilities with their
principal bank to provide aggregate borrowings up to $8 million, due in
September 1998. Borrowings under these facilities are based on eligible
accounts receivable and inventory with interest at prime (8.5% at June 30,
1998). At June 30, 1998, there were aggregate outstanding borrowings of
approximately $2.8 million and approximately $3 million of available borrowings
under these credit facilities. At June 30, 1998, the companies were in
compliance or had obtained the necessary waivers from its bank to waive its
compliance with certain financial covenants under the terms of its credit
agreement. Under the terms of the credit agreement, ENStar is required to make
capital contributions if pretax losses are in excess of specified levels. The
<PAGE>
ENStar Inc.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
CAPITAL RESOURCES AND LIQUIDITY (Continued)
companies are currently in the process of extending the terms of their credit
agreements with their principal bank beyond September 1998. Management believes
they will obtain credit facilities with terms comparable to its existing
agreements.
For the six months ended June 30, 1998, ENStar has provided an aggregate of
$1,993,000 of cash contributions in 1998, under the terms of the amended credit
agreement of Americable and Enstar Networking, as a result of operating losses
at Enstar Networking. Additional cash contributions from ENStar are expected in
1998 to fund anticipated operating losses and capital expenditures at Enstar
Networking.
In March 1998, the Company announced a stock repurchase plan pursuant
to which the Company plans to repurchase up to 350,000 shares of its common
stock from time-to-time in open market or privately negotiated transactions.
Through July 31, 1998, approximately 91,800 shares had been repurchased at
an average price of $6.38 per share.
ENStar expects to be able to fund its working capital and capital
expenditures along with any repurchase of common stock for 1998 with cash flow
from operations along with available cash and cash equivalents and amounts
available under the credit facilities of its operating companies. At July 31,
1998, ENStar had approximately $10.7 million of cash and cash equivalents,
excluding cash of its operating subsidiaries. During 1998, ENStar's operating
plans call for $1.7 million in capital expenditures.
<PAGE>
ENStar Inc.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company will include the required disclosures in its 1998 annual report
on Form 10-K.
<PAGE>
PART II - OTHER INFORMATION
ENStar Inc. and Subsidiaries
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 Annual Meeting of Shareholders of ENStar Inc. was held on
June 18, 1998, at the offices of Transition Networks in Eden Prairie, Minnesota.
The holders of 3,025,418 shares of Common Stock, in excess of 91.56
percent of the outstanding 3,175,156 common shares entitled to vote, were
represented at the meeting in person or by proxy.
The four candidates for election as directors listed in the Company's
proxy statement were elected to serve until the next annual meeting. Each
received at least 3,022,572 votes representing 99.9 percent of the votes
cast and 91.5 percent of the outstanding shares.
The proposal to amend the ENStar 1996 Stock Incentive Plan to increase
the number of available shares under the plan passed by a vote of 2,323,932 in
favor, 28,772 against, and 210,216 abstaining, with 407,356 broker non-votes.
For complete minutes of the meeting, please write to ENStar Inc.,
6479 City West Parkway, Eden Prairie, MN 55344
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed with this report on
Form 10-Q.
10.22 Fourth Amendment to Loan and Security Agreement dated as
of June 30, 1998, among Transition Networks, Inc., and
U.S. Bank National Association, amending the terms of
the Amended and Restated Loan and Security Agreement and
Waiver dated September 30, 1997.
10.23 Tenth Amendment to Amended and Restated Loan and
Security Agreement dated as of June 30, 1998, among
Americable, Inc., Cable Distribution Systems, Inc.,
Enstar Networking Corporation, and U.S. Bank National
Association, amending the terms of the Amended and
Restated Loan and Security Agreement dated September
30, 1997.
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
<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 August 13, 1998 by /s/ Jeffrey J. Michael
--------------------------- --------------------------
Jeffrey J. Michael
President and Chief Executive Officer
Date August 13, 1998 by /s/ Thomas S. Wargolet
--------------------------- --------------------------
Thomas S. Wargolet
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- --------
10.22 Fourth Amendment to Loan and Security Agreement dated as of
June 30, 1998, among Transition Networks, Inc., and
U.S. Bank National Association, amending the terms of the
Amended and Restated Loan and Security Agreement and Waiver
dated September 30, 1997.
10.23 Tenth Amendment to Amended and Restated Loan and Security
Agreement dated as of June 30, 1998, among Americable, Inc.,
Cable Distribution Systems, Inc., Enstar Networking Corporation,
and U.S. Bank National Association, amending the terms of the
Amended and Restated Loan and Security Agreement dated September
30, 1997.
27.1 Financial Data Schedule
Exhibit 10.22
FOURTH AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment") is
dated as of June 30, 1998, and is by and between TRANSITION NETWORKS, INC., a
Minnesota corporation (the "Borrower") and U.S. BANK NATIONAL ASSOCIATION, f/k/a
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, (the "Original Agreement") as amended
by a First Amendment dated as of May 29, 1997 a Second Amendment dated as of
September 30, 1997, and a Third Amendment dated as of March 31, 1998 (the
Original Agreement, 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 1 - AMENDMENTS TO THE LOAN AGREEMENT
Effective on the date hereof, the date "June 30, 1998" appearing in the
first line of the definition of "Termination Date" in Section 1.1 of the
Original Agreement and the date "September 30, 1998" substituted therefor.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to make and
maintain the Loans under the Loan Agreement as amended hereby, the Borrower
hereby warrants and represents to the Bank that: (a) The execution, delivery
and performance by the Borrower of this Amendment and any other documents to
which the Borrower is a party have been duly authorized by all necessary
corporate or partnership action, do not require any approval or consent of,
or any registration, qualification or filing with, any government agency or
-1-
<PAGE>
authority or any approval or consent of any other person (including, without
limitation, any stockholder or partner), do not and will not conflict with,
result in any violation of or constitute any default under, any provision of
the Borrower's articles of incorporation or bylaws, any agreement binding on
or applicable to the Borrower or any of its property, or any law or
governmental regulation or court decree or order, binding upon or applicable,
to the Borrower or of any of its property and will not result in the creation
or imposition of any security interest or other lien or encumbrance in or on
any of its property pursuant to the provisions of any agreement applicable to
the Borrower or any of its property; (b) The Loan Agreement as amended by this
Amendment is the legal, valid and binding obligations of the Borrower and is
enforceable in accordance with its terms, subject only to bankruptcy,
insolvency, reorganization, moratorium or similar laws, rulings or decisions
at the time in effect affecting the enforceability of rights or creditors
generally and to general equitable principles which may limit the right to
obtain equitable remedies.
ARTICLE III - CONDITIONS AND EFFECTIVENESS
This Amendment shall become effective on the date first set forth above,
provided, however, that the effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions:
3.1 Before and after giving effect to this Amendment, the
representations and warranties in ARTICLE IV of the Loan Agreement shall
be true and correct as though made on the date hereof except for changes
that are permitted by the terms of the Loan Agreement. The execution by
the Borrower of this Amendment shall be deemed a representation that the
Borrower has complied with the foregoing condition.
3.2 Before and after giving effect to this Amendment, no Event of
Default or no Default, shall have occurred and be continuing under the
Loan Agreement except for those expressly waived by the terms hereof. The
execution by the Borrower of this Amendment shall be deemed a
representation that the Borrower has complied with the foregoing
condition.
3.3 The Bank shall have received the following documents
appropriately completed and duly executed by the Borrower and the other
Obligors where appropriate:
(a) This Amendment appropriately completed and duly executed by
the Borrower; and
(b) Such other approvals, opinions or documents, as the Bank may
reasonably request.
-2-
<PAGE>
ARTICLE IV - GENERAL
4.1 Expenses. The Borrower agrees to reimburse the Bank upon demand
for all reasonable expenses, including reasonable fees of attorneys (who
may be employees of the Bank) and legal expenses incurred by the Bank in
the preparation, negotiation and execution of this Amendment and any other
document required to be furnished herewith, and in enforcing the
obligations of the Borrower hereunder, and to pay and save the Bank
harmless from all liability for, any stamp or other taxes which may be
payable with respect to the execution or delivery of this Amendment, which
obligations of the Borrower shall survive any termination of the Loan
Agreement.
4.2 Counterparts. This Amendment may be executed in as many
counterparts as may be deemed necessary or convenient, and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed an original but all such counterparts shall
constitute but one and the same instrument.
4.3 Severability. Any provision of this Amendment which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining portions hereof or
affecting the validity or enforceability of such provisions in any other
jurisdiction.
4.4 Law. This Amendment shall be a contract made under the laws of
the State of Minnesota, which laws shall govern all the rights and duties
hereunder.
4.5 Successors: Enforceability. This Amendment shall be binding
upon the Borrower and the Bank and their respective successors and
assigns, and shall inure to the benefit of the Borrower and the Bank and
the successors and assigns of the Bank. Except as hereby amended, the
Loan Agreement shall remain in full force and effect and is hereby
ratified and confirmed in all respects.
4.6 Recitals. The recitals hereto are incorporated herein by
reference and constitute and integral part of this Amendment.
4.7 Acknowledgement and Release. In order to induce the Bank
to enter into this Amendment, the Borrower: (a) represents and warrants
to the Bank that no events have taken place and no circumstances exist
at the date hereof which would give the Borrower the right to assert a
defense, offset or counterclaim to any claim by the Bank for payment of
the Obligations; and (b) hereby releases and forever discharges the Bank
and its successors, assigns, directors, officers, agents, employees and
participants from any and all actions, causes of action, suits,
-3-
<PAGE>
proceedings, debts, sums of money, covenants, contracts, controversies,
claims and demands, at law or in equity, which the Borrower ever had or
now has against the Bank or its successors, assigns, directors, officers,
agents, employees or participants by virtue of their relationship to the
Borrower in connection with the Loan Documents and the transactions
related thereto.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the
date first written above.
TRANSITION NETWORKS, INC.,
a Minnesota corporation
By:/s/ C.S. MONDELLI
-------------------------
C.S. Mondelli
President and
Chief Executive Officer
U.S. BANK NATIONAL ASSOCIATION, f/k/a
First Bank National Association,
a national banking association
By:/s/ KIM LEPPANEN
-------------------------
Kim Leppanen
Assistanct Vice President
-4-
Exhibit 10.23
TENTH AMENDMENT TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AND WAIVER
THIS TENTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(the "Amendment") is dated as of June 30, 1998, and is by and among AMERICABLE,
INC., a Minnesota corporation ("Americable"), CABLE DISTRIBUTION SYSTEMS, INC.,
a Georgia corporation ("Cable"), (Americable and Cable are hereinafter each
individually referred to as an "Original Borrower" and collectively as the
"Original Borrowers") ENSTAR NETWORKING CORPORATION, a Minnesota corporation
("ENC") (Americable, Cable, and ENC are hereinafter each individually referred
to as a "Borrower" and collectively as the "Borrowers") and U.S. BANK NATIONAL
ASSOCIATION, a national banking association and the successor by merger with
First Bank National Association, (the "Bank"). Capitalized terms not otherwise
expressly defined herein shall have the meanings set forth in the Loan Agreement
hereinafter described.
RECITALS
WHEREAS, the Original 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, a Seventh Amendment dated as of May 29, 1997, an
Eighth Amendment dated as of September 30, 1997, and a Ninth Amendment dated as
of March 5, 1998 (as so amended, the "Loan Agreement");
WHEREAS, the Borrows have requested and the Bank has agreed further to
amend 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 1 - AMENDMENTS TO 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 date
"June 30, 1998," appearing in the definition of "Termination Date" and the
date "September 30, 1998" substituted therefor;
-1-
<PAGE>
(b) As of the Effective Date, Section 5.5 of Supplement A attached to
the Assumption Agreement and Ninth Amendment to Amended and Restated Loan
and Security Agreement and Waiver is hereby amended in its entirety to read
as follows:
5.5 MONTHLY LOSS CALCULATION. Sustain, at any fiscal month-end,
a fiscal month loss before taxes computed on a consolidated basis for
Americable and its consolidated Subsidiaries in accordance with GAAP
greater than (i.e., a greater negative number than) the amount set
forth opposite the relevant fiscal month:
Month Loss
----- ----
July 1998 $100,000
August 1998 $100,000
September 1998 $100,000;
provided, however, that if the fiscal month loss as of any fiscal
month-end exceeds the maximum permitted fiscal month-end loss, then
Borrowers, by no later than 10 days after submitting its financial
statements to Bank, shall obtain a capital contribution from ENStar
in the amount of such excess.
ARTICLE III - REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to make and maintain
the Loans under the Loan Agreement as amended hereby, the Borrowers hereby
warrant and represent to the Bank that: (a) The execution, delivery and
performance by the Borrowers of this Amendment and any other documents to which
any Borrower is a party have been duly authorized by all necessary corporate or
partnership action, do not require any approval or consent of, or any
registration, qualification or filing with, any government agency or authority
or any approval or consent of any other person (including, without limitation,
any stockholder or partner), do not and will not conflict with, result in any
violation of or constitute any default under, any provision of such Borrower's
articles of incorporation or bylaws, any agreement binding on or applicable to
such Borrower or any of its property, or any law or governmental regulation or
court decree or order, binding upon or applicable to such Borrower or of any
of its property and will not result in the creation or imposition of any
security interest or other lien or encumbrance in or on any of its property
pursuant to the provisions of any agreement applicable to the such Borrower
or any of its property; (b) The Loan Agreement as amended by this Amendment
is the legal, valid and binding obligations of each Borrower and is enforceable
in accordance with its terms, subject only to bankruptcy, insolvency,
reorganization, moratorium or similar laws, rulings or decisions at the time in
effect affecting the enforceability of rights of creditors generally and to
general equitable principles which may limit the right to obtain equitable
remedies.
-2-
<PAGE>
ARTICLE IV - CONDITIONS AND EFFECTIVENESS
This Amendment shall become effective on the date first set forth above,
provided, however, that the effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions:
4.1 Before and after giving effect to this Amendment, the representations
and warranties in ARTICLE IV of the Loan Agreement shall be true and correct as
though made on the date hereof except for changes that are permitted by the
terms of the Loan Agreement. The execution by the Borrowers of this Amendment
shall be deemed a representation that the Borrowers have complied with the
foregoing condition.
4.2 Before and after giving effect to this Amendment, no Event of Default
or no Default, shall have occurred and be continuing under the Loan Agreement
except for those expressly waived by the terms hereof. The execution by the
Borrowers of this Amendment shall be deemed a representation that the
Borrowers have complied with the foregoing condition.
4.3 The Bank shall have received the following documents appropriately
completed and duly executed by the Borrowers and the other Obligors where
appropriate:
(a) This Amendment appropriately completed and duly executed by
the Borrowers, together with a resolution of each of the Borrowers
authorizing the execution and delivery of this Amendment in form and
substance satisfactory to the Bank;
(b) An Acknowledgment and Consent duly executed by ENStar in form
and substance satisfactory to the Bank; and
(c) An extension fee in the amount of $5,000, the receipt of which
is hereby acknowledged; and
(d) Such other approvals, opinions or documents, as the Bank may
reasonably request.
-3-
<PAGE>
ARTICLE V - GENERAL
5.1 Expenses. The Borrowers jointly and severally agree to reimburse the
Bank upon demand for all reasonable expenses, including reasonable fees of
attorneys (who may be employees of the Bank) and legal expenses incurred by the
Bank in the preparation, negotiation and execution of this Amendment and any
other document required to be furnished herewith, and in enforcing the
obligations of the Borrowers hereunder, and to jointly and severally pay and
save the Bank harmless from all liability for, any stamp or other taxes which
may be payable with respect to the execution or delivery of this Amendment,
which obligations of the Borrowers shall survive any termination of the Loan
Agreement.
5.2 Counterparts. This Amendment may be executed in as many counterparts
as may be deemed necessary or convenient, and by the different parties hereto
on separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
5.3 Severability. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining portions hereof or affecting the validity or enforceability of such
provisions in any other jurisdiction.
5.4 Law. This Amendment shall be a contract made under the laws of the
State of Minnesota, which laws shall govern all the rights and duties hereunder.
5.5 Successors: Enforceability. This Amendment shall be binding upon the
Borrowers and the Bank and their respective successors and assigns, and shall
inure to the benefit of the Borrowers and the Bank and the successors and
assigns of the Bank. Except as hereby amended, the Loan Agreement shall remain
in full force and effect and is hereby ratified and confirmed in all respects.
5.6 Recitals. The recitals hereto are incorporated herein by reference and
constitute an integral part of this Amendment.
5.7 Acknowledgement and Release. In order to induce the Bank to enter into
this Amendment, the Borrowers: (a) represent and warrant to the Bank that no
events have taken place and no circumstances exist at the date hereof which
would give the Borrowers the right to assert a defense, offset or counterclaim
to any claim by the Bank for payment of the Obligations; and (b) hereby release
and forever discharge the Bank and its successors, assigns, directors, officers,
agents, employees and participants from any and all actions, causes of action,
suits, proceedings, debts, sums of money, covenants, contracts, controversies,
claims and demands, at law or in equity, which the Borrowers ever had or now
have against the Bank or its successors, assigns, directors, officers, agents,
employees or participants by virtue of their relationship to the Borrowers in
connection with the Loan Documents and the transactions related thereto.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
AMERICABLE, INC., a Minnesota corporation
By: /s/ THOMAS S. WARGOLET
------------------------
Thomas S. Wargolet
Vice President, Finance
CABLE DISTRIBUTION SYSTEMS, INC.,
a Georgia corporation
By: /s/ THOMAS S. WARGOLET
------------------------
Thomas S. Wargolet
Vice President, Finance
ENSTAR NETWORKING CORPORATION,
a Minnesota corporation
By: /s/ THOMAS S. WARGOLET
------------------------
Thomas S. Wargolet
Vice President, Finance
U.S. BANK NATIONAL ASSOCIATION,
a national banking association
and the successor by merger with
First Bank National Association
By: /s/ KIM LEPPANEN
------------------------
Kim Leppanen
Assistanct Vice President
-5-
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