ITEM 1. BUSINESS
GENERAL
The Enstar Group, Inc., a Georgia corporation (the "Company"), currently holds assets, aggregating approximately $69.4 million at December 31, 1999, consisting primarily of cash, cash equivalents 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. In accordance with the terms of the Reorganization Plan and orders of the Bankruptcy Court, the Company issued 4,549,244 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 401 Madison Avenue, 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
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 received recoveries from litigation pursued under the terms of its Reorganization Plan. The total amount of these recoveries, net of expenses, was approximately $25.7 million.
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 since that time has distributed 4,549,244 Shares to its qualified former shareholders in accordance with the terms of its Reorganization Plan.
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. 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 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.
ITEM 2. PROPERTIES
The Company does not currently own any real property. In June 1999, the Company signed a three year lease on an office building at 401 Madison Avenue, Montgomery, Alabama which serves as the corporate headquarters. Additionally, pursuant to an oral agreement, the Company leases space in a warehouse at 703 Howe Street, Montgomery, Alabama on a month-to-month basis. The Company leases the office building and warehouse space from unaffiliated third parties for $2,500 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.
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.
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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of the Company during the quarter ended December 31, 1999.
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.
PART II
ITEM 5.
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. The following table reflects the range of high and low selling prices of the Company's Common Stock by quarter for 1999 and 1998, as reflected in the OTC Bulletin Board Daily Trade and Quote Summary Report:
At March 14, 2000, there were approximately 3,375 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."
ITEM 6.
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, 1999 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.
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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.
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
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 $69.4 million at December 31, 1999, consist primarily of cash, cash equivalents and certificates of deposit.
The Company is currently 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, however, such efforts have not resulted to date in any definitive agreements with respect to the acquisition of any business or company. With the exception of various expenses incurred in connection with the Company's search for a suitable acquisition, its only needs are to fund normal 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 $69.4 million at December 31, 1999 compared to $68.0 million at December 31, 1998. The change in total assets was primarily due to the increase in the Company's cash, cash equivalents and certificates of deposit.
The Company's total liabilities at December 31, 1999 were $819,000 compared to $1.1 million at December 31, 1998. The decrease in liabilities is primarily due to the reduction of certain accounts payable and accrued liabilities.
OTHER MATERIAL TRANSACTION
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 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 of Directors. 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 of Directors 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 aggregating approximately $464,000 incurred in relation to the Transaction were charged to equity in 1998 and 1999.
The full recourse promissory note in the amount of $15.0 million for the purchase price of the shares was repaid in full with accrued interest on March 3, 2000. The note bore interest at the rate of 4.06% per annum,
required quarterly interest payments and had a maturity date of December 18, 2000. Since the interest rate on the note was 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 was being accreted over the term of the note. The promissory note, net of discount, was classified as a reduction of equity at December 31, 1999 and 1998.
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
1999 Compared to 1998
Investment income was approximately $4.4 million in 1999 compared to approximately $40.5 million in 1998. Investment income for 1999 consisted almost entirely of interest income from cash, cash equivalents, certificates of deposit and the note receivable from Flowers. Investment income for 1998 included interest and dividend income of approximately $2.6 million and a gain of approximately $40.4 million on the sale of 1,334,246 shares of First Union Common Stock, offset by losses on call option transactions of approximately $2.5 million.
In 1999, the Company recorded net litigation income of approximately $244,000 compared to approximately $3.0 million in 1998. The 1999 litigation income resulted from the receipt of additional proceeds from the earlier settlement of the Company's claim against a former officer of the Company. In 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. In addition, the 1998 income included the reversal of a $1.9 million reserve for litigation settlements previously recorded in connection with litigation involving a former officer of the Company.
General and administrative expenses were approximately $2.4 million in 1999 and approximately $3.7 million in 1998. The reduction in these expenses was primarily due to the absence in 1999 of approximately $1.8 million of expenses recorded in 1998 resulting from the Flowers Transaction. In addition to normal operating expenses, the Company's general and administrative expenses include legal and professional fees as well as travel expenses incurred in connection with the Company's search for a suitable acquisition. Most variances in general and administrative expenses can be attributed to the number of potential acquisition candidates the Company locates as well as the degree of interest the Company may have in such candidates. The stronger the interest in a candidate, the more rigorous financial and legal due diligence the Company will incur with respect to that candidate. During 1999, the Company experienced an increase in certain general and administrative expenses as a direct result of intensive evaluation of several potential acquisition candidates.
Income tax expense was $124,000 in 1999 and approximately $1.4 million in 1998. 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 approximately $2.1 million in 1999 compared to approximately $38.3 million in 1998. The decrease in 1999 from 1998 is primarily due to the absence in 1999 of transactions comparable to the 1998 gain on the sale of shares of First Union Common Stock.
1998 Compared to 1997
Investment income was approximately $40.5 million in 1998 compared to approximately $11.9 million in 1997. This substantial increase was a result of the increase in 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.
The Company had net litigation income of approximately $3.0 million in 1998 compared to net 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 litigation involving a former officer of the Company.
General and administrative expenses were approximately $3.7 million in 1998 and approximately $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 approximately $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 approximately $38.3 million in 1998 compared to approximately $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.
RECENT DEVELOPMENTS
On March 2, 2000, the Company announced that its Board of Directors named John J. Oros to the position of Executive Vice President and elected him as a director to fill a newly created position on the Board of Directors. Mr. Oros' responsibilities will involve working with the Company's management and other directors to locate an acquisition target. Mr. Oros also was granted options to purchase 100,000 shares of the Company's common stock under the Omnibus Plan with an exercise price of 12 3/4, the average of the high and low bid prices on March 2, 2000. The options granted under the 1997 Amended Omnibus Incentive Plan vest in three installments; 50,000 on March 2, 2001 and 25,000 each on March 2, 2002 and 2003. In addition, Mr. Oros has purchased a total of 75,000 shares of the Company's common stock from J. Christopher Flowers and Jeffrey S. Halis, two directors of the Company. The purchase, when added to the Company common stock he already owns, results in Mr. Oros owning approximately 1.8% of the outstanding shares of the Company.
The Company also announced that J. Christopher Flowers repaid his $15.0 million note with accrued interest to the Company on March 3, 2000. The note had a due date of December 18, 2000, and resulted from the Company's sale of 1,158,860 newly issued shares of common stock to Mr. Flowers on December 18, 1998.
ITEM 7A.
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 $64.3 million in interest bearing accounts (interest at floating rates) and approximately $3.6 million of short-term certificates of deposit (interest at fixed rates) at December 31, 1999. 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, 1999 is approximately nine 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, 1999, classified as a reduction of equity.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Atlanta, Georgia February 4, 2000 (March 7, 2000 as to Note 12)
THE ENSTAR GROUP, INC.
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
THE ENSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statements.
THE ENSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
THE ENSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
THE ENSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
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 canceled 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 approximately $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.
In addition to the proceeds received from the disposition of the American stock, the Company received recoveries from litigation pursued under the terms of its Reorganization Plan. As of December 31, 1999, the total amount of these recoveries, net of expenses, was approximately $25.7 million.
In July 1997, the Company's bankruptcy case was closed by final decree of the Bankruptcy Court.
As of December 31, 1999, the Company has issued 4,549,244 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.
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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 were excluded from net income and reported as a separate component of comprehensive income and shareholders' equity until the sale of all remaining shares of First Union in 1998. During 1998, the Company purchased membership units of 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 nine months, are classified by the Company as "held to maturity" securities. The estimated fair value of CDs at December 31, 1999 and 1998, based on interest rates available on CDs of comparable amounts, maturities, and credit quality, was approximately equal to their carrying values.
(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.
(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 certain 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.
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: INVESTMENT IN B-LINE
In November 1998, the Company purchased $950,000 in membership units of 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. B-Line also purchases credit card receivables and recovers payments on these accounts.
At the time of the purchase, the Company's membership units represented approximately 8.77% of the 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. The Company's warrants expired unexercised in November 1999. As a result of the expiration of the warrants, a loss of approximately $42,000 was incurred and the Company's ownership percentage decreased to approximately 7.99%.
The Company's B-Line membership units are 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. Approximately $803,000 of the original $950,000 paid was recorded as goodwill and is being amortized over a period of 10 years.
NOTE 4: 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. During 1997 and the first quarter of 1998, 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. The Company has 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.
NOTE 5: LEGAL PROCEEDINGS
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.
NOTE 6: LEASES
In June 1999, the Company signed a three year lease on an office building at 401 Madison Avenue, Montgomery, Alabama which serves as the corporate headquarters. Additionally, pursuant to an oral agreement, the Company leases space in a warehouse at 703 Howe Street, Montgomery, Alabama on a month-to-month basis. The Company also leases certain office equipment on a month-to-month basis. Rent expense was approximately $36,000, $34,000 and $34,000 in 1999, 1998 and 1997, respectively.
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: INCOME TAXES
The reconciliation of income taxes computed at statutory rates to the actual tax provision is as follows:
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, 1999 and 1998:
The Company has established a valuation allowance equal to deferred tax assets 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 Internal Revenue Code of 1986, as amended 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, 1999, the Company had federal NOLs of approximately $46.4 million, which, if not utilized, expire in various years from 2004 through 2011. The Company also had general business tax credit carryforwards of approximately $3.3 million at December 31, 1999. If not utilized, these credit carryforwards expire in 2000 and 2001.
NOTE 8: SHAREHOLDER'S EQUITY AND PRO FORMA EARNINGS PER SHARE
(a) Distribution of Common Stock -- As of December 31, 1999, the Company had issued 4,549,244 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
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certification of ownership form on or before December 31, 1997. Approximately 200,000 shares were unclaimed and therefore will not be issued.
(b) Note Receivable -- 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 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 of Directors. 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 of Directors 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 $464,000 incurred in relation to the Transaction were charged to equity in 1998 and 1999.
The full recourse promissory note in the amount of $15.0 million for the purchase price of the shares was repaid in full with accrued interest on March 3, 2000. The note bore interest at the rate of 4.06% per annum, required quarterly interest payments and had a maturity date of December 18, 2000. Since the interest rate on the note was 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 was being accreted over the term of the note. The promissory note, net of discount, was classified as a reduction of equity at December 31, 1999 and 1998. See Note 12.
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.
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.
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 of Directors approved an amendment to the Rights Plan for the sole purpose of exempting the Transaction from being a Distribution Triggering Event.
NOTE 9: INVESTMENT INCOME
Investment income for the three years ended December 31, 1999, 1998 and 1997, respectively, is made up of the following components:
NOTE 10: 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 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 have elected to receive 100% of their compensation in stock units in lieu of cash payments for the retainer and meeting fees. Approximately $260,000 and $174,000 in stock compensation has been deferred under this plan as of December 31, 1999, and 1998, respectively.
(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
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and nonqualified stock options. As of December 31, 1999, no awards have been created and no options have been granted under the Omnibus Plan. See Note 12.
As of December 31, 1999, 150,000 stock options have been granted under the CEO Plan and 100,000 stock options have been granted under the Directors' Plan. Additionally, 112,500 and 60,000 of such options were vested at December 31, 1999 under the CEO Plan and Directors' Plan, respectively, none of which have been exercised (on January 1, 2000, 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:
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 1999, 1998 and 1997 would have been as follows:
NOTE 11: 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 years ended December 31, 1999, 1998 and 1997. Net income per common share is computed by dividing net income by the weighted average shares outstanding. Net income per common share -- assuming dilution is computed by dividing net income by the sum of the weighted average shares outstanding and the number of shares that would have been outstanding if potentially dilutive shares had been issued.
NOTE 12: SUBSEQUENT EVENTS
On March 2, 2000, the Company announced that its Board of Directors named John J. Oros to the position of Executive Vice President and elected him as a director to fill a newly created position on the Board
THE ENSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Directors. Mr. Oros' responsibilities will involve working with the Company's management and other directors to locate an acquisition target. Mr. Oros also was granted options to purchase 100,000 shares of the Company's common stock under the Omnibus Plan with an exercise price of 12 3/4, the average of the high and low bid prices on March 2, 2000. The options granted under the Omnibus Plan vest in three installments: 50,000 on March 2, 2001 and 25,000 each on March 2, 2002 and 2003. In addition, Mr. Oros has purchased a total of 75,000 shares of the Company's common stock from J. Christopher Flowers and Jeffrey S. Halis, two directors of the Company. The purchase, when added to the Company common stock he already owns, results in Mr. Oros owning approximately 1.8% of the outstanding shares of the Company. See Note 10.
The Company also announced that J. Christopher Flowers repaid his $15,000,000 note with accrued interest to the Company on March 3, 2000. The note had a due date of December 18, 2000, and resulted from the Company's sale of 1,158,860 newly issued shares of common stock to Mr. Flowers on December 18, 1998. See Note 8.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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 18, 2000 and such sections are deemed incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included under the sections entitled, "Severance Agreements", "Executive Compensation", "Report of Compensation Committee", "Option Grants in Last Fiscal Year", "Aggregated Option Exercises in 1999 and Year-End Option Values", "Performance Graph" and "Compensation Committee Interlocks and Insider Participation" of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 18, 2000 and such sections are deemed incorporated herein by reference.
ITEM 12.
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 18, 2000 and such sections are deemed incorporated herein by reference.
ITEM 13.
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 18, 2000 and such section is deemed incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements included in this Annual Report are for the fiscal period ended December 31, 1999.
Independent Auditors' Report. Consolidated Balance Sheets as of December 31, 1999 and 1998. Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Comprehensive Income for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
All financial statement schedules are omitted because the information is not required or because the information required is in the financial statements or notes thereto.
3. Exhibits
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended December 31, 1999.
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 22, 2000
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.