ENSTAR GROUP INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

OR

[ ] 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 0-07477

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THE ENSTAR GROUP, INC.
(Exact name of registrant as specified in its charter)

GEORGIA 63-0590560
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

401 MADISON AVENUE
MONTGOMERY, ALABAMA 36104
(Address of principal executive offices)
(334) 834-5483
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required 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 [ ]

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]

The number of shares of Registrant's Common Stock, $.01 par value per
share, outstanding at November 9, 2004 was 5,517,909.

THIS FORM 10-Q AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY THE
ENSTAR GROUP, INC. OR MEMBERS OF ITS MANAGEMENT TEAM CONTAIN STATEMENTS WHICH
MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES
ACT OF 1933, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, 15 U.S.C.A. SECTIONS 77Z-2 AND 78U-5
(SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF
OR CURRENT EXPECTATIONS OF THE ENSTAR GROUP, INC. AND MEMBERS OF ITS MANAGEMENT
TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THE ENSTAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003, AND ARE
HEREBY INCORPORATED BY REFERENCE. THE ENSTAR GROUP, INC. UNDERTAKES NO
OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED
ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE
OPERATING RESULTS OVER TIME.
i

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial
statements.
1

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of the consolidated financial
statements.
2

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

The accompanying notes are an integral part of the consolidated financial
statements.
3

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of the consolidated financial
statements.
4

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1: GENERAL

The Enstar Group, Inc. (the "Company") is a publicly traded company engaged
in the operation of several equity affiliates in the financial services
industry. Enstar also continues its active search for one or more additional
operating businesses which meet its acquisition criteria.

The Company, through the operations of its partially owned equity
affiliates, Castlewood Holdings Limited ("Castlewood Holdings") and B.H.
Acquisition Limited ("B.H. Acquisition"), and their subsidiaries, has acquired
and manages books of reinsurance business from the international markets. In
general, reinsurance is an arrangement in which the reinsurer agrees to
indemnify an insurance or reinsurance company against all or a portion of the
risks underwritten by such insurance or reinsurance company under one or more
insurance or reinsurance contracts.

The Company consolidates JCF CFN LLC and related entities (collectively,
the "JCF CFN Entities"). The JCF CFN Entities were formed to serve as members of
Green Tree Investment Holdings LLC (formerly known as CFN Investment Holdings
LLC) and related entities (collectively, "Green Tree"), which, in turn, were
formed to effect the acquisition of a portfolio of home equity and manufactured
housing loan securities and the associated servicing businesses from Conseco
Finance Corp. ("Conseco Finance"). In July 2004, the JCF CFN Entities completed
the sale of their entire interests in Green Tree.

The condensed consolidated financial statements of the Company are
unaudited and, in the opinion of management, include all adjustments consisting
solely of normal recurring adjustments necessary to fairly state the Company's
financial condition, results of operations and cash flows for the interim
period. The results of operations for the three and nine months ended September
30, 2004 are not necessarily indicative of the results to be expected for the
full year. These statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 2003
included in the Company's Form 10-K as filed with the Securities and Exchange
Commission on March 15, 2004 under the Securities Exchange Act of 1934, as
amended.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation -- The condensed consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary,
Enstar Financial Services, Inc., an inactive company. Since adoption of
Financial Accounting Standards Board Interpretation No. 46R, "Consolidation of
Variable Interest Entities" in 2003, the Company has consolidated the JCF CFN
Entities, recording a minority interest for Castlewood Holdings' 40% interest.
All significant intercompany balances and transactions have been eliminated in
consolidation.

(b) Use of Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The estimates susceptible to significant change are
those related to the valuation allowance for deferred tax assets and loss and
loss adjustment expenses included in earnings of partially owned equity
affiliates.

(c) Cash Equivalents -- Cash equivalents consist of short term, highly
liquid investments with original purchased maturities of three months or less.

(d) Partially Owned Equity Affiliates -- Partially owned equity affiliates
are accounted for under the equity method of accounting. Equity method
investments are recorded at cost and are adjusted periodically to recognize the
Company's proportionate share of the investee's income or loss, additional
contributions made

5

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and dividends and capital distributions received. In the event any of the
partially owned equity affiliates were to incur a loss and the Company's
cumulative proportionate share of the loss exceeded the carrying amount of the
equity method investment, application of the equity method would be suspended
and the Company's proportionate share of further losses would not be recognized
until the Company committed to provide further financial support to the
investee. The Company would resume application of the equity method once the
investee becomes profitable and the Company's proportionate share of the
investee's earnings equals its cumulative proportionate share of losses that
were not recognized during the period the application of the equity method was
suspended.

(e) Comprehensive Income -- The Company reports comprehensive income in
accordance with Statement of Financial Accounting Standards ("SFAS") 130,
"Reporting Comprehensive Income," which defines comprehensive income as certain
changes in equity from non-owner sources. The Company recorded other
comprehensive income from its partially owned equity affiliates. This other
comprehensive income arose from unrealized holding gains and losses from debt
and equity securities that were classified as available-for-sale and were
carried at fair value, an unrealized loss on a cash flow hedge and currency
translation adjustments resulting from the translations of financial information
of subsidiaries into U.S. dollars.

(f) Revenue Recognition -- Revenue includes interest income earned from
cash, cash equivalents and certificates of deposit and the Company's
proportionate share of earnings from partially owned equity affiliates. Interest
income is recorded when earned. The Company's proportionate share of earnings
from partially owned equity affiliates is recorded as such earnings are
recognized by the partially owned equity affiliate with the exception of B-Line
LLC ("B-Line"). Prior to its disposal of B-Line in the fourth quarter of 2003,
the Company accounted for its investment in B-Line three months in arrears.

(g) Stock-Based Compensation -- For the three and nine months ended
September 30, 2004 and 2003, the Company utilized various stock-based
compensation plans for the benefit of non-employee directors and certain
officers. In 1997, the Company adopted the Deferred Compensation and Stock Plan
for Non-Employee Directors and a long-term incentive program made up of three
stock option/incentive plans. Additionally, in 2001, the Company adopted the
2001 Outside Directors' Stock Option Plan and amended certain provisions of an
existing plan. The Company accounts for these plans under the intrinsic value
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations. Compensation expense for the Deferred Compensation and
Stock Plan for Non-Employee Directors is recognized at the first of every
quarter for retainer fees and upon the occurrence of various Board of Director
and committee meetings. There is no compensation expense recognized in net
earnings for grants under stock option/incentive plans that had an exercise
price equal to the market value of the Company's underlying common stock on the
date of grant. In connection with options granted in November 2001, the market
value of the Company's common stock on the date of grant exceeded the exercise
price, resulting in a charge to earnings for that year. In addition,
compensation expense was recognized over the vesting life of these options
through June 2004. Had compensation costs for grants under the Company's stock
option/incentive plans been determined based on the fair value recognition
provision of SFAS 123, "Accounting for Stock-Based Compensation," the

6

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's pro forma net income and net income per share for the three and nine
months ended September 30, 2004 and 2003 would have been as follows:

NOTE 3: PARTIALLY OWNED EQUITY AFFILIATES

B.H. ACQUISITION

In July 2000, the Company, through B.H. Acquisition, a joint venture with
Castlewood Limited ("Castlewood") and an entity controlled by Trident II, L.P.
("Trident"), acquired as an operating business two reinsurance companies,
Brittany Insurance Company Ltd. ("Brittany") and Compagnie Europeenne
d'Assurances Industrielles S.A. ("CEAI"). Brittany and CEAI are principally
engaged in the active management of books of reinsurance business from
international markets. The Company owns 50% of the voting stock and a 33%
economic interest in B.H. Acquisition. As part of the transaction, Castlewood
owns 33% of the voting stock and a 45% economic interest in B.H. Acquisition.
The Company's ownership in B.H. Acquisition is accounted for using the equity
method of accounting.

CASTLEWOOD HOLDINGS LIMITED

In November 2001, the Company, together with Trident and the shareholders
and senior management of Castlewood (the "Castlewood Principals"), completed the
formation of a new venture, Castlewood Holdings, to acquire and manage insurance
and reinsurance companies, including companies in "run-off" (insurance and
reinsurance companies that have ceased the underwriting of new policies), and to
provide management, consulting and other services to the insurance and
reinsurance industry (the "Castlewood Holdings Transaction"). The Company owns
50% of the voting stock of Castlewood Holdings and the Castlewood Principals and
Trident each own 25% of Castlewood Holdings' voting stock. Castlewood is a
private Bermuda-based firm, experienced in managing and acquiring reinsurance
operations. The Company's ownership in Castlewood Holdings is accounted for
using the equity method of accounting.

7

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As a result of this transaction, the Company's 33% direct economic interest
in B.H. Acquisition increased by an additional 15% indirect economic interest
through Castlewood Holdings. The Company's combined voting interest in B.H.
Acquisition is limited to 50%.

Immediately following the closing of the Castlewood Holdings Transaction,
Castlewood Holdings completed the acquisition of two reinsurance companies,
River Thames Insurance Company Limited ("River Thames"), based in London,
England, and Overseas Reinsurance Corporation Limited ("Overseas Reinsurance"),
based in Bermuda.

In August 2002, Castlewood Holdings purchased Hudson Reinsurance Company
Limited, a Bermuda-based company.

Also in August 2002, Castlewood Holdings capitalized Fitzwilliam (SAC)
Insurance Limited ("Fitzwilliam"), a wholly owned subsidiary. Fitzwilliam, based
in Bermuda, offers specialized reinsurance protections to related companies,
clients of Castlewood Holdings and other third-party companies.

In March 2003, Castlewood Holdings and Shinsei Bank, Limited ("Shinsei")
completed the acquisition of all of the outstanding capital stock of The Toa-Re
Insurance Company (UK) Limited ("Toa-UK"), a London-based company, for
approximately $46 million. Toa-UK underwrote reinsurance business throughout the
world between 1980 and 1994, when it stopped writing new business and is
currently operating in run-off. The acquisition was effected through Hillcot
Holdings Ltd. ("Hillcot"), a newly formed Bermuda company, in which Castlewood
Holdings has a 50.1% economic interest and a 50% voting interest. Upon
completion of the transaction, Toa-UK's name was changed to Hillcot Re Limited.
Hillcot is included in Castlewood Holdings' consolidated financial statements,
with the remaining 49.9% interest reflected as minority interest. J. Christopher
Flowers ("Mr. Flowers"), a member of the Company's board of directors and the
Company's largest shareholder, is a director of Shinsei. Castlewood Holdings'
results of operations include the results of Toa-UK from the date of acquisition
in March 2003.

In August 2004, Castlewood Holdings awarded a grant of 744 shares to
certain of their senior employees under a stock-based compensation plan. The
plan allows total awards up to a maximum of 7.5% of the total issued share
capital of Castlewood Holdings. Of the shares awarded, 242 shares had vested as
of September 30, 2004. The remaining shares granted under the award will vest
over various periods through April 2009. As a result of the award in August
2004, the Company's economic interest in Castlewood Holdings of 33 1/3% was
diluted by 0.44% to 32.89% as of September 30, 2004. As shares issued under the
August 2004 award vest and as additional shares are awarded in the future, the
Company's economic interest could decrease to a minimum of 30.83%. The Company's
voting interest will remain at 50%.

In September 2004, Castlewood Holdings, through one of its subsidiaries,
invested approximately $5.8 million in exchange for a 27% interest in Cassandra
Equity LLC ("Cassandra"). Cassandra was formed to invest in certain marketable
securities. J.C. Flowers I LP also owns a 27% interest in Cassandra. J.C.
Flowers I LP is a private investment fund, the general partner of which is JCF
Associates I LLC. Mr. Flowers is the managing member of JCF Associates I LLC.

B-LINE

The Company owned membership units of B-Line from November 1998 to December
2003. Based in Seattle, Washington, B-Line provides services to credit card
issuers and other holders of similar receivables. B-Line also purchases credit
card receivables and recovers payments on these accounts. In December 2003, the
Company sold its entire interest in B-Line to B-Line Holdings LLC, an affiliate
of Golden Gate Capital, for cash of approximately $7.8 million, net of expenses.

8

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PARTIALLY OWNED EQUITY AFFILIATES OF JCF CFN

During 2003, the Company funded approximately $15.3 million to the JCF CFN
Entities in exchange for a 60% interest in such entities. In addition,
Castlewood Holdings funded approximately $10.2 million to the JCF CFN Entities
in exchange for a 40% interest.

The JCF CFN Entities invested in Green Tree together with affiliates of
J.C. Flowers I LP, affiliates of Fortress Investment Group LLC and affiliates of
Cerberus Capital Management, L.P. In June 2003, the JCF CFN Entities invested
approximately $25.1 million in exchange for a 3.995% interest in Green Tree.
Green Tree completed the purchase of certain assets of Conseco Finance for
approximately $630 million in cash plus certain assumed liabilities. The assets
consist primarily of a portfolio of home equity and manufactured housing loan
securities as well as the associated servicing businesses. J.C. Flowers I LP is
a private investment fund, the general partner of which is JCF Associates I LLC.
The managing member of JCF Associates I LLC is Mr. Flowers, a member of the
Company's board of directors and the Company's largest shareholder. The JCF CFN
Entities accounted for the investment in Green Tree under the equity method of
accounting. Because the JCF CFN Entities are consolidated, Green Tree was
treated as a partially owned equity affiliate of the Company.

In July 2004, the JCF CFN Entities, along with certain affiliates of J.C.
Flowers I LP, completed the sale of their entire interests in Green Tree to FIT
CFN Holdings LLC, an affiliate of Fortress Investment Group LLC, and Cerberus
Green Tree Investments, LLC and Cerberus JCF Coinvest, LLC, each an affiliate of
Cerberus Capital Management L.P. In exchange for their entire interest, the JCF
CFN Entities received aggregate sales proceeds of approximately $40 million in
cash. Of this amount, Castlewood Holdings received aggregate sales proceeds of
approximately $16 million. The proceeds received by the JCF CFN Entities at
completion of the sale were reduced by prior cash distributions of approximately
$7.2 million made by Green Tree during 2004. The Company recorded a pre-tax
realized gain of approximately $6.9 million on the sale.

SUMMARIZED FINANCIAL INFORMATION

In accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock", the Company prepared summarized financial
information for B.H. Acquisition and Castlewood Holdings as of September 30,
2004 and December 31, 2003 and for the three and nine months ended September 30,
2004 and 2003, respectively. Summarized financial information for Green Tree for
2004 is presented for the period from January 1 to July 15. The information for
2003 is presented as of December 31 and for the three months ended September 30
and the period from June 23 to September 30 (Green Tree was acquired in June
2003 and sold in July 2004). Summarized information for B-Line is presented for
the three and nine months ended September 30, 2003 (the Company sold its entire
interest in B-Line in December 2003). The summarized financial information
presented below for B.H. Acquisition, Castlewood Holdings and Green Tree is
derived from their respective audited financial statements for December 31, 2003
and their unaudited quarterly and/or monthly financial statements. The
summarized financial information presented below for B-Line is derived from its
unaudited quarterly financial statements.

9

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's consolidated accumulated deficit includes undistributed
earnings of its partially owned equity affiliates of approximately $15.4 million
and approximately $18.9 million at September 30, 2004 and December 31, 2003,
respectively.

10

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4: COMMITMENTS AND CONTINGENCIES

The Company is currently negotiating the renewal of its lease of an office
building which serves as the corporate headquarters. Additionally, pursuant to
an oral agreement, the Company leases space in a warehouse at 703 Howe Street,
Montgomery, Alabama on a month-to-month basis. The Company leases the office
building and warehouse space from unaffiliated third parties for $2,750 and $350
per month, respectively. In February 2002, the Company entered into an agreement
with J.C. Flowers & Company, LLC running through November 2005 for the use of
certain office space and administrative services from J.C. Flowers & Company,
LLC for an annual payment of $66,000. J.C. Flowers & Company, LLC is managed by
Mr. Flowers, a member of the Company's board of directors and the Company's
largest shareholder.

NOTE 5: INCOME TAXES

Income tax expense was approximately $2.1 million and approximately $3.4
million for the three and nine months ended September 30, 2004, respectively,
compared to $634,000 and approximately $1.9 million for the same periods in
2003. The Company's effective tax rates for 2004 and 2003 differ from the
statutory rate primarily due to changes in the valuation allowance related to
deferred tax assets and state income taxes.

The Company provides U.S. taxes for the anticipated repatriation of certain
earnings of foreign subsidiaries. A valuation allowance is recorded when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of the deferred tax assets depends on
the ability to generate sufficient taxable income in the future in the
appropriate jurisdictions. The Company has provided a valuation allowance for
operating losses of partially owned foreign subsidiaries and tax credits at
September 30, 2004 and December 31, 2003. During the nine months ended September
30, 2004, the Company increased the valuation allowance from approximately $7.2
million to approximately $7.6 million.

In the second quarter of 2004 additional paid-in capital increased by
$606,000 as a result of an income tax benefit. This income tax benefit resulted
from tax deductions triggered by the exercise of stock options and the issuance
of shares of common stock from the Deferred Compensation and Stock Plan for
Non-Employee Directors.

NOTE 6: SEGMENT INFORMATION

The Company separately evaluates the performance of B.H. Acquisition and
Castlewood Holdings based on the different services provided by each of the
entities, and such evaluation is based on 100% of the entities' results of
operations. Prior to its sale in December 2003, the Company also separately
evaluated the performance of B-Line. The Company also reviews separate financial
results for JCF CFN and Enstar's corporate activity.

A reconciliation of the consolidated financial information by segment to
the Company's consolidated financial statements as of September 30, 2004 and
December 31, 2003 and for the three and nine months ended September 30, 2004 and
2003, respectively, is as follows:

11

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's economic ownership percentage in Castlewood Holdings
decreased from 33 1/3% to 32.89% during the three months ended September 30,
2004. The Company's economic ownership percentage used in the table for the nine
months ended September 30, 2004 represents a weighted average for the period
(Note 3).

13

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A minority interest for Castlewood Holdings' portion of earnings from the
JCF CFN Entities is reported in the Corporate column.

NOTE 7: STOCK COMPENSATION

In May 2004 Mr. Jeffrey S. Halis resigned from the Company's board of
directors. Upon his resignation, Mr. Halis exercised 25,000 stock options in
connection with the 1997 Amended Outside Directors' Stock Option Plan at an
exercise price of $10.8125 per share and 15,000 stock options in connection with
the 2001 Outside Directors' Stock Option Plan at an exercise price of $18.90 per
share. In addition, 12,156 shares of the Company's common stock were issued to
Mr. Halis pursuant to the terms of the Deferred Compensation and Stock Plan for
Non-Employee Directors.

NOTE 8: INCOME PER SHARE

The table below illustrates the reconciliation between net income per
common share -- basic and net income per common share -- assuming dilution for
the three and nine months ended September 30, 2004 and 2003. Net income per
common share -- basic is computed by dividing net income by the weighted average
shares outstanding. Net income per common share -- assuming dilution is computed
by dividing net income by the sum of the weighted average shares outstanding and
common share equivalents. Common share equivalents consist of stock units
deferred under the Deferred Compensation and Stock Plan for Non-Employee
Directors and stock options granted under the Company's stock option/incentive
plans.

15

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9: SUBSEQUENT EVENTS

In October 2004, the Company announced that its partially owned equity
affiliate, Castlewood Holdings, had reached a definitive agreement and had
completed the acquisition of Turegum Insurance Company, a subsidiary of Zurich
Insurance Company. The acquisition was effected through Harper Holding Sarl, a
newly formed company which is wholly owned by Castlewood Holdings.

16

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

Board of Directors and Shareholders of
The Enstar Group, Inc.
Montgomery, Alabama

We have reviewed the accompanying condensed consolidated balance sheet of
The Enstar Group, Inc. and Subsidiaries ("Enstar") as of September 30, 2004, and
the related condensed consolidated statements of income and comprehensive income
for the three-month and nine-month periods ended September 30, 2004 and 2003,
and of cash flows for the nine-month periods ended September 30, 2004 and 2003.
These interim financial statements are the responsibility of Enstar's
management.

We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America.

We have previously audited, in accordance with standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Enstar as of December 31, 2003, and the related consolidated statements
of income, comprehensive income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated March 12, 2004,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2003 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia
November 9, 2004

17

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Through the operations of the Company's partially owned equity affiliates,
Castlewood Holdings and B.H. Acquisition, and their subsidiaries, the Company
has acquired and manages books of reinsurance business from the international
markets. In general, reinsurance is an arrangement in which the reinsurer agrees
to indemnify an insurance or reinsurance company against all or a portion of the
risks underwritten by such insurance or reinsurance company under one or more
insurance or reinsurance contracts. For a discussion of certain risks and
uncertainties relating to the Company's participation in the reinsurance
industry see "Safe Harbor Compliance Statement for Forward-Looking Statements"
included as Exhibit 99.1 to The Enstar Group, Inc. Annual Report on Form 10-K
for the fiscal year ended December 31, 2003, which is hereby incorporated by
reference.

The Company is also actively engaged in the search for one or more
additional operating businesses which meet the Company's acquisition criteria.

CRITICAL ACCOUNTING POLICIES

ENSTAR

In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The most significant accounting estimates inherent
in the preparation of the Company's consolidated financial statements include
estimates associated with its evaluation of its income tax valuation allowance.

Income Tax Valuation Allowance -- The Company recognizes deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. The effect of
temporary differences on the financial statements includes certain operating
losses of partially owned foreign subsidiaries and tax credit carryforwards. The
Company has established a valuation allowance for the uncertainty of the
realization of these and other net deferred tax assets. However, utilization of
the remaining deferred tax assets at September 30, 2004 is based on management's
assessment of the Company's earnings history, expectations of future taxable
income, and other relevant considerations.

CASTLEWOOD HOLDINGS AND B.H. ACQUISITION

Certain amounts in Castlewood Holdings' and B.H. Acquisition's consolidated
financial statements are the result of transactions that require the use of best
estimates and assumptions to determine reported values. These amounts could
ultimately be materially different than what has been provided in their
consolidated financial statements. The assessment of loss reserves and
reinsurance recoverable are considered to be the values requiring the most
inherently subjective and complex estimates. In addition, the assessment of the
possible impairment of goodwill involves certain estimates and assumptions. As
such, the accounting policies for these amounts are of critical importance to
their consolidated financial statements.

Loss and Loss Adjustment Expenses -- Because a significant amount of time
can lapse between the assumption of risk, the occurrence of a loss event, the
reporting of the event to an insurance or reinsurance company and the ultimate
payment of the claim on the loss event, Castlewood Holdings' and B.H.
Acquisition's liability for unpaid losses and loss expenses is based largely
upon estimates. Castlewood Holdings' and B.H. Acquisition's management must use
considerable judgment in the process of developing these estimates. The
liability for unpaid losses and loss expenses for property and casualty business
includes amounts determined from loss reports on individual cases and amounts
for losses incurred but not reported. Such reserves are reviewed and estimated
by management quarterly based upon reports received from ceding companies and
annually based upon independent actuarial estimates of ultimate unpaid losses.
Castlewood Holdings' and B.H. Acquisition's ultimate liability may be
significantly greater than or less than

18

the amount estimated, with any adjustments in such estimates being reflected in
the periods in which they become known.

Reinsurance Balances Receivable -- One of the ways loss exposure is managed
is through the use of reinsurance. While reinsurance arrangements are designed
to limit losses and to permit recovery of a portion of direct unpaid losses,
reinsurance does not relieve Castlewood Holdings or B.H. Acquisition of their
liabilities to their insureds. Accordingly, loss reserves represent total gross
losses, and reinsurance recoverable represents anticipated recoveries of a
portion of those unpaid losses as well as amounts recoverable from reinsurers
with respect to claims, which have already been paid.

Goodwill -- On January 1, 2002, Castlewood Holdings and B.H. Acquisition
adopted SFAS 142, "Goodwill and Other Intangible Assets." This statement
requires that goodwill be assessed for impairment on at least an annual basis
and that negative goodwill be reversed immediately upon adoption. In assessing
the recoverability of Castlewood Holdings' goodwill, Castlewood Holdings must
make assumptions regarding estimated future cash flows to determine the fair
value of the respective assets. If these estimates or their related assumptions
change in the future, Castlewood Holdings may be required to record impairment
charges for these assets.

RECENT DEVELOPMENTS

In October 2004, the Company announced that its partially owned equity
affiliate, Castlewood Holdings, had reached a definitive agreement and had
completed the acquisition of Turegum Insurance Company, a subsidiary of Zurich
Insurance Company. The acquisition was effected through Harper Holding Sarl, a
newly formed company which is wholly owned by Castlewood Holdings.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary uses of liquidity include, but are not limited to,
funding normal operating expenses as well as various expenses incurred in
connection with the Company's search for one or more suitable acquisitions. In
addition, the Company uses cash on hand to fund commitments made in connection
with the purchase of its partially owned equity affiliates. The primary sources
of the Company's liquidity include the receipt of dividends and distributions
from partially owned equity affiliates.

Net cash provided by operating activities decreased from approximately
$17.7 million for the nine months ended September 30, 2003 to approximately $8.6
million for the same period in 2004. This substantial decrease was primarily due
to the receipt of approximately $20.8 million in dividends from Castlewood
Holdings in 2003, compared to the receipt of distributions of approximately $7.2
million from Green Tree and a $3.0 million dividend from Castlewood Holdings in
2004.

Net cash provided by investing activities was approximately $32.8 million
for the nine months ended September 30, 2004 and consisted of proceeds received
from the sale of Green Tree. In July 2004, the JCF CFN Entities, along with
certain affiliates of J.C. Flowers I LP, completed the sale of their entire
interests in Green Tree to FIT CFN Holdings LLC, an affiliate of Fortress
Investment Group LLC, and Cerberus Green Tree Investments, LLC and Cerberus JCF
Coinvest, LLC, each an affiliate of Cerberus Capital Management L.P. In exchange
for their entire interests, the JCF CFN Entities received aggregate sales
proceeds of approximately $40.0 million in cash. The proceeds received by the
JCF CFN Entities at completion of the sale were reduced by cash distributions of
approximately $7.2 million made by Green Tree in 2004 prior to the completion of
the sale.

For the nine months ended September 30, 2003, net cash used in investing
activities was approximately $31.9 million. During that period the Company
funded capital contributions to Castlewood Holdings of approximately $7.2
million and the JCF CFN Entities invested approximately $24.7 million in Green
Tree.

Net cash used in financing activities was approximately $15.6 million for
the nine months ended September 30, 2004 compared to net cash provided by
financing activities of approximately $10.0 million for the same period in 2003.
During 2004, approximately $16.1 million was distributed to Castlewood Holdings
as the minority interest portion of the approximately $40.0 million in
distributions received from Green Tree
19

during 2004. This amount was partially offset by the receipt of $555,000 from
the exercise of certain stock options in May 2004. Net cash provided by
financing activities of approximately $10.0 million in 2003, representing
Castlewood Holdings' minority interest capital contribution in the JCF CFN
Entities of approximately $10.2 million less minority interest distributions to
Castlewood Holdings of $194,000.

The Company's assets, aggregating approximately $148.1 million at September
30, 2004, include approximately $81.7 million in cash and cash equivalents and
approximately $4.1 million in short-term certificates of deposit. The Company
believes its current liquidity is adequate to fund any foreseeable cash
requirements.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The Company is currently negotiating the renewal of its lease of an office
building which serves as the corporate headquarters. Additionally, pursuant to
an oral agreement, the Company leases space in a warehouse at 703 Howe Street,
Montgomery, Alabama on a month-to-month basis. The Company leases the office
building and warehouse space from unaffiliated third parties for $2,750 and $350
per month, respectively. The Company believes the rental amounts are competitive
with market rates and that the cancellation or termination of either of these
leases would not have a material adverse effect on the Company's results of
operations. In February 2002, the Company entered into an agreement with J.C.
Flowers & Company, LLC running through November 2005 for the use of certain
office space and administrative services from J.C. Flowers & Company, LLC for an
annual payment of $66,000. J.C. Flowers & Company, LLC is managed by Mr.
Flowers, a member of the Company's board of directors and the Company's largest
shareholder.

RESULTS OF OPERATIONS

The Company reported net income of approximately $2.4 million and
approximately $4.2 million for the three and nine months ended September 30,
2004, respectively, compared to net income of $817,000 and approximately $3.0
million for the same periods in the prior year. The changes in net income for
the three and nine month periods ended September 30, 2004 compared to the same
periods in the prior year were primarily attributable to the gain on the sale of
Green Tree of approximately $6.9 million.

Interest income was $259,000 and $637,000 for the three and nine months
periods ended September 30, 2004, respectively, compared to $176,000 and
$655,000 for the same periods in the prior year. Interest income was earned from
cash, cash equivalents and certificates of deposit. Interest income increased
during the three month period ended September 30, 2004 as a result of the
receipt of approximately $24.0 million in July 2004, representing the Company's
share of proceeds from the sale of Green Tree.

Earnings (losses) of partially owned equity affiliates were $(237,000) and
approximately $4.7 million for the three and nine month periods ended September
30, 2004, respectively, compared to approximately $2.5 million and approximately
$6.9 million for the same periods in the prior year. The Company recorded equity
in losses of $(50,000) and $(295,000) from B.H. Acquisition for the three and
nine month periods ended September 30, 2004, respectively, compared to equity in
losses of $(165,000) and $(229,000) for the same periods in 2003. The Company
recorded equity in losses of $(447,000) and equity in earnings of $783,000 from
Castlewood Holdings for the three and nine months ended September 30, 2004,
respectively, compared to equity in earnings of $651,000 and approximately $4.1
million for the same periods in 2003. The Company's equity in earnings from
B-Line was $458,000 and approximately $1.1 million for the three and nine months
ended September 30, 2003 (the Company sold its entire interest in B-Line in
December 2003). The Company reported equity in earnings of $260,000 and
approximately $4.3 million from Green Tree for the period from July 1 to July
15, 2004 and for the period from January 1 to July 15, 2004, respectively, (the
Company sold its entire interest in Green Tree in July 2004) compared to
approximately $1.6 million and approximately $2.0 million for the three months
ended September 30, 2003 and for the period from June 23, 2003 to September 30,
2003, respectively (the Company's made its investment in Green Tree in June
2003). The Company's reported income was reduced by approximately $1.9 million
and approximately $3.0 million to reflect Castlewood Holdings' minority interest
in Green Tree for the three and nine months ended

20

September 30, 2004, respectively, compared to $631,000 and $750,000 for the same
periods in the prior year. For further discussion of the reasons underlying the
changes in earnings (losses) from B.H. Acquisition and Castlewood Holdings, see
"-- Results of Operations -- Partially Owned Equity Affiliates".

Other income consists primarily of investment management fees charged to
Castlewood Holdings, one of the Company's partially owned equity affiliates.

General and administrative expenses were $610,000 and approximately $2.1
million for the three and nine month periods ended September 30, 2004,
respectively, compared to $714,000 and approximately $2.3 million for the same
periods in 2003. Of these amounts, $315,000 and $908,000 related to employee
expenses, including non-cash compensation, for the three and nine month periods
ended September 30, 2004, respectively, compared to $340,000 and approximately
$1.1 million for the same periods in 2003. General and administrative expenses
also include legal and professional fees as well as travel expenses incurred in
connection with the Company's search for one or more additional operating
companies. Additionally, the Company incurs legal and professional fees in
connection with reporting requirements associated with being a publicly traded
company, and in connection with handling various other accounting and tax
matters. Legal and professional fees and travel expenses were $153,000 and
$727,000 for the three and nine months ended September 30, 2004, respectively,
compared to $208,000 and $705,000 for the same periods in 2003.

Income tax expense was approximately $2.1 million and approximately $3.4
million for the three and nine months ended September 30, 2004, respectively,
compared to $634,000 and approximately $1.9 million for the same periods in
2003. The Company's effective tax rates for 2004 and 2003 differ from the
statutory rate primarily due to changes in the valuation allowance related to
deferred tax assets and state income taxes.

RESULTS OF OPERATIONS -- PARTIALLY OWNED EQUITY AFFILIATES

Since a substantial portion of the Company's results of operations are
comprised of the results of operations of Castlewood Holdings and B.H.
Acquisition, the following additional summary information is provided with
respect to those companies' results of operations:

CASTLEWOOD HOLDINGS

Castlewood Holdings reported net earnings of $1.5 million and $6.8 million
for the three and nine months ended September 30, 2004, respectively, compared
to net earnings of $2.0 million and $12.2 million for the same periods in 2003.
The reduction in earnings of $5.4 million for the nine months ended September
30, 2004 was due to a combination of reduced consulting fees and increased
salary and benefit costs.

Underwriting income was $1.9 million and $6.1 million for the three and
nine months ended September 30, 2004, respectively, compared to $2.5 million and
$5.2 million for the same periods in 2003. The increase for the nine months
ended September 2004 over 2003 is due primarily to the inclusion of Hillcot Re
results for a full nine months versus only six months in 2003.

Castlewood Holdings earned consulting fees of $4.8 million and $15.5
million for the three and nine months ended September 30, 2004, respectively,
compared to $6.0 million and $19.9 million for the same periods in 2003.
Castlewood Holdings generates its consulting fees based on a combination of
fixed and success based fee arrangements. Consulting income will vary dependent
on the success and timing of completion of success based fee arrangements.
Included in this amount were $313,000 and $938,000 in consulting fees charged to
B.H. Acquisition, a partly-owned company, for each of the three and nine months
ended September 30, 2004 and 2003, respectively.

Castlewood Holdings' share of equity in earnings from its partly-owned
companies was $1.8 million and $2.8 million for the three and nine months ended
September 30, 2004, respectively, and $298,000 and $211,000 for the same periods
in 2003. This amount represents Castlewood Holdings' proportionate share of
equity in the earnings of B.H. Acquisition, the JCF CFN Entities, and Cassandra
Equity LLC. The increase in 2004 compared to 2003 was primarily due to a
substantial increase in equity in earnings from the JCF CFN Entities for the
three months ended September 2004. Castlewood Holdings' equity in earnings for
this period

21

included $2.6 million resulting from the JCF CFN Entities' gain on the sale of
their interest in Green Tree recorded in July 2004.

Net investment income, excluding unrealized gains and losses, was $3.2
million and $5.9 million for the three and nine months ended September 30, 2004,
respectively, compared to net investment income of $1.2 million and $6.0 million
for the same periods in 2003. Interest income was earned from cash and cash
equivalents and debt securities.

Salaries and benefits were $6.4 million and $14.8 million for the three and
nine months ended September 30, 2004, respectively, compared to $4.5 million and
$8.8 million for the same periods in 2003. Castlewood Holdings is a service
based company and as such employee salaries and benefits is its largest cost.
During the three month period ended September 30, 2004, the Company implemented
an employee share plan whereby the Company has the ability to grant shares to
employees up to a maximum of 7.5% of the Company's outstanding ordinary shares.
During the quarter ended September 30, 2004, the Company granted shares to
existing employees comprising 3.82% of the maximum 7.5%. These shares vest over
a period of 5 years. The charge for the quarter associated with these shares was
$2.0 million. The charge is being amortized to income over the vesting period.
Additionally, Castlewood Holdings has a discretionary bonus plan included as a
part of its employee compensation. During the quarter ended June 30, 2003 the
bonus plan was amended, resulting in a decrease in bonus accruals and salaries
and benefits expense of $2.6 million for the nine months ended September 30,
2003.

General and administrative expenses were $3.3 million and $8.2 million for
the three and nine months ended September 30, 2004, respectively, compared to
$3.7 million and $9.0 million for the same periods in 2003. General and
administrative expenses include rent and rent related costs, professional fees
(legal, investment, audit and actuarial) and travel expenses. Castlewood
Holdings operates in both the UK and Bermuda and staff travel frequently in
connection with Castlewood Holdings' search for acquisition opportunities and in
the general management of the business.

Castlewood Holdings has recorded a foreign exchange gain of $282,000 and
$1.3 million for the three and nine months ended September 30, 2004,
respectively, compared to a gain of $179,000 and $1.0 million for the same
periods in 2003. Through its subsidiaries, Castlewood Holdings conducts business
in a variety of foreign (non-U.S.) currencies, the principal exposures being
Euros and British pounds. At each balance sheet date, recorded balances that are
denominated in a currency other than the functional currency of Castlewood
Holdings are adjusted to reflect the current exchange rate. Revenue and expense
items are translated into U.S. dollars at average rates of exchange for the
periods. The resulting exchange gains or losses are included in net earnings.

Income taxes of $291,000 and $745,000 were recorded for the three and nine
months ended September 30, 2004, respectively, compared to $264,000 and $1.0
million for the same periods in 2003. Under current Bermuda law, Castlewood
Holdings and its Bermuda subsidiaries are not required to pay taxes in Bermuda
on either income or capital gains. Castlewood Holdings and its Bermuda
subsidiaries have received an undertaking from the Bermuda government that, in
the event of income or capital gains taxes being imposed, Castlewood Holdings
and its Bermuda subsidiaries will be exempted from such taxes until the year
2016. United Kingdom subsidiaries record income taxes based on their graduated
statutory rates, net of tax benefits arising from tax loss carry-forwards.

Castlewood Holdings has recorded a minority interest in earnings (losses)
of $484,000 and $896,000 for the three and nine months ended September 30, 2004,
respectively, compared to $(254,000) and $1.4 million for the same periods in
2003. The minority interest amounts represent Shinsei's proportionate share of
earnings (losses) from Hillcot.

B.H. ACQUISITION

B.H. Acquisition reported net losses of $151,000 and $893,000 for the three
months and nine months ended September 30, 2004, respectively, compared to net
losses of $503,000 and $695,000 for the same periods ended in 2003.

22

B.H. Acquisition had net underwriting losses of $290,000 and $871,000 for
the three and nine months ended September 30, 2004 compared to net underwriting
losses of $341,000 and $744,000 for the same periods in 2003.

Net investment income was $519,000 and $1.0 million for the three and nine
months ended September 30, 2004, respectively, compared to $277,000 and $1.2
million for the same periods in 2003. The principal source of net investment
income was interest income earned from cash, cash equivalents and mutual funds.
The increase in income for the current quarter was attributable to an increased
return on one of the mutual funds held by B.H. Acquisition.

Amortization of the run-off provision was $333,000 and $1.0 million for the
three and nine months ended September 30, 2004, respectively, compared to
$375,000 and $1.1 million for the same periods in 2003. The Company established
a provision at the date of acquisition equal to the anticipated expenses to be
incurred over the expected life of the run-off. In 2003, an additional provision
was established and the expected life of the run-off was extended 2 years. This
provision is amortized on a straight-line basis over this period.

General and administrative expenses were $718,000 and $1.9 million for the
three and nine months ended September 30, 2004, respectively, compared to
$883,000 and $2.5 million for the same periods in 2003. General and
administrative expenses include legal, audit, management and actuarial expenses.
The decrease between the nine months ended September 2004 and 2003 relates
primarily to the reclassification of claims-related legal expenses from general
and administrative to underwriting income.

B.H. Acquisition recorded foreign exchange gains/(losses) of $5,000 and
$(197,000) for the three and nine months ended September 30, 2004, respectively,
compared to $69,000 and $288,000 for the same periods in 2003. Through its
subsidiaries, B.H. Acquisition conducts business in a variety of foreign
(non-U.S.) currencies, the principal exposures being Euros and British pounds.
At each balance sheet date, recorded balances that are denominated in a currency
other than the functional currency of B.H. Acquisition are adjusted to reflect
the current exchange rate. Revenue and expense items are translated into U.S.
dollars at average rates of exchange for the periods. The resulting exchange
gains or losses are included in net earnings.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates. At
September 30, 2004, the Company had cash and cash equivalents of approximately
$81.7 million in interest bearing accounts (interest at floating rates) and
approximately $4.1 million of short-term certificates of deposit (interest at
fixed rates). Accordingly, each one percent change in market interest rates
would change interest income by approximately $858,000 per year. However, any
future transactions affecting the Company's cash and cash equivalents and
certificates of deposit will change this estimate. Additionally, although
interest rate changes would affect the fair value of the Company's certificates
of deposits, the weighted average original term of certificates held by the
Company at September 30, 2004 was approximately six months. The short-term
nature of these certificates limits the Company's risk of changes in the fair
value of these certificates.

The Company is also exposed to foreign currency risk through its holdings
in partially owned equity affiliates and their subsidiaries. Foreign currency
risk is the risk that the Company will incur economic losses due to adverse
changes in foreign currency exchange rates. These entities conduct business in a
variety of foreign (non-U.S.) currencies, the principal exposures being in Euros
and British pounds. Assets and liabilities denominated in foreign currencies are
exposed to risk stemming from changes in currency exchange rates. Exchange rate
fluctuations impact the Company's and its partially owned equity affiliates'
reported consolidated financial condition, results of operations and cash flows
from year to year.

ITEM 4. CONTROLS AND PROCEDURES

As required by Securities and Exchange Commission ("SEC") rules, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of the end of the period covered by this
quarterly report. This evaluation was carried out under the supervision and with
the participation of the Company's management, including its principal executive
officer and principal financial

23

officer. Based on this evaluation, these officers have concluded that the design
and operation of the Company's disclosure controls and procedures are effective.
There were no changes to the Company's internal controls over financial
reporting during the period covered by this report that materially affected, or
are reasonably likely to materially affect, the Company's internal controls over
financial reporting subsequent to the date of their evaluation.

Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act,
is recorded, processed, summarized and reported, within the time periods
specified in SEC rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act are accumulated and communicated to the Company's
management, including its principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.

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PART II

OTHER INFORMATION

ITEM 6. EXHIBITS

26

SIGNATURES

Pursuant to the requirements 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.

THE ENSTAR GROUP, INC.

By: /s/ CHERYL D. DAVIS
------------------------------------
Cheryl D. Davis
Chief Financial Officer, Vice
President
of Corporate Taxes, Secretary
(Authorized Officer)
(Principal Financial Officer)

Date: November 9, 2004

27