UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of
Report (Date of earliest event reported): February 11, 2011
ENCOMPASS GROUP AFFILIATES,
INC.
(Exact
Name of Registrant as Specified in Its Charter)
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Florida
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000-30486
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65-0738251
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(State
or Other
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(Commission
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(IRS
Employer
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Jurisdiction
of
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File
Number)
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Identification
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Incorporation)
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Number)
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420 Lexington Avenue, New York, New
York
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10170
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (800) 432-8542
_____________________________
(Former
name or former address, if changed since last report.)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General
Instruction A.2. below):
o Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o Soliciting material
pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
o Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item
8.01. Other
Information.
Encompass
Group Affiliates, Inc. (the “Company”) has appointed a Special Committee of
independent directors to review and evaluate a non-binding acquisition proposal
(the “Proposal”) submitted to the Company’s Board of Directors by Sankaty
Advisors, LLC (“Sankaty”), the advisor to the Company’s principal lenders (the
“Lenders”), on February 11, 2011, as described in Amendment No. 1 to Schedule
13D filed by Sankaty on February 11, 2011. As described further
below and subject to negotiations between the parties, the Proposal, if
accepted, would likely transfer ownership of the Company’s operating
subsidiaries to a new entity controlled by the Lenders, in exchange for
relieving the Company’s obligations to the Lenders, assumption of certain
Company expenses to be agreed upon and the payment to the Company of cash and
issuance of a junior equity security in the new company.
The
Proposal contemplates that during the Company’s evaluation period and Sankaty’s
due diligence period, the parties would negotiate the terms of definitive
documents pursuant to which a newly formed entity controlled by the Lenders
(“Newco”) would acquire the Company’s operating subsidiaries (the “Operating
Company”), or would acquire substantially all of the assets (and assume
substantially all of the liabilities) of the Operating Company in exchange for
consideration consisting of cash and non-voting equity securities in Newco.
Additionally, pursuant to the Proposal, the senior debt of the Operating Company
held by the Lenders would remain outstanding; however, it is anticipated the
Company’s guarantee of that debt would be terminated. The
subordinated debt of the Operating Company held by the Lenders would either be
repaid as part of the transaction, assumed by Newco, or exchanged for preferred
equity interests in Newco. A condition of the Proposal is that
holders of certain notes of the Company, other than those held by the Lenders,
enter into mutually agreeable arrangements with Newco. It is contemplated that
the Company would then be relieved of those debts. The Operating
Company or Newco would reimburse the Company for certain expenses that would be
agreed upon. The Proposal is conditioned on Sankaty’s satisfaction with the
results of its due diligence (including, without limitation, business, legal,
environmental, tax, employee benefits and accounting due
diligence).
If the
transactions contemplated in the Proposal are effected, the Company’s assets
would consist of cash remaining after payment of expenses and liabilities not
assumed or paid by Newco and a junior equity security in Newco of uncertain
value. While the specific terms of the transaction are subject to
negotiation, the Company expects that the net proceeds to the Company will
likely be less than 10% of the liquidation preference of the various classes of
preferred stock held by the Company’s majority stockholder and
others. Therefore it is unlikely the Proposal will result in any
material distribution, if any, to common shareholders.
The
transactions contemplated by the Proposal are expected to permit the Operating
Company to operate profitably with reduced debt and a more favorable capital
structure. As the Company will be divested of the Operating Company,
however, those improvements will not benefit the Company or its
shareholders.
Even if
the Special Committee determines that the Proposal is in the best interest of
the Company and stockholders, there can be no assurance that the parties will be
able to reach full agreement on the definitive terms of the
agreement. Further, the transaction described in the proposal is
subject to the approval of (i) the majority holder of Company’s Series E
Preferred Stock and (ii) the majority holder of the Company’s Series C Preferred
Stock.
The
Special Committee members consist of John G. Ball, Thomas Ketteler, Gerald
Wedren and Wilbank Roche, all of the Company’s directors who are deemed to be
independent. No members of the Company’s management currently serve
on its Board of Directors.
The
Special Committee has also been authorized to consider other strategic
alternatives for the Company. The Special Committee has retained
Cassel Salpeter & Co. to provide financial advice with respect to the
fairness of Sankaty’s proposal and other strategic alternatives and to assist
the Board with its evaluation process. The Company does not plan to
make any further comment on the evaluation process until the evaluation is
complete.
The
Proposal and the Company’s consideration of the Proposal arise from the
Company’s inability to meet the financial covenants under its agreements with
the Lenders or to make required interest payments under those
agreements. The Company expects to file its Annual Report on Form
10-K for the year ended June 30, 2010 and its Quarterly Reports on Form 10-Q for
the two most recent fiscal quarters as soon as practicable. The
Company’s Annual Report was due on September 28, 2010, on which date the Company
filed a Form 12b-25 Notification of Late Filing stating that the Company was
unable, without unreasonable effort and expense, to prepare its accounting
records and schedules in sufficient time to allow its accountant to complete its
review of its financial information for the fiscal year ended June 30, 2010 on
or by September 28, 2010. The Company expects to report net losses of
approximately $28,774,000 for the fiscal year ended June 30, 2010, and
$4,619,000 and $2,428,000, respectively, for the fiscal quarters ended September
30 and December 31, 2010.
In a
Notification of Late Filing on Form 12b-25 filed with the SEC on September 28,
2010, the Company stated that it expected to report a net loss of approximately
$10,000,000 for the fiscal year ended June 30, 2010. The Company now
anticipates that it will report a net loss of approximately $28,774,000 for the
fiscal year ended June 30, 2010. The increased loss estimate is
primarily attributable to the following additional noncash charges that had not
been identified and quantified at the time the Form 12b-25 was filed: a loss
from the impairment of goodwill in the amount of $11,907,000, income tax expense
in the amount of $3,841,000 based on an increase in the valuation allowance, and
an increase in inventory reserves in the amount of $1,385,000 based on a change
in estimate for valuing certain inventory. Various year end closing
and audit adjustments represent the balance of the difference. These
matters have not had a material impact on the Company’s liquidity or working
capital position, as such are largely related to assets that are not
tangible.
The
foregoing description of the Proposal and the transactions contemplated thereby
do not purport to be complete and is subject to, and qualified in its entirety
by, the full text of the Proposal, which is filed as Exhibit 99.1 to this report
and is incorporated herein by reference in its entirety.
Forward-Looking
Statements
This
Current Report on Form 8-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are based on current
expectations and projections about future events affecting the
Company. All statements, other than statements of historical fact,
are statements that could be deemed forward-looking statements, including,
statements about the Company’s intention to restate its financial statements,
the effects of the corrections discussed on future periods and the timing of
filing of the Company’s restated financial statements, and statements containing
the words “expects,” “estimates,” “anticipates” and similar
words. The potential risks and uncertainties which contribute to the
uncertain nature of these statements include, among others: the
uncertainty of the outcome of the final negotiations with the Company’s lenders;
and the uncertainty of the Company’s ability to generate cash pending the
closing of any transaction. This list of factors is not exhaustive
and should be read with the other cautionary statements that are included in the
other periodic reports filed by the Company with the Commission. If
one or more of these or other risks or uncertainties materialize, or if the
Company’s underlying assumptions prove to be incorrect, actual results and
outcomes may vary materially from those described herein. Any
forward-looking statements contained herein reflect the Company’s current views
with respect to future events and are subject to these and other risks,
uncertainties and assumptions relating to, among other things, its operations,
results of operations, growth strategy and liquidity. Any
forward-looking statements speak only as of the date of this
report. Subject to any obligations under applicable law, the Company
undertakes no obligation to publicly update or review any forward-looking
statement, whether as a result of new information, future developments or
otherwise
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(d)
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Exhibits.
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Exhibit No.
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Exhibit
Description
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99.1
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Proposal
submitted by Sankaty on February 11, 2011 (incorporated by reference to
Exhibit A of Amendment No. 1 to Schedule 13D filed with the Securities and
Exchange Commission by Sankaty on February 11, 2011).
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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ENCOMPASS
GROUP AFFILIATES, INC.
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Dated:
February 15, 2011
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By:
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/s/ Robert
B. Gowens
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Interim Chief Executive Officer |
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EXHIBIT
INDEX
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Exhibit No.
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Exhibit
Description
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99.1
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Proposal
submitted by Sankaty on February 11, 2011 (incorporated by reference to
Exhibit A of Amendment No. 1 to Schedule 13D filed with the Securities and
Exchange Commission by Sankaty on February 11, 2011).
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