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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
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.)
172 COMMERCE STREET-3RD FLOOR 36104
MONTGOMERY, ALABAMA (Zip Code)
(Address of principal executive offices)
(334) 834-5483
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
COMMON STOCK, $.01 PAR VALUE
(including rights attached thereto)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the registrant as of March 22, 1999, was $47,539,170 (Based on
the closing price on such date on the OTC Bulletin Board maintained by the
National Association of Securities Dealers, Inc.).
The number of shares of the Registrant's Common Stock, $.01 par value per
share, outstanding at March 22, 1999 was 5,265,729.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to
be held on May 20, 1999 are incorporated herein by reference in Part III.
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TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business.................................................... 1
2. Properties.................................................. 4
3. Legal Proceedings........................................... 4
4. Submission of Matters to a Vote of Security Holders......... 5
Supplementary Item. Certain Risk Factors.................... 5
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 6
6. Selected Financial Data..................................... 7
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
7A. Quantitative and Qualitative Disclosures About Market
Risks....................................................... 11
8. Financial Statements and Supplementary Data................. 11
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 27
PART III
10. Directors and Executive Officers of the Registrant.......... 27
11. Executive Compensation...................................... 27
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 27
13. Certain Relationships and Related Transactions.............. 27
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 27
THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY THE
ENSTAR GROUP, INC. OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND 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 THIS FORM 10-K, 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.
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PART I
ITEM 1. BUSINESS
GENERAL
The Enstar Group, Inc., a Georgia corporation (the "Company"), currently
holds assets, aggregating approximately $68.0 million at December 31, 1998,
consisting primarily of cash or cash equivalent assets and short-term
certificates of deposit. The Company filed for bankruptcy under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code") on May 31, 1991 and
operated as a reorganized debtor pursuant to its Second Amended Plan of
Reorganization, as modified (the "Reorganization Plan"), until July 17, 1997
when the United States Bankruptcy Court for the Middle District of Alabama (the
"Bankruptcy Court") closed the Company's Chapter 11 proceedings by final order.
During 1997 and in accordance with the terms of the Reorganization Plan and
orders of the Bankruptcy Court, the Company issued 4,549,060 shares of common
stock, par value $.01 per share (the "Common Stock" or "Shares") to qualified
former shareholders of record, or transferees of such former shareholders, of
the common stock of the Company which had been cancelled in the Company's
bankruptcy proceeding (the "Cancelled Stock"). See "History." The Company
currently is engaged actively in the search for one or more operating businesses
which meet the Company's acquisition criteria. The Company does not operate in
multiple segments. See "Strategy for Business Acquisitions."
ORGANIZATIONAL STRUCTURE
The Company's executive offices are located at 172 Commerce Street - 3rd
Floor, Montgomery, Alabama 36104, and its telephone number is (334) 834-5483.
The Company has seven employees whose principal duties currently include
managing the assets of the Company, evaluating potential acquisition candidates,
fulfilling reporting requirements associated with being a publicly traded
company and various other accounting and tax matters. The Company is a Georgia
corporation and successor by a 1996 merger to a Delaware corporation of the same
name.
SUBSIDIARIES
The Company has one wholly-owned subsidiary, Enstar Financial Services,
Inc., a Florida corporation, which currently is inactive.
HISTORY
The Company filed for protection under Chapter 11 of the United States
Bankruptcy Code on May 31, 1991 in the United States Bankruptcy Court for the
Middle District of Alabama. Prior to its bankruptcy filing, the Company was a
publicly traded holding company with subsidiaries operating primarily in the
specialty retail business and the financial services business. Prior to November
16, 1989, when its name was changed, the Company's name was Kinder-Care, Inc.,
and prior to January 1987, the Company's name was Kinder-Care Learning Centers,
Inc. The Company originally was incorporated on October 26, 1970 in the State of
Delaware.
The Company's retail services subsidiaries filed for bankruptcy prior to
May 31, 1991. At the time of its bankruptcy filing, the Company's principal
remaining business was its ownership of approximately 49% of the outstanding
common stock of American Savings of Florida, F.S.B. ("American").
The Company's Reorganization Plan was confirmed in February, 1992, and
became effective on June 1, 1992 (the "Effective Date"). The Reorganization Plan
provided that creditors would receive all distributions under the Reorganization
Plan until paid in full and that the Company's stock would be cancelled on the
Effective Date. The Bankruptcy Court authorized a modification of the Company's
Reorganization Plan in August of 1993. Among other things, the modification
clarified that any property remaining after creditors had been paid in full
would be held for the benefit of the Company's former shareholders.
On July 1, 1995, the Company disposed of its stock in American through a
merger with a wholly-owned subsidiary of First Union Corporation ("First
Union"). On the date of the merger, the Company owned
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5,689,391 shares of American, in exchange for which it received $82.5 million in
cash which it used to pay certain creditor claims and 815,549 shares of First
Union common stock (the "First Union Common Stock") with a market value on the
exchange date of $45.25 per share. In addition to the shares of First Union
Common Stock received pursuant to the merger, the Company acquired 16,191 shares
through settlements with parties in the litigation against the Company's former
Chairman and Chief Executive Officer, Richard Grassgreen, and 21,683 shares
purchased through First Union's dividend reinvestment program. During 1997, the
Company sold 186,300 shares of First Union Common Stock, the proceeds of which
were used to repay an $18.1 million loan which had been used to pay the
remaining allowed claims of creditors under the Reorganization Plan.
Subsequently, First Union paid a 2-for-1 stock dividend. During 1998, the
Company sold its remaining 1,334,246 shares of First Union Common Stock.
In addition to the proceeds received from the disposition of the American
stock, the Company has received recoveries from litigation pursued under the
terms of its Reorganization Plan. The total amount of these recoveries, net of
expenses, was approximately $25.5 million, including $1.1 million received in
1998 and the reversal of a $1.9 million reserve previously accrued.
In total, the Company paid approximately $116.8 million under its
Reorganization Plan to satisfy the allowed claims of creditors, including
interest. In 1997, the Company completed its reorganization and distributed
4,549,060 Shares to its qualified former shareholders in accordance with the
terms of its Reorganization Plan.
B-LINE INVESTMENT
In November 1998, the Company made an investment in B-Line LLC ("B-Line").
B-Line is a privately owned company based in Seattle, Washington, that provides
services to credit card issuers and other holders of similar receivables. The
Company invested $950,000 in membership units of B-Line, representing
approximately 8.77% of the then outstanding units of B-Line. The Company also
purchased a one-year warrant to acquire additional B-Line units, with an
aggregate exercise price of $950,000. Other investors also purchased membership
units and warrants in B-Line. If the Company and the other investors with
outstanding B-Line warrants and options were to exercise those warrants and
options, the Company would own approximately 13.89% of B-Line. The Company's
investment in B-Line is accounted for under the equity method. In addition,
legal and professional fees of approximately $15,000 incurred in the purchase of
the Company's investment were capitalized as a part of the original cost.
FLOWERS TRANSACTION
On October 20, 1998, the Company and J. Christopher Flowers ("Flowers")
entered into an Investment Agreement (the "Investment Agreement"), whereby the
Company agreed to sell to Flowers 1,158,860 newly issued shares of the Company's
Common Stock at a price of $12.94375 per share, for a total purchase price of
$15.0 million, in exchange for a full recourse promissory note from Flowers (the
"Transaction"). The price per share represented the average of the reported
closing prices for the Company's Common Stock for the ten trading days
immediately preceding October 20, 1998, the date the Board of Directors (the
"Board") approved the Transaction. In the Investment Agreement, Flowers agreed
to certain restrictions on his ability to transfer the Shares and agreed not to
acquire any additional Shares of the Company or participate in any capacity in
certain other significant transactions involving the Company without the
approval of the Board. The Investment Agreement also contains certain provisions
relating to conflicting business opportunities and competing transactions
involving Flowers and related entities. In addition, Flowers was appointed to
the executive officer position of Vice Chairman of the Board effective December
1, 1998.
On December 17, 1998, the Transaction was approved by the shareholders of
the Company at a special meeting held for such purpose. On December 18, 1998,
the Company consummated the sale of the shares to Flowers, resulting in Flowers
owning approximately 23% of the outstanding Common Stock of the Company at such
date. Since the price per share on the date of the shareholders' approval
($13 5/8) exceeded the per share sales price to Flowers, a charge to earnings of
approximately $789,000 was recognized. In addition, legal,
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professional and other fees of approximately $454,000 incurred in relation to
the Transaction were charged to equity.
The full recourse promissory note in the amount of $15.0 million for the
purchase price of the shares bears interest at the rate of 4.06% per annum,
requires quarterly interest payments and has a maturity date of December 18,
2000. Since the interest rate on the note is less than the rate an independent
lender would charge Flowers, the note was recorded at a discount so as to yield
a then current "market rate" of interest over its term, and a charge to earnings
of approximately $990,000 was incurred to reflect such discount. This discount
is being accreted over the term of the note. The promissory note, net of
discount, is classified as a reduction of equity.
The Company and Flowers entered into a Registration Rights Agreement
pursuant to which Flowers was granted certain rights to require the Company to
register his shares.
The Company believes that it was in the best interests of the Company's
future business prospects to retain Flowers as a director and Vice Chairman of
the Board of Directors, an executive officer position, in order to capitalize on
Flowers' business and financial acumen and reputation. The Company believes that
Flowers' experience in mergers and acquisitions will support the Company's
search for an operating entity.
Prior to the consummation of the Transaction, Flowers had been an outside
director of the Company since October 1996 and had been involved in working with
Company's management in locating an acquisition target. He graduated magna cum
laude from Harvard College and joined Goldman, Sachs & Co. in 1979. He was made
a general partner in 1988 and a managing director in 1996. At Goldman, Sachs &
Co., Flowers was a founder of and headed the Financial Institutions Group.
Flowers resigned from Goldman, Sachs & Co. as of November 27, 1998 in order to
pursue his own business interests.
By consummating the Transaction with Flowers, the Company secured Flowers'
continued services in an enhanced capacity as Vice Chairman of the Board of
Directors and further aligned Flowers' interests with those of the Company's
shareholders. The Company believes that consummation of the Transaction provided
further incentives to Flowers, as a 23% shareholder of the Company, to devote
his efforts to locate one or more operating companies to acquire and to
participate in the negotiation of such acquisition.
STRATEGY FOR BUSINESS ACQUISITIONS
The Company currently is engaged in the active search for one or more
operating businesses. This search occupies substantially all of the time of the
Company's senior officers. The Company's officers and directors have made
efforts to identify suitable acquisition targets. Such efforts, however, have
not resulted to date in any definitive agreements with respect to the
acquisition of any business or company.
The Company's strategy for making a suitable acquisition is to utilize the
considerable experience, knowledge and business contacts of the Company's
executive officers and directors. Each of the Company's directors has been asked
by management to assist the Company actively in its pursuit of an acquisition,
and since Flowers' appointment to Vice Chairman of the Board, he has played an
enhanced role in the Company's search for an operating company. Management
follows up on the leads and meets with various prospective targets. The Company
will conduct rigorous financial and legal due diligence with respect to any
entity about which it has a strong interest.
The Company does not presently focus solely on any particular industry or
geographical market. While the Company focuses its attention in the United
States, the Company does investigate acquisition opportunities outside of the
United States when management believes that such opportunities might be
attractive. Similarly, the Company does not yet know the structure of any
acquisition. The Company may pay consideration in the form of cash, securities
of the Company or some combination of both. The Company may also borrow money in
connection with the acquisition. In that event, the Company's shareholders would
be subject to the risks normally associated with leveraged transactions.
Depending upon the level of indebtedness, a leveraged transaction could have
important consequences to the Company, including the following: (i) if the
acquired business is unable to achieve satisfactory operating results, the
Company could prove unable to service such indebtedness; (ii) a substantial
portion of the Company's cash flow from operations may be
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dedicated to the payment of principal or interest on its indebtedness and would
not be available for other purposes; (iii) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures or
other acquisitions may be limited; and (iv) the Company's level of indebtedness
could limit its flexibility in planning for, or reacting to, changes in its
industry. In order to preserve the Company's possible use of its net operating
loss carryforwards ("NOLs"), the Company does not currently intend to offer an
interest in the Company in connection with the acquisition of one or more
operating businesses that would cause an "ownership change" within the meaning
of Section 382 of the Internal Revenue Code of 1986, as amended.
In the event the Company fails to acquire an operating business within a
reasonable period of time, the Company will consider other alternatives,
including, but not limited to, liquidation of the Company.
COMPETITION
The Company does not currently have an operating business. As a result, the
Company does not currently compete with any businesses in any particular
markets. However, the Company does face intense competition in its search for
one or more operating businesses. See "Strategy for Business Acquisitions." In
this regard, the Company competes with strategic buyers, financial buyers and
others who are looking to acquire suitable operating businesses, many of whom
have greater financial resources than the Company or have greater flexibility in
structuring acquisition transactions or strategic relationships.
ITEM 2. PROPERTIES
The Company does not currently own any real property. Pursuant to oral
agreements, the Company leases a suite of offices at 172 Commerce Street - 3rd
Floor, Montgomery, Alabama and space in a warehouse at 703 Howe Street,
Montgomery, Alabama on a month-to-month basis. The Company leases the suite of
offices and warehouse space from unaffiliated third parties for $2,185 and $350
per month, respectively. The Company believes the rental amounts are competitive
with market rates. The cancellation or termination of either of these leases
would not have a material adverse effect on the Company's results of operations.
ITEM 3. LEGAL PROCEEDINGS
Beginning in 1991, the Company was involved in extensive litigation
relating to its bankruptcy case. The Company's bankruptcy case was closed by
final decree dated July 17, 1997. Except as described below, the Company is not
aware of any pending litigation matters that could have a material adverse
effect on the Company.
In February 1993, the Company obtained a $15.0 million judgement against
Richard Grassgreen, one of the Company's former officers, who subsequently filed
for bankruptcy. In connection with the settlement of the Company's claims
against the Grassgreen bankruptcy estate (the "Estate"), and others, and the
confirmed plan of reorganization of the Estate (the "Grassgreen Bankruptcy
Estate Settlement"), the Company agreed to pay certain taxes of the Estate in
the event the Estate did not have sufficient funds. The United States Internal
Revenue Service (the "IRS") asserted a liability of the Company for taxes
allegedly owed by the Estate. In December 1996, the IRS appealed a determination
by the United States Bankruptcy Court for the Middle District of Florida (the
"Florida Bankruptcy Court") that the IRS cannot seek payment of the taxes. The
alleged tax liability, for calendar year 1994, was for sums paid to the Company
in connection with the Grassgreen Bankruptcy Estate Settlement by third parties
to resolve the Company's claims against those parties. In United States of
America v. Richard J. Grassgreen and The Enstar Group, Inc., Case No. 96-1099-
CIV-J-10 (U.S.D.C. M.D. Fla.), the IRS claimed that it should be entitled to
assess additional taxes in the approximate amount of $1.6 million against the
Estate for 1994 and that the IRS should be able to seek payment of those taxes
from the Company by virtue of the Company's agreement to pay certain taxes of
the Estate. On March 25, 1998, the United States District Court for the Middle
District of Florida reversed and remanded the case to the Florida Bankruptcy
Court to determine whether the Estate had any assets from which to satisfy any
such tax liability, and if so, for further proceedings to determine pursuant to
Section 505(a) of the Bankruptcy Code whether the Estate had any additional
income tax liability. On October 27,
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1998, the Florida Bankruptcy Court found that the Estate had no assets and had
been closed. Accordingly, the Florida Bankruptcy Court granted summary judgement
to the Company and Mr. Grassgreen, thereby preventing further efforts by the IRS
to seek payment of the taxes from the Estate. On November 4, 1998, the IRS
served a notice of appeal of the Florida Bankruptcy Court's October 27, 1998
order, but subsequently dismissed the appeal pursuant to stipulation of the
parties and order of the United States District Court for the Middle District of
Florida dated December 16, 1998. As a result, the Company has reversed the
previously accrued liability of $1.9 million for the potential tax and accrued
interest.
On February 11, 1997, fifteen former shareholders of the Company filed a
lawsuit against the Company in the Circuit Court of Montgomery County, Alabama
styled Peter N. Zachary, et al. v. The Enstar Group, Inc., Case No.
CV-97-257-Gr. The complaint, which deals with actions occurring prior to the
Company's filing for bankruptcy in 1991, alleges that the Company along with its
then principal officers and others defrauded the plaintiffs in violation of the
Alabama Securities Act and other Alabama statutory provisions. The plaintiffs
seek compensatory damages in the amount of their alleged losses of approximately
$2 million and unspecified punitive damages. The complaint is virtually
identical to a complaint brought by these plaintiffs against the Company's
former chairman, former president and others in December 1991, during the
pendency of the Company's bankruptcy case and prior to the confirmation of the
Reorganization Plan. The plaintiffs allege that the Bankruptcy Court issued an
order on January 15, 1997, allowing them to litigate their claims against the
Company. The Bankruptcy Court's order actually held that the plaintiffs could
not bring a late claim against the Company in its bankruptcy case and then went
on to state that because of facts relating to these particular plaintiffs, they
were not bound by the provisions of the Reorganization Plan and their claims
were not subject to discharge under the Bankruptcy Code. On March 17, 1997, the
Company filed a motion to dismiss and/or for summary judgment in response to the
complaint on the basis that the claims asserted are barred by the applicable
statute of limitations. The motion is still pending before the court. In the
event the plaintiffs' claims are not dismissed pursuant to the Company's motion,
the Company intends to contest the plaintiffs' claims vigorously.
On November 13, 1998, the Company received approximately $1.1 million in
net litigation proceeds as its share of the final distribution resulting from
its legal action originally brought against Michael Milken and others in 1991.
The payment represents the Company's share of the final distribution from the
global settlement pool established as part of the global settlement of all
actions against Mr. Milken and related parties in In re the Drexel Burnham
Lambert Group, Inc., et al., 90 Civ. Ct. 6954 (MP), Chapter 11 Case Number
90B10421 SCG (jointly administered), in the United States District Court for the
Southern District of New York. The Company has previously received distributions
from the settlement pool totalling approximately $16.3 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of shareholders on December 17, 1998.
The purpose of the meeting was to consider and vote upon a proposal to approve
the transactions contemplated under the Investment Agreement between the Company
and Flowers, whereby the Company would sell to Flowers 1,158,860 shares of newly
issued Common Stock for $15.0 million in exchange for a full recourse promissory
note from Flowers. Votes cast were: 2,393,286 for, 383,832 against and 10,450
abstentions.
SUPPLEMENTARY ITEM. CERTAIN RISK FACTORS
See "The Enstar Group, Inc. Private Securities Litigation Reform Act of
1995 Safe Harbor Compliance Statement For Forward-Looking Statements," included
as Exhibit 99.1 to this Form 10-K and incorporated herein by reference.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded in the over-the-counter market on the
OTC Bulletin Board maintained by the National Association of Securities Dealers,
Inc. On March 27, 1997, the Company commenced distribution of its Common Stock
to its former shareholders of record. The qualified former shareholders received
one share of Common Stock for every ten shares of Cancelled Stock and cash in
lieu of fractional shares based on the net book value of the Company on December
31, 1996. The Company's Common Stock initially began trading on April 1, 1997.
The following table reflects the range of high and low selling prices of the
Company's Common Stock by quarter for 1998 and 1997, as reflected in the OTC
Bulletin Board Daily Trade and Quote Summary Report:
1998 1997
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HIGH LOW HIGH LOW
------- ------- ------- -------
First Quarter.......................................... 14 1/2 10 1/2 N/A N/A
Second Quarter......................................... 15 7/16 13 7/8 12 8 1/8
Third Quarter.......................................... 16 1/2 10 3/4 14 3/4 11 3/8
Fourth Quarter......................................... 15 3/16 12 3/4 14 1/16 10 3/4
At March 22, 1999, there were approximately 3,557 holders of record of the
Company's Common Stock.
The Company has not declared or paid a cash dividend on any of its
securities since 1989. The Company currently intends to retain its earnings to
finance the growth and development of its future business and does not
anticipate paying cash dividends in the foreseeable future. The payment of cash
dividends in the future will depend upon such factors as the Company's earnings,
capital requirements, financial condition, contractual restrictions and other
factors deemed relevant by the Board of Directors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
On December 18, 1998, the Company sold 1,158,860 newly issued shares of the
Company's Common Stock to Flowers in exchange for a full recourse promissory
note from Flowers in the amount of $15.0 million. The sale of Common Stock to
Flowers was effected in a private placement transaction which was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information with respect
to the Company for each of the five years in the period ended December 31, 1998
and is derived in part from the audited Consolidated Financial Statements of the
Company. The data set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the historical consolidated financial statements and related
notes thereto, and other financial data included elsewhere herein.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Income (loss) from continuing
operations.............................. $ 38,348 $ 8,917 $ 740 $ 14,122 $ (4,650)
Income from discontinued operations(1).... 54,482 9,477
---------- ---------- ------- -------- --------
Net income................................ $ 38,348 $ 8,917 $ 740 $ 68,604 $ 4,827
========== ========== ======= ======== ========
Income (loss) per common share:
Continuing operations................... $ 9.08 $ 2.61 $ 7,400 $141,220 $(46,500)
Discontinued operations................. 544,820 94,770
---------- ---------- ------- -------- --------
Net income.............................. $ 9.08 $ 2.61 $ 7,400 $686,040 $ 48,270
========== ========== ======= ======== ========
Weighted average shares outstanding(2).... 4,221,555 3,413,351 100 100 100
========== ========== ======= ======== ========
Income (loss) per common share -- assuming
dilution:
Continuing operations................... $ 8.97 $ 2.61 $ 7,400 $141,220 $(46,500)
Discontinued operations................. 544,820 94,770
---------- ---------- ------- -------- --------
Net income.............................. $ 8.97 $ 2.61 $ 7,400 $686,040 $ 48,270
========== ========== ======= ======== ========
Weighted average shares outstanding --
assuming dilution(2).................... 4,275,500 3,421,738 100 100 100
========== ========== ======= ======== ========
Pro forma income (loss) per common
share(3):
Continuing operations................... $ 1.96 $ 0.16 $ 3.10 $ (1.02)
Discontinued operations................. 11.98 2.08
---------- ------- -------- --------
Net income.............................. $ 1.96 $ 0.16 $ 15.08 $ 1.06
========== ======= ======== ========
Balance Sheet data:
Total assets............................ $ 68,017 $ 72,932 $69,572 $ 59,602 $ 64,787
Note payable............................ 513 18,100
Liabilities subject to compromise....... 370 358 588 26,540 108,238
Total liabilities....................... 1,073 3,268 21,430 27,702 110,315
Shareholders' equity (deficit).......... 66,944 69,664 48,142 31,900 (45,528)
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(1) Represents the equity in earnings of American Savings of Florida, F.S.B.
("American"), accounted for under the equity method of accounting, through
July 1, 1995. On July 1, 1995, the Company sold its investment in American
to First Union Corporation and recognized a gain of approximately $52.7
million. As a result of the disposition, the Company ceased to have banking
operations and, accordingly, has accounted for its investment in American as
a discontinued operation.
(2) Upon confirmation of its Reorganization Plan on June 1, 1992, the Company
issued 100 shares of common stock to the Company's Chief Executive Officer
as trustee.
(3) Pro forma amounts per common share assuming that all shares issued
(4,549,060) as of December 31, 1997 had been outstanding for all years
presented before 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data (Item 6) and the Consolidated Financial Statements including the
related footnotes thereto and is qualified in its entirety by
7
10
the foregoing and other more detailed financial information appearing elsewhere
herein. Historical results of operations and the percentage relationships among
any amounts included in the Consolidated Statements of Income, and any trends
which might appear to be inferable therefrom, should not be taken as being
necessarily indicative of trends in operations or the results of operations for
any future period. See "Business" for a description of the business of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets, aggregating approximately $68.0 million at December
31, 1998, consist primarily of cash, cash equivalents and certificates of
deposit.
During 1998, the Company sold 1,334,246 shares of First Union Common Stock
for net proceeds of approximately $68.8 million. The sale of the First Union
Common Stock resulted in a realized gain of approximately $40.5 million.
At December 31, 1997, the Company had outstanding call options on 400,000
shares of its First Union Common Stock. During 1998, the Company sold additional
call options for 205,000 shares of its First Union Common Stock. Call options
for 55,000 shares expired unexercised and call options were exercised in
conjunction with the sale of 260,000 shares of First Union Common Stock. In
addition, the Company repurchased call options for 290,000 shares. The net
effect of the call option transactions resulted in a loss of approximately $2.5
million.
In November 1998, the Company made an investment in B-Line LLC ("B-Line").
B-Line is a privately owned company based in Seattle, Washington, that provides
services to credit card issuers and other holders of similar receivables. The
Company invested $950,000 in membership units of B-Line, representing
approximately 8.77% of the then outstanding units of B-Line. The Company also
purchased a one-year warrant to acquire additional B-Line units, with an
aggregate exercise price of $950,000. Other investors also purchased membership
units and warrants in B-Line. If the Company and the other investors with
outstanding B-Line warrants and options were to exercise those warrants and
options, the Company would own approximately 13.89% of B-Line. The Company's
investment in B-Line is accounted for under the equity method. In addition,
legal and professional fees of approximately $15,000 incurred in the purchase of
the Company's investment were capitalized as a part of the original cost.
On November 13, 1998, the Company received approximately $1.1 million in
net litigation proceeds as its share of the final distribution resulting from
its legal action originally brought against Michael Milken and others in 1991.
The payment represents the Company's share of the final distribution from the
global settlement pool established as part of the global settlement of all
actions against Mr. Milken and related parties in In re the Drexel Burnham
Lambert Group, Inc., et al., 90 Civ. Ct. 6954 (MP), Chapter 11 Case Number
90B10421 SCG (jointly administered), in the United States District Court for the
Southern District of New York. The Company has previously received distributions
from the settlement pool totaling approximately $16.3 million.
The Company is seeking to acquire one or more operating businesses. Until
such time as the Company uses its assets for an acquisition, the Company's only
liquidity needs are to fund operating expenses. In the event the Company fails
to acquire an operating business within a reasonable period of time, the Company
will consider other alternatives, including, but not limited to, liquidation of
the Company.
FINANCIAL CONDITION
The Company had total assets of $68.0 million at December 31, 1998 compared
to $72.9 million at December 31, 1997. The change in total assets was primarily
due to the repurchase of approximately 358,000 shares of the Company's Common
Stock for approximately $4.8 million.
The Company's total liabilities at December 31, 1998 were $1.1 million
compared to $3.3 million at December 31, 1997. The decrease in liabilities is
primarily due to the repayment of a net $513,000 in indebtedness and the
reversal of a $1.9 million reserve for litigation settlements.
8
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During the first quarter of 1998, the Company repurchased 303,700 shares of
its Common Stock for approximately $4.0 million. The purchase of such Shares was
financed through borrowings of approximately $1.2 million under a revolving
credit agreement with First Union National Bank and the proceeds from the sale
of 101,939 shares of the Company's First Union Common Stock. The purchases made
in the first quarter of 1998 completed a stock repurchase program announced in
July 1997 under which the Company could repurchase up to $5.0 million of its
Common Stock. Under the program, the Company repurchased a total of 387,826
Shares for approximately $5.0 million. On April 21, 1998, the Company announced
a second stock repurchase program under which the Company could repurchase up to
$5.0 million of its Common Stock in the open market at prices deemed favorable
from time to time by the Company. As of December 31, 1998, the Company had
repurchased 54,525 shares of its Common Stock for approximately $815,000 as part
of this plan. Under the two stock repurchase programs, the Company has
repurchased a total of 442,351 Shares for approximately $5.8 million.
OTHER MATERIAL TRANSACTION
Flowers Transaction. On October 20, 1998, the Company and Flowers entered
into an Investment Agreement, whereby the Company agreed to sell to Flowers
1,158,860 newly issued shares of the Company's Common Stock at a price of
$12.94375 per share, for a total purchase price of $15.0 million, in exchange
for a full recourse promissory note from Flowers. The price per share
represented the average of the reported closing prices for the Company's Common
Stock for the ten trading days immediately preceding October 20, 1998, the date
the Board approved the Transaction. In the Investment Agreement, Flowers agreed
to certain restrictions on his ability to transfer the shares and agreed not to
acquire any additional Shares of the Company or participate in any capacity in
certain other significant transactions involving the Company without the
approval of the Board. The Investment Agreement also contains certain provisions
relating to conflicting business opportunities and competing transactions
involving Flowers and related entities. In addition, Flowers was appointed to
the executive officer position of Vice Chairman of the Board effective December
1, 1998.
On December 17, 1998, the Transaction was approved by the shareholders of
the Company at a special meeting held for such purpose. On December 18, 1998,
the Company consummated the sale of the shares to Flowers, resulting in Flowers
owning approximately 23% of the outstanding Common Stock of the Company at such
date. Since the price per share on the date of the shareholders' approval
($13 5/8) exceeded the per share sales price to Flowers, a charge to earnings of
approximately $789,000 was recognized. In addition, legal, professional and
other fees of approximately $454,000 incurred in relation to the Transaction
were charged to equity.
The full recourse promissory note in the amount of $15.0 million for the
purchase price of the shares bears interest at the rate of 4.06% per annum,
requires quarterly interest payments and has a maturity date of December 18,
2000. Since the interest rate on the note is less than the rate an independent
lender would charge Flowers, the note was recorded at a discount so as to yield
a then current "market rate" of interest over its term, and a charge to earnings
of approximately $990,000 was incurred to reflect such discount. This discount
is being accreted over the term of the note. The promissory note, net of
discount, is classified as a reduction of equity.
The Company and Flowers entered into a Registration Rights Agreement
pursuant to which Flowers was granted certain rights to require the Company to
register his shares.
RESULTS OF OPERATIONS
1998 Compared to 1997
Investment income was $40.5 million in 1998 compared to $11.9 million in
1997. This substantial increase is a result of the gain on the sale of the
Company's shares of First Union Common Stock, partially offset by losses
incurred on call option transactions involving the First Union Common Stock and
an increase in interest income resulting from depositing the proceeds from the
sale of the First Union shares in interest bearing accounts.
9
12
The Company had litigation income of $3.0 million in 1998 compared to
litigation expense of $43,000 in 1997. In 1998, the Company received
approximately $1.1 million in proceeds from the Milken litigation and reversed a
$1.9 million reserve for litigation settlements previously recorded in
connection with the Grassgreen litigation.
General and administrative expenses were $3.7 million in 1998 and $1.4
million in 1997. The increase in 1998 was primarily a result of the Flowers
Transaction and includes compensation expense of approximately $789,000 relating
to the difference between the market value of the shares of Common Stock on the
date of shareholder approval over the price at which the shares were sold to
Flowers. In addition, approximately $973,000 was recognized as expense relating
to the discount on the note issued by Flowers to the Company. The Company also
incurred additional franchise taxes of approximately $210,000 in 1998.
Interest expense was $28,000 in 1998 compared to $761,000 in 1997. Interest
expense decreased in 1998 primarily because of the repayment of a $18.1 million
loan in 1997 and the reversal of accrued interest on the reserve for litigation
settlements in 1998.
Income tax expense was $1.4 million in 1998 and $221,000 in 1997. The
increase in 1998 compared to 1997 was principally due to state tax expense,
which increased as a result of the absence of NOLs in amounts sufficient to
fully offset state taxable income. The Company's effective tax rate remains
substantially less than statutory rates primarily due to the availability of
NOLs for federal tax purposes.
Consolidated net income was $38.3 million in 1998 compared to $8.9 million
in 1997. The increase in 1998 from 1997 is primarily due to the increase in the
gain on the sale of shares of First Union Common Stock.
1997 Compared to 1996
Investment income was $11.9 million in 1997 compared to $1.9 million in
1996. This increase resulted from the gain on the sale of 186,300 shares of
First Union Common Stock of approximately $9.7 million, a reclassification of
interest income of approximately $184,000 and a gain on sale of call options on
First Union Common Stock of approximately $137,000. Through March 1997, interest
income was classified as a reorganization item. After the distribution of its
Common Stock, the Company completed its reorganization and accordingly, interest
income subsequent to March 1997 is included in investment income.
The Company had litigation expense of $43,000 in 1997 and litigation income
of $2.0 million in 1996. In 1996, the Company received approximately $3.1
million in proceeds from the Milken and Grassgreen litigation. This amount was
partially offset by payment of claims and adjustments to litigation reserves of
approximately $1.1 million.
General and administrative expenses were $1.4 million in 1997 and $2.3
million in 1996. The decrease in 1997 was primarily due to the payment of a one
time bonus for certain directors and employees of $1.2 million in September
1996. The substantial decrease was partially offset by an increase in
professional fees incurred in connection with the preparation of the Company's
registration statement and complying with other reporting and legal requirements
of a publicly traded company.
Reorganization items consist of interest income less expenses directly
related to the reorganization of the Company. The Company completed its
reorganization in March 1997 and therefore incurred no reorganization items from
that point forward. Net reorganization expense was $484,000 for 1997 compared to
net reorganization income of $79,000 for 1996. The increase in net expenses for
1997 was a result of expenses incurred in connection with the distribution of
the Company's Common Stock.
Interest expense was $761,000 in 1997 compared to $871,000 in 1996.
Interest expense for 1997 was comprised of $597,000 relating to the $18.1
million loan repaid in July 1997 and $164,000 relating to the reserve for
litigation settlements and liabilities subject to compromise. Interest expense
for 1996 was related to liabilities subject to compromise and the reserve for
litigation settlements.
10
13
Income tax expense of $221,000 was recorded in 1997 due to the alternative
minimum tax which limits the utilization of NOLs. The additional income tax
expense that would have been recordable for 1997 and 1996 was offset by the
Company's utilization of the tax loss carryforwards.
Consolidated net income was $8.9 million in 1997 compared to $740,000 in
1996. The increase in 1997 from 1996 is primarily due to the $9.7 million gain
on the sale of 186,300 shares of First Union Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to some market risk from changes in interest rates,
but the Company does not believe the risk is material. The Company had cash and
cash equivalents of approximately $12.8 million in interest bearing accounts
(interest at floating rates) and approximately $53.4 million of short-term
certificates of deposit (interest at fixed rates) at December 31, 1998. Although
interest rate changes would affect the fair value of the Company's certificates
of deposits, the weighted average term of certificates held by the Company at
December 31, 1998 is approximately two months. The short-term nature of these
certificates limits the Company's risk of changes in the fair value of these
certificates. The Company also had a full recourse note receivable at December
31, 1998, classified as a reduction of equity. The $15.0 million note bears
interest at a fixed rate of 4.06% per annum, requires quarterly interest
payments, and matures in December 2000. The note was recorded at a discount so
as to yield a then current market rate of interest.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of The Enstar Group, Inc.
We have audited the accompanying consolidated balance sheets of The Enstar
Group, Inc. and Subsidiary (the "Company") as of December 31, 1998 and 1997, and
the related consolidated statements of income, comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 15, 1999
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THE ENSTAR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
--------------------
1998 1997
-------- ---------
ASSETS
Cash and cash equivalents................................... $ 12,826 $ 700
Certificates of deposit..................................... 53,424 3,322
Other....................................................... 724 484
Investment in First Union................................... -- 68,380
Investment in B-Line LLC.................................... 1,007 --
Property and equipment, net................................. 36 46
-------- ---------
Total assets...................................... $ 68,017 $ 72,932
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable................................................ $ -- $ 513
Reserve for litigation settlements.......................... -- 1,877
Accounts payable and accrued liabilities.................... 529 47
Deferred liabilities........................................ 174 473
Other....................................................... 370 358
-------- ---------
Total liabilities................................. 1,073 3,268
-------- ---------
Shareholders' equity:
Common stock ($.01 par value; 55,000,000 shares
authorized, 5,707,920 and 4,549,060 shares issued at
December 31, 1998 and 1997, respectively).............. 57 45
Additional paid-in capital................................ 183,201 167,878
Accumulated other comprehensive income -- unrealized gain
on investment in First Union........................... -- 37,606
Note receivable, net of discount of $973.................. (14,027) --
Accumulated deficit....................................... (96,477) (134,825)
Treasury stock, at cost (442,351 and 84,126 shares at
December 31, 1998 and 1997, respectively).............. (5,810) (1,040)
-------- ---------
Total shareholders' equity........................ 66,944 69,664
-------- ---------
Total liabilities and shareholders' equity........ $ 68,017 $ 72,932
======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
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THE ENSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- -------
Investment income........................................... $ 40,525 $ 11,875 $ 1,871
Litigation income (expense), net............................ 3,024 (43) 1,999
General and administrative expenses......................... (3,733) (1,449) (2,338)
Reorganization items, net................................... -- (484) 79
Interest expense............................................ (28) (761) (871)
---------- ---------- -------
Income before income taxes.................................. 39,788 9,138 740
Income taxes................................................ (1,440) (221) --
---------- ---------- -------
Net income.................................................. $ 38,348 $ 8,917 $ 740
========== ========== =======
Weighted average shares outstanding......................... 4,221,555 3,413,351 100
========== ========== =======
Weighted average shares outstanding -- assuming dilution.... 4,275,500 3,421,738 100
========== ========== =======
Net income per common share................................. $ 9.08 $ 2.61 $ 7,400
========== ========== =======
Net income per common share -- assuming dilution............ $ 8.97 $ 2.61 $ 7,400
========== ========== =======
The accompanying notes are an integral part of the consolidated financial
statements.
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THE ENSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------- -------
Net income.................................................. $ 38,348 $ 8,917 $ 740
Other comprehensive income:
Unrealized gains on investment in First Union............. 2,846 23,368 15,502
Less: reclassification adjustment for gains included in
net income............................................. (40,452) (9,711) --
-------- ------- -------
Other comprehensive income.................................. (37,606) 13,657 15,502
-------- ------- -------
Comprehensive income........................................ $ 742 $22,574 $16,242
======== ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
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THE ENSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER
COMPREHENSIVE NOTE
ADDITIONAL INCOME -- RECEIVABLE,
COMMON PAID IN UNREALIZED NET OF ACCUMULATED TREASURY
STOCK CAPITAL GAIN DISCOUNT DEFICIT STOCK
------ ---------- ------------- ----------- ----------- --------
Balance at December 31, 1995..... $-- $167,935 $ 8,447 $ -- $(144,482) $ --
Net income..................... 740
Unrealized gain on investment
in First Union.............. 15,502
--- -------- -------- -------- --------- -------
Balance at December 31, 1996..... -- 167,935 23,949 -- (143,742) --
Net income..................... 8,917
Unrealized gain on investment
in First Union.............. 23,368
Reclassification adjustment for
gains included in net
income...................... (9,711)
Common stock issued............ 45 (45)
Cost of fractional shares...... (12)
Purchase of treasury stock..... (1,040)
--- -------- -------- -------- --------- -------
Balance at December 31, 1997..... 45 167,878 37,606 -- (134,825) (1,040)
Net income..................... 38,348
Unrealized gain on investment
in First Union.............. 2,846
Reclassification adjustment for
gains included in net
income...................... (40,452)
Common stock issued............ 12 15,323 (14,027)
Purchase of treasury stock..... (4,770)
--- -------- -------- -------- --------- -------
Balance at December 31, 1998..... $57 $183,201 $ -- $(14,027) $ (96,477) $(5,810)
=== ======== ======== ======== ========= =======
The accompanying notes are an integral part of the consolidated financial
statements.
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THE ENSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income................................................ $ 38,348 $ 8,917 $ 740
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation............................................ 15 11 9
Gain on sale of First Union common stock................ (40,452) (9,711) --
Loss (gain) on call option transactions................. 2,498 (137) --
Litigation income....................................... -- -- (1,004)
Noncash compensation expense............................ 1,762 -- --
Changes in assets and liabilities:
Restricted cash......................................... -- -- 3,857
Accounts payable and accrued expenses................... (1,395) (818) 2,119
Liabilities subject to compromise....................... 12 (230) (26,421)
Other, net.............................................. (96) (52) 841
-------- -------- --------
Net cash provided by (used in) operating
activities....................................... 692 (2,020) (19,859)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of First Union common stock............ 68,824 18,141 --
Proceeds from sale of call options........................ 363 580 --
Repurchases of call options sold.......................... (902) -- --
Reinvestment of First Union dividends..................... -- -- (868)
Investment in B-Line LLC.................................. (1,007) -- --
Purchase of certificates of deposit....................... (56,876) (8,978) (9,228)
Maturities of certificates of deposit..................... 6,774 6,894 14,790
Other, net................................................ (5) (27) --
-------- -------- --------
Net cash provided by investing activities.......... 17,171 16,610 4,694
-------- -------- --------
Cash flows from financing activities:
Common stock issuance costs............................... (454) -- --
Proceeds from note payable................................ 1,311 513 18,100
Repayment of note payable................................. (1,824) (18,100) --
Purchase of treasury stock................................ (4,770) (1,040) --
Cost of fractional shares................................. -- (12) --
-------- -------- --------
Net cash provided by (used in) financing
activities....................................... (5,737) (18,639) 18,100
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ 12,126 (4,049) 2,935
Cash and cash equivalents at the beginning of the year...... 700 4,749 1,814
-------- -------- --------
Cash and cash equivalents at the end of the year............ $ 12,826 $ 700 $ 4,749
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 18 $ 751 $ 14,474
======== ======== ========
Income taxes paid (refunded).............................. $ 1,440 $ 185 $ (500)
======== ======== ========
Supplemental disclosures of noncash investing and financing
activities:
During 1996 the Company received 16,191 shares of First
Union common stock valued at approximately $1,004,000 in
connection with a litigation settlement.
During 1998 the Company sold 1,158,860 shares of newly
issued common stock to J. Christopher Flowers, a
director of the Company, for a $15 million full recourse
promissory note.
Supplemental disclosure of cash receipts (payments)
resulting from the reorganization:
Liabilities subject to compromise......................... $ -- $ (244) $(27,009)
======== ======== ========
Interest income........................................... $ -- $ 102 $ 990
======== ======== ========
Professional fees......................................... $ -- $ (323) $ (245)
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND HISTORY OF BANKRUPTCY PROCEEDINGS
(a) Nature of Business -- The Enstar Group, Inc. (the "Company") is a
publicly traded company engaged in the active search for one or more operating
businesses which meet its acquisition criteria. As a result of holding shares of
First Union common stock as its primary asset for a period of time longer than
the twelve months ending March 27, 1998, the Company may have been required to
register as an investment company under the Investment Company Act of 1940 (the
"1940 Act"). On March 19, 1998, the Company filed an application with the
Securities and Exchange Commission (the "SEC") requesting a two year exemption
from registration under the 1940 Act. In April 1998, the Company received
initial comments on the original application from the staff of the SEC and filed
an amended application on May 22, 1998. While the amended application was still
pending, the Company liquidated all of its First Union common stock and is
holding the proceeds in cash, cash equivalents and short-term certificates of
deposit. Accordingly, the Company believes that its status as an inadvertent
investment company has been effectively resolved. In the event the Company fails
to acquire an operating business and again holds securities as its primary
asset, then it may be required to register under the 1940 Act.
(b) History of Bankruptcy Proceedings -- The Company filed for protection
under Chapter 11 of the United States Bankruptcy Code on May 31, 1991 in the
United States Bankruptcy Court for the Middle District of Alabama (the
"Bankruptcy Court"). The Company was successful in negotiating a settlement
among its creditors which was incorporated into the Company's Second Amended
Plan of Reorganization (the "Reorganization Plan"). The Reorganization Plan was
confirmed in February 1992, and became effective on June 1, 1992 (the "Effective
Date"). The Reorganization Plan provided that creditors would receive all
distributions under the Reorganization Plan until paid in full and that the
Company's stock would be cancelled on the Effective Date.
During 1993, the Company determined that it might be able to pay all of its
creditors in full. Because the Reorganization Plan had not anticipated or
specifically provided for the distribution of the estate proceeds after
creditors were paid in full, the Company filed a motion to modify its
Reorganization Plan to clarify the distributions and make clear that once all
creditors were paid in full with interest, any remaining property would be held
or distributed for the benefit of the Company's former shareholders. The
Bankruptcy Court authorized the modification of the Company's Reorganization
Plan in August 1993.
On July 1, 1995, the Company sold its ownership interest in American
Savings of Florida, F.S.B. ("American") to First Union Corporation ("First
Union") for approximately $82.5 million in cash and 815,549 shares of First
Union common stock valued at $36.9 million, representing less than 0.5%
ownership interest in First Union at that date. As a result of this transaction,
the Company realized a gain of approximately $52.7 million, net of expenses of
$2.1 million. The cash proceeds from this transaction were used to pay the
claims of certain creditors of the Company in accordance with the Reorganization
Plan.
Prior to 1997, the Company also received approximately $22.0 million in
recoveries, net of expenses, as a result of litigation against certain former
officers and advisors.
In July 1997, the Company's bankruptcy case was closed by final decree of
the Bankruptcy Court.
As of December 31, 1997, the Company had issued 4,549,060 shares of its
common stock to its qualified former shareholders in accordance with the terms
of its Reorganization Plan. Shareholders received one share for every ten shares
of stock formerly held and cash in lieu of any fractional shares.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation -- The financial statements include the
accounts of the Company and its wholly-owned subsidiary, Enstar Financial
Services, Inc., an inactive company. All significant intercompany balances and
transactions have been eliminated in consolidation.
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THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles 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.
(c) Cash Equivalents -- Cash equivalents consist of short term, highly
liquid investments with original purchased maturities of three months or less.
(d) Investments -- The Company classified its investment in First Union as
available-for-sale in accordance with Statement of Financial Accounting Standard
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, unrealized gains and losses associated with this
investment were excluded from net income and reported as a separate component of
comprehensive income and shareholders' equity. During 1998, the Company made an
investment in B-Line LLC. This investment is accounted for under the equity
method.
(e) Property and Equipment -- Property and equipment is stated at cost less
accumulated depreciation and is depreciated using the straight line method over
the estimated useful lives of the related assets.
(f) Financial Instruments -- The Company invests in certificates of deposit
("CDs") offered by commercial banks. These certificates, which have a weighted
average maturity of approximately two months, are classified by the Company as
"held to maturity" securities. The estimated fair value of CDs at December 31,
1998 and 1997, based on interest rates available on CDs of comparable amounts,
maturities, and credit quality, was approximately equal to their carrying
values.
The Company has from time-to-time sold call options on its First Union
common stock for trading purposes. Proceeds from the sale of call options were
deferred and subsequently adjusted to fair market value by a charge or credit to
investment income as such market value changes occurred. As options were
exercised, the Company recognized investment income in the amount of the
deferred balance.
(g) Liabilities Subject to Compromise -- Liabilities subject to compromise
represent amounts paid in accordance with the Reorganization Plan.
(h) Reorganization Items -- Prior to the initial distribution of the
Company's common stock in March 1997, reorganization items consisted of interest
income on cash and cash equivalents and certificates of deposit, professional
fees, and other expenses that related directly to the Company's bankruptcy.
(i) Income Taxes -- The Company computes deferred tax assets and
liabilities based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the years
in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
(j) Earnings per Share -- Effective January 1, 1997 the Company adopted
SFAS 128, "Earnings per Share" ("EPS"). This statement establishes standards for
computing and presenting EPS and applies to entities with publicly held stock.
All prior year EPS calculations were restated to conform to SFAS 128.
(k) Comprehensive Income -- The Company adopted SFAS 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting and
display of comprehensive income. The statement defines comprehensive income as
all changes in equity from non-owner sources.
(l) Reclassifications -- Certain prior year amounts have been reclassified
in the financial statements to conform with the current year presentation.
19
22
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: INVESTMENT IN FIRST UNION
In July 1997, the Company sold 186,300 shares of common stock of First
Union for net proceeds of $18.1 million which were used to repay indebtedness
owed to First Union National Bank. The First Union National Bank indebtedness
was incurred by the Company in October 1996 in order to make final distributions
to creditors under the Company's Reorganization Plan. On June 17, 1997, First
Union declared a 2-for-1 stock split payable July 31, 1997 changing the
Company's holdings to 1,334,246 shares. During 1998, the Company sold the
remaining 1,334,246 shares of common stock of First Union for net proceeds of
approximately $68.8 million. The sale of the First Union common stock resulted
in a realized gain of approximately $40.5 million.
NOTE 4: INVESTMENT IN B-LINE
In November 1998, the Company made an investment in B-Line LLC ("B-Line").
B-Line is a privately owned company based in Seattle, Washington, that provides
services to credit card issuers and other holders of similar receivables.
The Company invested $950,000 in membership units of B-Line, representing
approximately 8.77% of the then outstanding units of B-Line. The Company also
purchased a one-year warrant to acquire additional B-Line units, with an
aggregate exercise price of $950,000. Other investors also purchased membership
units and warrants in B-Line. If the Company and the other investors with
outstanding B-Line warrants and options were to exercise those warrants and
options, the Company would own approximately 13.89% of B-Line.
The Company's investment in B-Line is accounted for under the equity
method. In addition, legal and professional fees of approximately $15,000
incurred in the purchase of the Company's investment were capitalized as a part
of the original cost.
NOTE 5: NOTE PAYABLE
The Company had a $5.0 million revolving credit agreement from First Union
National Bank for the purpose of acquiring the Company's common stock under a
stock repurchase program announced in July 1997. Outstanding borrowings at
December 31, 1997 were $513,000 and additional borrowings of $1.3 million were
made during 1998. All amounts were subsequently paid in 1998. The loan was
collateralized by shares of First Union common stock owned by the Company. The
loan matured on July 30, 1998 and had a fixed rate of interest equal to the
Adjusted Eurodollar Rate, as defined, plus .6%.
NOTE 6: TREASURY STOCK
In July 1997, the Company announced a stock repurchase program under which
the Company could repurchase up to $5.0 million of its common stock in the open
market at prices per share deemed favorable from time to time by the Company. In
conjunction with the stock repurchase program the Company executed a new $5.0
million revolving credit note with First Union National Bank. As of December 31,
1997, the Company had repurchased 84,126 shares of its common stock for
approximately $1.0 million. During the first quarter of 1998, the Company
repurchased 303,700 shares of its common stock for approximately $4.0 million.
The purchase of such shares was financed through borrowing of approximately $1.2
million under the revolving credit agreement with First Union National Bank and
the proceeds from the sale of 101,939 shares of the Company's First Union common
stock. The purchases made in the first quarter of 1998 completed the stock
repurchase program announced in July 1997. Under the program, the Company
repurchased a total of 387,826 shares for approximately $5.0 million. On April
21, 1998, the Company announced a second stock repurchase program under the same
terms as the July 1997 program. As of December 31, 1998, the Company had
repurchased 54,525 shares of its common stock for approximately $815,000 as part
of this plan. Under the two stock repurchase programs, the Company has
repurchased a total of 442,351 shares for approximately $5.8 million.
20
23
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: LEGAL PROCEEDINGS
In February 1993, the Company obtained a $15.0 million judgement against
Richard Grassgreen, one of the Company's former officers, who subsequently filed
for bankruptcy. In connection with the settlement of the Company's claims
against the Grassgreen bankruptcy estate (the "Estate") and others, the Company
agreed to pay certain taxes of the Estate in the event the Estate did not have
sufficient funds. The United States Internal Revenue Service (the "IRS")
appealed a determination by the bankruptcy court that the IRS cannot seek
payment of the taxes from the Estate. On March 25, 1998, the United States
District Court for the Middle District of Florida reversed and remanded the case
to the bankruptcy court to determine whether the Estate had any assets from
which to satisfy any such tax liability, and if so, for further proceedings to
determine pursuant to Section 505(a) of the Bankruptcy Code whether the Estate
had any additional income tax liability. On October 27, 1998, the bankruptcy
court found that the Estate had no assets and had been closed, and accordingly,
granted summary judgement to the Company and Mr. Grassgreen, thereby preventing
further efforts by the IRS to seek payment of the taxes from the Estate. On
November 4, 1998, the IRS served a notice of appeal of the bankruptcy court's
October 27, 1998 order, but subsequently dismissed the appeal pursuant to
stipulation of the parties and order of the United States District Court for the
Middle District of Florida dated December 16, 1998. As a result the Company has
reversed a previously accrued liability of $1.9 million for the potential tax
and accrued interest.
On February 11, 1997, fifteen former shareholders of the Company filed a
lawsuit against the Company. The complaint, which deals with actions occurring
prior to the Company's filing for bankruptcy in 1991, alleges that the Company
along with its then principal officers and others defrauded the plaintiffs in
violation of the Alabama Securities Act and other Alabama statutory provisions.
The plaintiffs seek compensatory damages in the amount of their alleged losses
of approximately $2.0 million and unspecified punitive damages. The Company
filed a motion to dismiss and/or for summary judgement on March 17, 1997. The
motion filed by the Company contends that the claims asserted are barred by the
applicable statutes of limitations. The motion is still pending before the
court. In the event the plaintiffs' claims are not dismissed pursuant to the
Company's motion, the Company intends to contest the plaintiffs' claims
vigorously. The Company cannot, however, reasonably predict the outcome of this
lawsuit.
On November 13, 1998, the Company received approximately $1.1 million in
net litigation proceeds as its share of the final distribution resulting from
its legal action originally brought against Michael Milken and others in 1991.
The payment represents the Company's share of the final distribution from the
global settlement pool established as part of the global settlement of all
actions against Mr. Milken and related parties in In re the Drexel Burnham
Lambert Group, Inc., et al., 90 Civ. Ct. 6954 (MP), Chapter 11 Case Number
90B10421 SCG (jointly administered), in the United States District Court for the
Southern District of New York. The Company had previously received distributions
from the settlement pool totalling approximately $16.3 million.
NOTE 8: LEASES
The Company leases its corporate office, warehouse space, and office
equipment on a month-to-month basis. Rent expense was approximately $34,000 for
each of the three years ended December 31, 1998.
21
24
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9: INCOME TAXES
The reconciliation of income taxes computed at statutory rates to the
actual tax provision is as follows:
1998 1997 1996
-------- ------- -----
(IN THOUSANDS)
Federal income taxes at statutory rate..................... $ 13,528 $ 3,198 $ 259
State income taxes, net of federal benefit................. 2,134 297 24
Utilization of net operating loss carryforwards............ (14,544) -- --
Dividends received deduction............................... (267) (494) (499)
Capitalized reorganization costs........................... -- 251 --
Non-deductible expenses related to Flowers Transaction
(See Note 9)............................................. 605 -- --
Change in valuation allowance.............................. (72) (3,174) 200
Other...................................................... 56 143 16
-------- ------- -----
$ 1,440 $ 221 $ --
======== ======= =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. The following items
comprise the Company's deferred taxes at December 31, 1998 and 1997:
1998 1997
-------- --------
(IN THOUSANDS)
Deferred income tax assets:
Operating loss carryforwards.............................. $ 16,444 $ 30,988
Tax credit carryforwards.................................. 4,004 4,106
Reserve for litigation settlements........................ -- 719
Other..................................................... 208 133
Alternative minimum tax................................... 1,002 221
-------- --------
Deferred tax assets....................................... 21,658 36,167
Valuation allowance....................................... (21,658) (21,730)
-------- --------
-- 14,437
Deferred income tax liabilities:
Unrealized appreciation in investment in First Union...... -- (14,385)
Other..................................................... -- (52)
-------- --------
Net deferred taxes..................................... $ -- $ --
======== ========
The Company has established a valuation allowance equal to deferred tax
assets in excess of deferred tax liabilities as realization of such deferred tax
assets is dependent on future taxable income of sufficient amounts to utilize
the net operating loss carryforwards ("NOLs"), tax credit carryforwards and
other deferred tax assets. In addition, because there are possible applications
of certain provisions of the Tax Code that may limit the Company's use of the
NOLs in future tax returns, there can be no assurance that the Company will be
able to utilize its NOLs fully.
At December 31, 1998, the Company had federal NOLs of approximately $48.0
million, which, if not utilized, expire in various years from 2004 through 2011.
The Company also had tax credit carryforwards of approximately $4.0 million at
December 31, 1998. If not utilized, these credit carryforwards expire in various
years from 1999 through 2001.
22
25
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: SHAREHOLDER'S EQUITY AND PRO FORMA EARNINGS PER SHARE
(a) Distribution of Common Stock -- As of December 31, 1997, the Company
had issued 4,549,060 shares of its common stock to its qualified former
shareholders in accordance with the terms of its Reorganization Plan.
Shareholders received one share for every ten shares of stock formerly held and
cash in lieu of any fractional shares. To qualify for this distribution, former
shareholders had to submit a signed certification of ownership form on or before
December 31, 1997. As of that date approximately 200,000 shares were unclaimed
and therefore will not be issued. The pro forma earnings per share, assuming
that the distributed shares had been outstanding for all of 1996, would have
resulted in net income of $.16 per share.
(b) Flowers Transaction -- On October 20, 1998, the Company and J.
Christopher Flowers ("Flowers") entered into an Investment Agreement (the
"Investment Agreement"), whereby the Company agreed to sell to Flowers 1,158,860
newly issued shares of the Company's common stock at a price of $12.94375 per
share, for a total purchase price of $15.0 million, in exchange for a full
recourse promissory note from Flowers (the "Transaction"). The price per share
represented the average of the reported closing prices for the Company's common
stock for the ten trading days immediately preceding October 20, 1998, the date
the Board of Directors (the "Board") approved the Transaction. In the Investment
Agreement, Flowers agreed to certain restrictions on his ability to transfer the
shares and agreed not to acquire any additional shares of the Company or
participate in any capacity in certain other significant transactions involving
the Company without the approval of the Board. The Investment Agreement also
contains certain provisions relating to conflicting business opportunities and
competing transactions involving Flowers and related entities. In addition,
Flowers was appointed to the executive officer position of Vice Chairman of the
Board effective December 1, 1998.
On December 17, 1998, the Transaction was approved by the shareholders of
the Company at a special meeting held for such purpose. On December 18, 1998,
the Company consummated the sale of the shares to Flowers, resulting in Flowers
owning approximately 23% of the outstanding common stock of the Company at such
date. Since the price per share on the date of the shareholders' approval
($13 5/8) exceeded the per share sales price to Flowers, a charge to earnings of
approximately $789,000 was recognized. In addition, legal, professional and
other fees of approximately $454,000 incurred in relation to the Transaction
were charged to equity.
The full recourse promissory note in the amount of $15.0 million for the
purchase price of the shares bears interest at the rate of 4.06% per annum,
requires quarterly interest payments and has a maturity date of December 18,
2000. Since the interest rate on the note is less than the rate an independent
lender would charge Flowers, the note was recorded at a discount so as to yield
a then current "market rate" of interest over its term, and a charge to earnings
of approximately $990,000 was incurred to reflect such discount. This discount
is being accreted over the term of the note. The promissory note, net of
discount, is classified as a reduction of equity.
The Company and Flowers entered into a Registration Rights Agreement
pursuant to which Flowers was granted certain rights to require the Company to
register his shares.
(c) Share Purchase Rights Plan -- On January 20, 1997, the Board of
Directors of the Company adopted a Share Purchase Rights Plan (the "Rights
Plan"). The Rights Plan entitles shareholders to a right to purchase one share
of common stock for each outstanding share of common stock of the Company (a
"Right").
Until the occurrence of a "Distribution Triggering Event" as described
below, all future issuances of common stock by the Company will also carry the
Rights. The Rights will have no dividend or voting rights and will expire on the
tenth anniversary of their issuance unless exercised or redeemed prior to that
time.
23
26
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rights may not be exercised and are not detached from the common stock
until ten days after the occurrence of a Distribution Triggering Event. The
exercise price of the Rights is fixed at $40. The Rights generally are
redeemable by the Board of Directors of the Company at a nominal price of $.01
per Right at any time prior to the time that they are detached from the common
stock and separate certificates evidencing the Rights are delivered.
Distribution Triggering Events. Shortly after a person or group acquires
beneficial ownership of a fifteen percent (15%) interest or announces its
intention to commence a tender or exchange offer, the consummation of which
would result in beneficial ownership of fifteen percent (15%) of the Company's
common stock (a "Distribution Triggering Event"), the Rights will separate from
the common stock. Upon distribution of the Rights, they become exercisable and
are transferable separately from the Company's common stock. Each Right (other
than Rights beneficially owned by the acquiror) is then immediately converted
into the right to buy that number of shares of common stock of the Company (or
in certain circumstances, shares of stock of the acquiring company) that has a
market value of two times the exercise price of the Right.
In connection with the Transaction described above, the Board approved an
amendment to the Rights Plan for the sole purpose of exempting the Transaction
from being a Distribution Triggering Event.
NOTE 11: INVESTMENT INCOME
Investment income for the three years ended December 31, 1998, 1997 and
1996, respectively, is made up of the following components:
DECEMBER 31,
--------------------------
1998 1997 1996
------- ------- ------
(IN THOUSANDS)
Gain on sale of First Union common stock................... $40,452 $ 9,711 $ --
Gain (loss) on call option transactions.................... (2,498) 137 --
Dividend and interest income............................... 2,571 2,027 1,871
------- ------- ------
Total investment income.......................... $40,525 $11,875 $1,871
======= ======= ======
NOTE 12: FINANCIAL INSTRUMENTS
During 1997, the Company sold call options for 400,000 shares of its First
Union common stock for total proceeds of approximately $580,000. Proceeds from
the options sold were deferred and subsequently adjusted to reflect a market
value of approximately $443,000 at December 31, 1997, resulting in a gain of
approximately $137,000. This gain is included in investment income in the
Consolidated Statements of Income for the year ended December 31, 1997. The
options contained a call price of $55 per share with expiration dates ranging
from January 17 to July 18, 1998. At December 31, 1997, the Company had
outstanding call options on 400,000 shares of its First Union common stock.
During 1998, the Company sold additional call options for 205,000 shares of its
First Union common stock. Call options for 55,000 shares expired unexercised and
call options were exercised in conjunction with the sale of 260,000 shares of
First Union common stock. In addition, the Company repurchased call options for
290,000 shares. The net effect of the call option transactions resulted in a
loss of approximately $2.5 million for the year ended December 31, 1998.
NOTE 13: STOCK COMPENSATION
(a) Deferred Compensation and Stock Plan for Non-Employee Directors -- In
September 1997, the Company adopted a Deferred Compensation and Stock Plan for
Non-Employee Directors. The purposes of this plan are to enable the Company to
attract and retain qualified persons to serve as non-employee directors, to
solidify the common interests of its non-employee directors and shareholders by
enhancing the equity
24
27
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest of non-employee directors in the Company, and to encourage the highest
level of non-employee director performance by providing such non-employee
directors with a proprietary interest in the Company's performance and progress
by permitting non-employee directors to receive all or a portion of their
retainer and meeting fees in common stock and to defer all or a portion of their
retainer and meeting fees in stock units.
All non-employee directors elected to receive 100% of their compensation in
stock units in lieu of cash payments for the retainer and meeting fees. As of
December 31, 1998, a total of $174,000 in stock compensation has been deferred
under this plan.
(b) Long-Term Incentive Program -- In January 1997, the Company adopted a
long-term incentive program made up of three stock option/incentive plans which,
as amended, authorize the issuance of up to 362,500 shares of common stock.
Under the program, the Company has established the 1997 Amended CEO Stock Option
Plan (the "CEO Plan"), the 1997 Amended Outside Directors' Stock Option Plan
(the "Directors' Plan"), and the 1997 Amended Omnibus Incentive Plan (the
"Omnibus Plan").
Under the CEO Plan, the CEO was granted options for 150,000 shares of
common stock with an exercise price of $10.50 in 1997. The options granted under
the CEO Plan vest in four equal installments of 37,500 options through January
1, 2000. Under the Directors' Plan, each Outside Director was granted options
for 25,000 shares of common stock in 1997. The options have an exercise price of
$10.8125 and vest in five equal installments of 5,000 options through January 1,
2001. The Omnibus Plan was established for the benefit of key employees and
directors which provides generally for stock appreciation awards, incentive
stock options and nonqualified stock options. As of December 31, 1998, no awards
have been created and no options have been granted under the Omnibus Plan.
As of December 31, 1998, 150,000 stock options have been granted under the
CEO Plan and 100,000 stock options have been granted under the Directors' Plan.
Additionally, 75,000 and 40,000 of such options were vested at December 31, 1998
under the CEO Plan and Directors' Plan, respectively, none of which have been
exercised (on January 1, 1999, an additional 37,500 and 20,000 options became
vested under the CEO Plan and Directors' Plan, respectively).
The fair value of options granted in 1997 were $2.16 and $2.62 for the CEO
Plan and Directors' Plan, respectively, using the Black-Scholes option pricing
model, as modified, with the following assumptions:
CEO DIRECTORS'
PLAN PLAN
----- ----------
Dividend yield.............................................. 0.00% 0.00%
Expected volatility......................................... 17.24% 16.00%
Risk free interest rate..................................... 6.49% 6.48%
Expected life, in years..................................... 2.75 3.60
Had compensation cost for grants under the Company's stock option plans in
1997 been determined based on the fair value at the date of grant consistent
with the method of SFAS 123, "Accounting for Stock-Based Compensation," the
Company's pro forma net income and net income per share for 1998 and 1997 would
have been as follows:
1998 1997
----------- ----------
Pro forma net income....................................... $38,214,600 $8,783,600
Pro forma net income per common share...................... $ 9.05 $ 2.57
Pro forma net income per common share -- assuming
dilution................................................. $ 8.94 $ 2.57
25
28
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14: INCOME PER SHARE
In 1997, the Company implemented SFAS 128, "Earnings per Share." The table
below illustrates the reconciliation between net income per common share and net
income per common share -- assuming dilution for the year ended December 31,
1998. No reconciliation is illustrated for the years ended December 31, 1997 and
1996 since the application of this statement has no impact on the net income per
share calculations for those years.
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
NET INCOME PER COMMON SHARE
Net income.............................................. $38,348,000 4,221,555 $9.08
EFFECT OF DILUTIVE SECURITIES
Stock options........................................... 53,945
NET INCOME PER COMMON SHARE -- ASSUMING DILUTION
Net income plus assumed conversions..................... $38,348,000 4,275,500 $8.97
26
29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
executive officers of the Registrant, is included under the sections entitled,
"Election of Directors", "Executive Officers" and "Other Matters -- Section
16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement for the
Annual Meeting of Shareholders to be held on May 20, 1999 and such sections are
deemed incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included under the sections
entitled, "Executive Compensation", "Report of Compensation Committee", "Option
Grants in Last Fiscal Year", "Aggregated Option Exercises in 1998 and Year-End
Option Values" and "Performance Graph" of the Proxy Statement for the Annual
Meeting of Shareholders to be held on May 20, 1999 and such sections are deemed
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the sections
entitled, "Common Stock Ownership by Management" and "Principal Shareholders"
appearing in the Proxy Statement for the Annual Meeting of Shareholders to be
held on May 20, 1999 and such sections are deemed incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included under the section
entitled, "Certain Transactions" appearing in the Proxy Statement for the Annual
Meeting of Shareholders to be held on May 20, 1999 and such section is deemed
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
REFERENCE
NUMBER DESCRIPTION OF EXHIBITS
--------- -----------------------
2.1 Second Amended Plan of Reorganization of the Company,
effective as of June 1, 1992 (incorporated by reference to
Exhibit 2.1 to the Amendment No. 2 to Registration Statement
on Form 10, dated March 27, 1997).
2.2 Amended Modification to Second Amended Plan of
Reorganization of the Company, confirmed on August 24, 1993
(incorporated by reference to Exhibit 2.2 to the Amendment
No. 2 to Registration Statement on Form 10, dated March 27,
1997).
2.3 Agreement and Plan of Merger, dated as of December 31, 1996
(incorporated by reference to Exhibit 2.3 to the Amendment
No. 2 to Registration Statement on Form 10, dated March 27,
1997).
3.1 Articles of Incorporation of the Company, as amended on June
10, 1998 (incorporated by reference to Exhibit 3.1 to the
Quarterly Report on Form 10-Q, dated August 4, 1998).
27
30
REFERENCE
NUMBER DESCRIPTION OF EXHIBITS
--------- -----------------------
3.2 Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3.2 to the Annual Report on Form 10-K, dated
March 25, 1998).
4.1 Rights Agreement between the Company and American Stock
Transfer & Trust Company, as Rights Agent, dated as of
January 20, 1997 (incorporated by reference to Exhibit 4.1
to the Amendment No. 2 to Registration Statement on Form 10,
dated March 27, 1997).
4.2 Amendment Agreement dated as of October 20, 1998, to the
Rights Agreement dated as of January 20, 1997 between the
Company and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K dated October 20, 1998).
10.1 1997 Amended CEO Stock Option Plan (incorporated by
reference to Appendix A to the Proxy Statement for the
Annual Meeting of Shareholders, dated May 23, 1997).
10.2 1997 Amended Outside Directors' Stock Option Plan
(incorporated by reference to Appendix B to the Proxy
Statement for the Annual Meeting of Shareholders, dated May
23, 1997).
10.3 1997 Amended Omnibus Incentive Plan (incorporated by
reference to Appendix C to the Proxy Statement for the
Annual Meeting of Shareholders, dated May 23, 1997).
10.4 Revolving Credit Note dated July 31, 1997 made by the
Company in favor of First Union National Bank (incorporated
by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q, dated August 14, 1997).
10.5 Stock Pledge Agreement between the Company and First Union
National Bank, dated July 31, 1997 (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form
10-Q, dated August 14, 1997).
10.6 Deferred Compensation and Stock Plan for Non-Employee
Directors (incorporated by reference to Exhibit 99.1 to the
Quarterly Report on Form 10-Q, dated October 30, 1997).
10.7 Investment Agreement dated October 20, 1998, between the
Company and J. Christopher Flowers, together with certain
exhibits thereto (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K dated October 20, 1998).
10.8 Form of Severance Benefits Agreement between the Company and
each of Nimrod T. Frazer, Cheryl D. Davis and Amy M.
Dunaway, each dated May 21, 1998.
27.1 Financial Data Schedule. (For SEC Use Only)
99.1 The Enstar Group, Inc. Private Securities Litigation Reform
Act of 1995 Safe Harbor Compliance Statement For
Forward-Looking Statements.
99.2 Notice of Pending Distribution of New Common Stock in The
Enstar Group, Inc. (incorporated by reference to Exhibit
99.1 to the Amendment No. 2 to Registration Statement on
Form 10, dated March 27, 1997).
99.3 Modified Order on Proposed Distribution to Equity Security
Holders by the United States Bankruptcy Court for the Middle
District of Alabama (incorporated by reference to Exhibit
99.2 to the Amendment No. 2 to Registration Statement on
Form 10, dated March 27, 1997).
99.4 Application for an Order Pursuant to Sections 6(c) and 6(e)
of the Investment Company Act of 1940 (incorporated by
reference to Application for an Order Pursuant to Sections
6(c) and 6(e) of the Investment Company Act of 1940, dated
March 19, 1998).
99.5 Amendment No. 1 to the Application for an Order Pursuant to
Sections 6(c) and 6(e) of the Investment Company Act of 1940
(incorporated by reference to Amendment No. 1 to the
Application for an Order Pursuant to Sections 6(c) and 6(e)
of the Investment Company Act of 1940, dated May 22, 1998).
28
31
(b) Reports on Form 8-K
(i) A report on Form 8-K dated October 20, 1998, announcing the proposed
appointment of Flowers, a director of the Company, to the executive officer
position of Vice Chairman of the Board of Directors effective December 1, 1998.
In addition, the Company announced that it had entered into an Investment
Agreement with Flowers dated October 20, 1998, pursuant to which the Company
proposed to sell to Flowers 1,158,860 newly issued shares of the Company's
Common Stock for a purchase price of approximately $15.0 million, or
approximately $12.94 per share. Flowers would purchase the shares with a full
recourse promissory note.
(ii) A report on Form 8-K dated November 24, 1998, announcing that the
Company had made an investment in B-Line. B-Line is a privately owned company
based in Seattle, Washington, that provides services to credit card issuers and
other holders of similar receivables.
(iii) A report on Form 8-K dated December 17, 1998, announcing the results
of the special meeting of shareholders and purchase by Flowers of 1,158,860
shares of the Company's Common Stock.
29
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE ENSTAR GROUP, INC.
By: /s/ NIMROD T. FRAZER
------------------------------------
Nimrod T. Frazer
Chairman of the Board of Directors,
President
and Chief Executive Officer
March 29, 1999
30
33
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ NIMROD T. FRAZER Chairman of the Board of March 29, 1999
- ----------------------------------------------------- Directors, President and
Nimrod T. Frazer Chief Executive Officer
/s/ CHERYL D. DAVIS Chief Financial Officer, Vice March 29, 1999
- ----------------------------------------------------- President and Secretary
Cheryl D. Davis (Principal Accounting
Officer)
/s/ J. CHRISTOPHER FLOWERS Vice Chairman of the Board of March 29, 1999
- ----------------------------------------------------- Directors
J. Christopher Flowers
/s/ T. WHIT ARMSTRONG Director March 29, 1999
- -----------------------------------------------------
T. Whit Armstrong
/s/ T. WAYNE DAVIS Director March 29, 1999
- -----------------------------------------------------
T. Wayne Davis
/s/ JEFFREY S. HALIS Director March 29, 1999
- -----------------------------------------------------
Jeffrey S. Halis
31