<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER 0-07477
THE ENSTAR GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 63-0590560
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
172 COMMERCE STREET-3RD FLOOR
MONTGOMERY, ALABAMA 36104
(Address of principal executive offices)
(334) 834-5483
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES [ X ] NO [ ]
The number of shares of Registrant's Common Stock, $.01 par value per
share, outstanding at November 12, 1998 was 4,106,709.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THIS FORM 10-Q 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, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, 15 U.S.C.A. SECTIONS 77Z-2 AND 78U-5
(SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF
OR CURRENT EXPECTATIONS OF THE ENSTAR GROUP, INC. AND MEMBERS OF ITS MANAGEMENT
TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-Q, AND ARE
HEREBY INCORPORATED BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE
OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE
OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER
TIME.
i
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE ENSTAR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 63,717 $ 700
Certificates of deposit..................................... 3,421 3,322
Other....................................................... 478 484
Investment in First Union................................... -- 68,380
Property and equipment, net................................. 38 46
-------- ---------
Total assets...................................... $ 67,654 $ 72,932
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable................................................ $ -- $ 513
Reserve for litigation settlements.......................... 1,981 1,877
Accounts payable and accrued liabilities.................... 80 47
Income taxes payable........................................ 1,005 --
Deferred liabilities........................................ 132 473
Other....................................................... 367 358
-------- ---------
Total liabilities................................. 3,565 3,268
-------- ---------
Shareholders' equity:
Common stock ($.01 par value; 55,000,000 shares
authorized, 4,549,060 shares issued at September 30,
1998 and December 31, 1997)............................ 45 45
Additional paid-in capital................................ 167,878 167,878
Accumulated other comprehensive income -- unrealized gain
on investment in First Union........................... -- 37,606
Accumulated deficit....................................... (98,024) (134,825)
Treasury stock, at cost (442,351 and 84,126 shares at
September 30, 1998 and December 31, 1997,
respectively).......................................... (5,810) (1,040)
-------- ---------
Total shareholders' equity........................ 64,089 69,664
-------- ---------
Total liabilities and shareholders' equity........ $ 67,654 $ 72,932
======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
<PAGE> 4
THE ENSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Investment income............................... $ 36,894 $ 10,201 $ 39,625 $ 11,255
Litigation income (expense), net................ (2) 2 68 (33)
General and administrative expenses............. (350) (304) (1,565) (1,167)
Reorganization items, net....................... -- -- -- (484)
Interest expense................................ (40) (66) (133) (717)
---------- ---------- ---------- ----------
Income before income taxes...................... 36,502 9,833 37,995 8,854
Income taxes.................................... (1,154) (200) (1,194) (200)
---------- ---------- ---------- ----------
Net income...................................... $ 35,348 $ 9,633 $ 36,801 $ 8,654
========== ========== ========== ==========
Weighted average shares outstanding............. 4,115,064 4,500,085 4,205,956 3,063,414
========== ========== ========== ==========
Weighted average shares outstanding -- assuming
dilution...................................... 4,171,084 4,534,699 4,257,165 3,084,002
========== ========== ========== ==========
Net income per common share..................... $ 8.59 $ 2.14 $ 8.75 $ 2.82
========== ========== ========== ==========
Net income per common share -- assuming
dilution...................................... $ 8.47 $ 2.12 $ 8.64 $ 2.81
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 5
THE ENSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
-------- ------- -------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income.............................................. $ 35,348 $ 9,633 $ 36,801 $ 8,654
Other comprehensive income:
Unrealized gains (losses) on investment in First Union
arising during period.............................. (5,680) 5,994 2,846 21,783
Less: reclassification adjustment for gains included
in net income...................................... (37,634) (9,711) (40,452) (9,711)
-------- ------- -------- -------
Other comprehensive income (loss)....................... (43,314) (3,717) (37,606) 12,072
-------- ------- -------- -------
Comprehensive income (loss)............................. $ (7,966) $ 5,916 $ (805) $20,726
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 6
THE ENSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 36,801 $ 8,654
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation........................................... 11 8
Gain on sale of First Union common stock............... (40,452) (9,711)
Loss on call option transactions....................... 2,498 --
Changes in assets and liabilities:
Accounts payable and accrued liabilities............... 1,142 (464)
Other.................................................. 117 (213)
-------- --------
Net cash provided by (used in) operating
activities...................................... 117 (1,726)
-------- --------
Cash flows from investing activities:
Proceeds from sale of First Union common stock............ 68,824 18,141
Proceeds from sale of call options........................ 363 --
Repurchases of call options sold.......................... (902) --
Purchases of certificates of deposit...................... (6,754) (8,122)
Maturities of certificates of deposit..................... 6,655 5,652
Purchase of property and equipment........................ (3) (17)
-------- --------
Net cash provided by investing activities......... 68,183 15,654
-------- --------
Cash flows from financing activities:
Proceeds from note payable................................ 1,311 --
Repayment of note payable................................. (1,824) (18,100)
Purchase of treasury stock................................ (4,770) (363)
-------- --------
Net cash used in financing activities............. (5,283) (18,463)
-------- --------
Increase (decrease) in cash and cash equivalents............ 63,017 (4,535)
Cash and cash equivalents at the beginning of the period.... 700 4,749
-------- --------
Cash and cash equivalents at the end of the period.......... $ 63,717 $ 214
======== ========
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 18 $ 750
======== ========
Income taxes paid (refunded).............................. $ 189 $ (36)
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 7
THE ENSTAR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: GENERAL
The consolidated financial statements of The Enstar Group, Inc. (the
"Company" or "Enstar") are unaudited and, in the opinion of management, include
all adjustments consisting solely of normal recurring adjustments necessary to
fairly state the Company's financial condition and results of operations for the
interim period. The results of operations for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year. These statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1997
included in the Company's Form 10-K/A-1 as filed with the Securities and
Exchange Commission on April 21, 1998 under the Securities Exchange Act of 1934,
as amended. Certain prior year amounts have been reclassified in the financial
statements to conform with the current year presentation.
NOTE 2: INVESTMENT IN FIRST UNION
In the first quarter of 1998, the Company sold 101,939 shares of common
stock of First Union Corporation ("First Union") for net proceeds of $5,125,000
which were used to repay indebtedness owed to First Union National Bank and to
repurchase shares of the Company's common stock. The First Union indebtedness
was incurred in conjunction with a stock repurchase program. The sale of the
First Union common stock resulted in a realized gain of $2,818,000. During the
quarter ended September 30, 1998, the Company sold its remaining 1,232,307
shares of First Union common stock. The Company received net proceeds of
$63,699,000 and realized a gain of $37,634,000 on the sale of the shares. See
Note 5.
NOTE 3: TREASURY STOCK
During the first quarter of 1998, the Company repurchased 303,700 shares of
its common stock for approximately $3,955,000. The purchase of such shares was
financed through borrowings of approximately $1,211,000 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 million of its common
stock. Under the program, the Company repurchased a total of 387,826 shares for
approximately $4,995,000. On April 21, 1998, the Company announced a second
stock repurchase program under which the Company could repurchase up to $5
million of its common stock in the open market at prices deemed favorable from
time to time by the Company. As of September 30, 1998, the Company had
repurchased 54,525 shares of its common stock for approximately $815,000 as part
of this plan.
NOTE 4: LITIGATION CONTINGENCIES
In February 1993, the Company obtained a $15 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 has 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
has any additional income tax liability. On October 27, 1998 the bankruptcy
court found that the Estate has no assets and has 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.
5
<PAGE> 8
THE ENSTAR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 5: INVESTMENT INCOME
Investment income for the three and nine months ended September 30, 1998
and 1997, respectively, is made up of the following components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gain on sale of First Union common stock.... $37,634,000 $ 9,711,000 $40,452,000 $ 9,711,000
Loss on call option transactions............ (1,371,000) -- (2,498,000) --
Dividend and interest income................ 631,000 490,000 1,671,000 1,544,000
----------- ----------- ----------- -----------
Total investment income........... $36,894,000 $10,201,000 $39,625,000 $11,255,000
=========== =========== =========== ===========
</TABLE>
NOTE 6: FINANCIAL INSTRUMENTS
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.
NOTE 7: INVESTMENT COMPANY ACT OF 1940
As a result of holding the 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 and cash equivalents. Accordingly, the Company believes that its status as
an inadvertent investment company has been effectively resolved.
NOTE 8: SUBSEQUENT EVENTS
Flowers Transaction. On October 20, 1998, The Company announced the
proposed appointment of J. Christopher Flowers to the position of Vice Chairman
of the Board of Directors (the "Board") of Enstar effective December 1, 1998.
Mr. Flowers has been an outside director of Enstar since October 1996 and has
been involved in working with Enstar's management in locating an acquisition
target.
6
<PAGE> 9
THE ENSTAR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, Enstar and Mr. Flowers have entered into an Investment
Agreement, dated October 20, 1998 (the "Investment Agreement"), whereby Enstar
will sell to Mr. Flowers 1,158,860 newly issued shares of Enstar's common stock
at a price of $12.94375 per share, for a total purchase price of $15 million, in
exchange for a full recourse promissory note from Mr. Flowers (the
"Transaction"). The price per share represents the average of the reported
closing prices for Enstar common stock for the ten trading days immediately
preceding October 20, 1998, the date the Board approved the Transaction. In the
Investment Agreement, Mr. Flowers has agreed to certain restrictions on his
ability to transfer the shares and has agreed not to acquire any additional
shares of Enstar or participate in any capacity in certain other significant
transactions involving Enstar without the approval of the Board. The Investment
Agreement also contains certain provisions relating to conflicting business
opportunities and competing transactions involving Mr. Flowers and related
entities.
Mr. Flowers will deliver to Enstar a full recourse promissory note in the
amount of $15 million for the purchase price of the shares. The note will bear
interest at the rate of 4.06% per annum, will have a maturity of two years and
will require quarterly interest payments. Since the interest rate on the note is
less than the rate an independent lender would charge Mr. Flowers, the note will
be recorded at a discount so as to yield a "market rate" of interest over its
term, and a charge to earnings will be incurred to reflect such discount. The
promissory note, net of the discount, will be classified as a reduction of
equity.
Enstar and Mr. Flowers have also agreed to enter into a Registration Rights
Agreement pursuant to which Mr. Flowers will be granted certain rights to
require Enstar to register his shares.
The Board has decided to present the Transaction to the shareholders of
Enstar for a vote in a special meeting to be called for such purpose. The
special meeting of shareholders is expected to take place on December 17, 1998.
Subject to certain conditions, the Board has agreed to recommend that the Enstar
shareholders vote in favor of the Transaction. The consummation of the sale of
shares to Mr. Flowers as contemplated in the Investment Agreement is conditioned
on the approval of the Transaction by the shareholders of Enstar at the special
meeting. In the event the price per share of Enstar common stock exceeds
$12.94375 per share at the date of approval by Enstar shareholders, Enstar will
recognize a charge to earnings equal to the per share difference multiplied by
the 1,158,860 newly issued shares.
The Company also amended its Share Purchase Rights Plan to exempt the
Transaction from the applicable provisions of such plan.
B-Line Transaction. Enstar has executed a term sheet with B-Line LLC
("B-Line") and other parties outlining the terms of a possible investment in
B-Line by Enstar and certain other investors. B-Line is a privately owned
company based in Seattle, Washington that provides services to credit card
issuers and other holders of similar receivables. Through the use of its
proprietary software, B-Line identifies and pursues the collection of
nondischargeable debt of debtors who have filed for bankruptcy under Chapter 7
of the Bankruptcy Code.
Enstar and certain other investors are negotiating the terms and conditions
of the possible investment in B-Line. Enstar's investment is expected to be
approximately $1.9 million, which would give Enstar an approximate 14% interest
in B-Line. Completion of the investment is contingent upon the negotiation of
mutually satisfactory definitive agreements executed and delivered by each of
the parties and customary closing conditions. There can be no assurance that the
parties will successfully negotiate mutually satisfactory definitive agreements;
moreover, the terms and conditions of any agreements executed by the parties may
differ from those described herein.
Milken Settlement. Additionally, on November 13, 1998, the Company
received approximately $1.1 million in net litigation proceeds as the final
payment resulting from legal action brought against Michael Milken and others in
1991. The Company has previously received distributions totalling approximately
$16.3 million in 1995 and 1996 in satisfaction of its claims against Milken.
7
<PAGE> 10
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders of
The Enstar Group, Inc.
Montgomery, Alabama
We have reviewed the accompanying consolidated balance sheet of The Enstar
Group, Inc. and subsidiary as of September 30, 1998, and the related
consolidated statements of income, comprehensive income and cash flows for the
three-month and nine-month periods ended September 30, 1998 and 1997. These
financial statements are the responsibility of The Enstar Group, Inc. and
subsidiary's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of The Enstar Group, Inc. and
subsidiary as of December 31, 1997 and the related consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the year
then ended (not presented herein); and in our report dated January 30, 1998
(March 23, 1998 as to Note 14 and April 15, 1998 as to Note 13), we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1997 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
October 21, 1998
(November 13, 1998 as to Note 8)
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
The Company's assets, aggregating approximately $67.7 million at September
30, 1998, consisted primarily of cash, cash equivalents and certificates of
deposit.
In the first quarter of 1998, the Company sold 101,939 shares of common
stock of First Union Corporation ("First Union") for net proceeds of $5,125,000
which were used to repay indebtedness owed to First Union National Bank and to
repurchase shares of the Company's common stock. The First Union indebtedness
was incurred in conjunction with a stock repurchase program. The sale of the
First Union common stock resulted in a realized gain of $2,818,000. During the
quarter ended September 30, 1998, the Company sold its remaining 1,232,307
shares of First Union common stock. The Company received net proceeds of
$63,699,000 and realized a gain of $37,634,000 on the sale of the shares.
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.
The Company is seeking to acquire an operating business. In addition, the
Company has executed a term sheet outlining the terms of a possible investment
of approximately $1.9 million. Until such time as the Company uses its assets
for an acquisition or the consummation of the $1.9 million investment, 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 $67.7 million at September 30, 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 its common
stock for approximately $4.8 million.
During the first quarter of 1998, the Company repurchased 303,700 shares of
its common stock for approximately $3,955,000. The purchase of such shares was
financed through borrowings of approximately $1,211,000 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 million of its common
stock. Under the program, the Company repurchased a total of 387,826 shares for
approximately $4,995,000. In April 1998, the Company announced a second stock
repurchase program under which the Company could repurchase up to $5 million of
its common stock in the open market at prices deemed favorable from time to time
by the Company. As of September 30, 1998, the Company had repurchased 54,525
shares of its common stock for approximately $815,000 as part of this plan.
Other Material Transactions
Flowers Transaction. On October 20, 1998, The Company announced the
proposed appointment of J. Christopher Flowers to the position of Vice Chairman
of the Board of Directors (the "Board") of Enstar effective December 1, 1998.
Mr. Flowers has been an outside director of Enstar since October 1996 and has
been involved in working with Enstar's management in locating an acquisition
target.
In addition, Enstar and Mr. Flowers have entered into an Investment
Agreement, dated October 20, 1998 (the "Investment Agreement"), whereby Enstar
will sell to Mr. Flowers 1,158,860 newly issued shares of Enstar's common stock
at a price of $12.94375 per share, for a total purchase price of $15 million, in
exchange
9
<PAGE> 12
for a full recourse promissory note from Mr. Flowers (the "Transaction"). The
price per share represents the average of the reported closing prices for Enstar
common stock for the ten trading days immediately preceding October 20, 1998,
the date the Board approved the Transaction. In the Investment Agreement, Mr.
Flowers has agreed to certain restrictions on his ability to transfer the shares
and has agreed not to acquire any additional shares of Enstar or participate in
any capacity in certain other significant transactions involving Enstar without
the approval of the Board. The Investment Agreement also contains certain
provisions relating to conflicting business opportunities and competing
transactions involving Mr. Flowers and related entities.
Mr. Flowers will deliver to Enstar a full recourse promissory note in the
amount of $15 million for the purchase price of the shares. The note will bear
interest at the rate of 4.06% per annum, will have a maturity of two years and
will require quarterly interest payments. Since the interest rate on the note is
less than the rate an independent lender would charge Mr. Flowers, the note will
be recorded at a discount so as to yield a "market rate" of interest over its
term, and a charge to earnings will be incurred to reflect such discount. The
promissory note, net of the discount, will be classified as a reduction of
equity.
Enstar and Mr. Flowers have also agreed to enter into a Registration Rights
Agreement pursuant to which Mr. Flowers will be granted certain rights to
require Enstar to register his shares.
The Board has decided to present the Transaction to the shareholders of
Enstar for a vote in a special meeting to be called for such purpose. The
special meeting of shareholders is expected to take place on December 17, 1998.
Subject to certain conditions, the Board has agreed to recommend that the Enstar
shareholders vote in favor of the Transaction. The consummation of the sale of
shares to Mr. Flowers as contemplated in the Investment Agreement is conditioned
on the approval of the Transaction by the shareholders of Enstar at the special
meeting. In the event the price per share of Enstar common stock exceeds
$12.94375 per share at the date of approval by Enstar shareholders, Enstar will
recognize a charge to earnings equal to the per share difference multiplied by
the 1,158,860 newly issued shares.
The Company also amended its Share Purchase Rights Plan to exempt the
Transaction from the applicable provisions of such plan.
B-Line Transaction. Enstar has executed a term sheet with B-Line LLC
("B-Line") and other parties outlining the terms of a possible investment in
B-Line by Enstar and certain other investors. B-Line is a privately owned
company based in Seattle, Washington that provides services to credit card
issuers and other holders of similar receivables. Through the use of its
proprietary software, B-Line identifies and pursues the collection of
nondischargeable debt of debtors who have filed for bankruptcy under Chapter 7
of the Bankruptcy Code.
Enstar and certain other investors are negotiating the terms and conditions
of the possible investment in B-Line. Enstar's investment is expected to be
approximately $1.9 million, which would give Enstar an approximate 14% interest
in B-Line. Completion of the investment is contingent upon the negotiation of
mutually satisfactory definitive agreements executed and delivered by each of
the parties and customary closing conditions. There can be no assurance that the
parties will successfully negotiate mutually satisfactory definitive agreements;
moreover, the terms and conditions of any agreements executed by the parties may
differ from those described herein.
Milken Settlement. Additionally, on November 13, 1998, the Company
received approximately $1.1 million in net litigation proceeds as the final
payment resulting from legal action brought against Michael Milken and others in
1991. The Company has previously received distributions totalling approximately
$16.3 million in 1995 and 1996 in satisfaction of its claims against Milken.
Results of Operations
The Company reported net income of $35,348,000 and $36,801,000 for the
three and nine month periods ended September 30, 1998, compared to net income of
$9,633,000 and $8,654,000 for the same periods in the prior year. The increase
in net income for the three and nine month periods ended September 30, 1998 is
primarily attributable to the gain on the sale of shares of the Company's First
Union common stock.
10
<PAGE> 13
Investment income increased by $26,693,000 and $28,370,000 in the three and
nine month periods ended September 30, 1998, respectively, over the same periods
in 1997. The increase in investment income for the three and nine month periods
ended September 30, 1998 over the same period in 1997 can be primarily
attributed to the increase of $27,923,000 and $30,741,000 in the gain on the
sale of shares of First Union Common Stock over the same periods from the prior
year, reduced by losses of $1,371,000 and $2,498,000 on call option transactions
on the Company's First Union Common Stock. The losses on the call option
transactions were primarily mark-to-market adjustments on call options sold and
the net cost of repurchases of certain call options. Investment income for the
three and nine months ended September 30, 1998 also includes dividend and
interest income of $631,000 and $1,671,000, respectively, compared to $490,000
and $1,544,000 for the same periods in the prior year.
General and administrative expenses were $350,000 and $1,565,000 for the
three and nine months ended September 30, 1998, respectively, compared to
$304,000 and $1,167,000 for the same periods in 1997. The increase in the nine
month period ended September 30, 1998 was primarily due to $213,000 in
additional franchise taxes and an increase in legal and professional fees.
Interest expense was $40,000 and $133,000 for the three and nine month
periods ended September 30, 1998, respectively. Interest expense for the
corresponding periods in 1997 was $66,000 and $717,000, respectively, and
included $27,000 and $597,000, respectively, relating to an $18.1 million loan.
The indebtedness was incurred by the Company in October 1996 for the purpose of
repaying certain of the Company's liabilities subject to compromise. The loan
was subsequently repaid in July 1997.
Since the completion of the Company's reorganization in March 1997, no
reorganization expenses have been incurred. Prior to that date, reorganization
items consisted of interest income less expenses directly related to the
reorganization of the Company. Net expenses of the reorganization for the nine
months ended September 30, 1997 were $484,000.
Income tax expense was $1,154,000 and $1,194,000 for the three and nine
month periods ended September 30, 1998, respectively, and $200,000 for the
comparable periods in 1997. The increase in income tax expense was a result of
an increase in the valuation reserve for deferred tax assets. The Company
incurred an alternative minimum tax liability for its tax year ended August 31,
1998, and provided a valuation reserve against the resulting credit
carryforward. In addition, certain state income taxes were incurred during the
three and nine months ended September 30, 1998 since the state taxable income
amounts exceeded available state net operating loss carryforwards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable.
11
<PAGE> 14
PART II
OTHER INFORMATION
ITEM 1. 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 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, is 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 claims 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 has 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 has any additional
income tax liability. On October 27, 1998, the Florida Bankruptcy Court found
that the Estate has no assets and has 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. The Company has accrued a
liability for the potential tax and accrued interest, and will continue to
accrue the potential liability until it is certain that the matter is resolved.
The Company intends to continue to vigorously contest that the Estate has any
assets from which to pay any taxes that might be determined to be owed or that
the Company has any obligation to pay such taxes. In addition, the Company
intends, if necessary, to contest vigorously that any taxes are owed by the
Estate.
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 United States Bankruptcy
Court for the Middle District of Alabama ("Alabama Bankruptcy Court") issued an
order on January 15, 1997, allowing them to litigate their claims against the
Company. The Alabama 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
12
<PAGE> 15
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 Enstar'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. The Company had been
informed by counsel to expect a much smaller final distribution, but apparently
the funds remaining in the settlement pool for distribution were substantially
greater than anticipated.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company entered into a Rights Agreement, dated as of January 20, 1997,
with American Stock Transfer & Trust Company, as rights agent (the "Rights
Agreement"), pursuant to which the Company's shareholders receive rights to
subscribe for additional shares if certain triggering events occur, including
the acquisition by a person of 15% or more of the total number of outstanding
shares of the Company's common stock. In connection with the Transaction, the
Company executed an amendment to the Rights Agreement (the "Amendment
Agreement") on October 20, 1998 to exclude from the definition of "Acquiring
Person" (as such term is defined in the Rights Agreement) Flowers and certain
permitted transferees and to otherwise exempt the Transaction and certain
transfers or pledges of the shares of the Company's common stock from the
applicable provisions of the Rights Agreement. The Company has agreed that the
Amendment Agreement shall remain in full force and effect at all times.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
REFERENCE
NUMBER DESCRIPTION OF EXHIBITS
- --------- -----------------------
<C> <C> <S>
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).
3.2 -- Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3.2 to the Annual Report on Form 10-K/A-1, dated
April 21, 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
Registrant and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 10.2 to Form 8-K,
dated October 20, 1998).
10.1 -- Investment Agreement dated October 20, 1998 between the
Registrant and J. Christopher Flowers, together with certain
exhibits thereto (incorporated by reference to Exhibit 10.1
to Form 8-K, dated October 20, 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.
</TABLE>
13
<PAGE> 16
(b) Reports on Form 8-K
(i) A report on Form 8-K dated July 16, 1998 announcing the sale of 205,000
shares of First Union Corporation common stock in conjunction with the exercise
of call options previously sold by The Enstar Group, Inc.
(ii) A report on Form 8-K dated August 18, 1998 announcing the sale of The
Enstar Group, Inc.'s remaining 1,027,307 shares of First Union Corporation
common stock.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ENSTAR GROUP, INC.
By: /s/ CHERYL D. DAVIS
------------------------------------
Cheryl D. Davis
Chief Financial Officer, Vice
President
of Corporate Taxes, Secretary
(Authorized Officer)
(Principal Financial Officer)
Date: November 13, 1998
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED FINANCIAL STATEMENTS CONTAINED IN ITS REPORT ON FORM
10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 63,717
<SECURITIES> 3,421
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 97
<DEPRECIATION> 59
<TOTAL-ASSETS> 67,654
<CURRENT-LIABILITIES> 1,085
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 64,044
<TOTAL-LIABILITY-AND-EQUITY> 67,654
<SALES> 0
<TOTAL-REVENUES> 39,693
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,565
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133
<INCOME-PRETAX> 37,995
<INCOME-TAX> 1,194
<INCOME-CONTINUING> 36,801
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,801
<EPS-PRIMARY> 8.75
<EPS-DILUTED> 8.64
</TABLE>
<PAGE> 1
EXHIBIT 99.1
THE ENSTAR GROUP, INC.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Section 77z-2 and 78u-5 (Supp. 1996), Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. The Enstar Group, Inc. ("Enstar" or the
"Company") intends to qualify both its written and oral forward-looking
statements for protection under the Reform Act and any other similar safe harbor
provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of Enstar. The Company
undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, Enstar 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.
Enstar provides the following risk factor disclosure in connection with its
continuing effort to qualify its written and oral forward-looking statements for
the safe harbor protection of the Reform Act and any other similar safe harbor
provisions. Important factors currently known to management that could cause
actual results to differ materially from those in forward-looking statements
include the following:
NO RECENT OPERATING HISTORY; BLIND POOL INVESTMENT
The Company filed for protection under Chapter 11 of the United States
Bankruptcy Code on May 31, 1991 and operated as a reorganized debtor pursuant to
its Second Amended Plan of Reorganization, as modified until July 17, 1997 when
the United States Bankruptcy Court for the Middle District of Alabama closed the
Company's Chapter 11 proceedings by final order.
Because the Company just completed its reorganization in 1997, the Company
does not have any significant operating history on which to base its performance
or its prospects. The executive officers and Board will select acquisitions for
the Company. For certain acquisitions no shareholder approval will be necessary.
Thus, the Company's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in their beginning stages
of development.
UNCERTAINTY OF ACQUISITION TARGET; COMPETITION FOR SUITABLE ACQUISITIONS
The Company has not entered into a definitive agreement with respect to a
specific acquisition target or focused on a particular industry or geographical
market. There can be no assurance that the Company will be successful in
acquiring an operating business that will bring value to the Company's
shareholders. The business of the acquisition target may be subject to numerous,
unpredictable risks. By way of example only, the acquisition target may be
subject to government regulation, or dependent upon new technology or new
product development. In sum, there can be no assurance that the Company will
make an acquisition that will prove financially advantageous to the Company's
shareholders. 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.
A-1
<PAGE> 2
The Company faces intense competition in its search for one or more
operating businesses. The Company competes with strategic and financial buyers
and others looking to acquire suitable operating businesses, who have greater
financial resources and greater flexibility in structuring acquisition
transactions or strategic relationships than the Company.
SUBSTANTIAL CHANGE IN THE NATURE OF THE COMPANY'S BUSINESS
The Company's long term viability, profitability and growth depend on its
ability to successfully realize the plans of the Company's management and Board
of Directors. The magnitude of the changes in the Company that have occurred
since its emergence from bankruptcy make it difficult to evaluate its future
prospects on the basis of historical information relating to the Company. In
addition, significant challenges are often encountered in attempting to build a
business upon emerging from bankruptcy.
DEPENDENCE ON NIMROD T. FRAZER AND OTHER EXECUTIVE OFFICERS AND DIRECTORS
The success of the Company is highly dependent on the ability of Nimrod T.
Frazer, the Company's Chairman, President and Chief Executive Officer, and the
other executive officers and directors of the Company to identify and consummate
an acquisition on favorable terms. The identification of attractive business
opportunities is difficult and involves a high degree of uncertainty. There can
be no assurance that the Company's Board of Directors and management will be
successful in identifying an attractive business opportunity or successfully
consummating a transaction.
One of the Company's current directors, J Christopher Flowers, entered into
an Investment Agreement with the Company, dated as of October 20, 1998 (the
"Investment Agreement"). The Investment Agreement provides that the Company will
sell to Mr. Flowers 1,158,860 newly issued shares of the Company's common stock
in exchange for a $15,000,000 full recourse promissory note from Mr. Flowers. It
also contemplated that Mr. Flowers will become Vice Chairman of the Company's
Board of Directors effective December 1, 1998. The Company believes that as Vice
Chairman, Mr. Flowers extensive business and financial acumen will enable him to
play an enhanced role in the Company's search for an operating company. The
transactions contemplated by the Investment Agreement are subject to a
shareholder approval at a special meeting expected to be held on December 17,
1998. There can be no assurance that the Investment Agreement will be approved
by the shareholders at the special meeting.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price for the Company's common stock may fluctuate substantially
due to the following factors:
- announcements with respect to an acquisition;
- changes in the value of the Company's assets;
- quarterly operating results of the Company;
- changes in general conditions in the economy;
- the financial markets; and
- adverse press or news announcements.
In addition, recently the stock market has experienced significant price
and volume fluctuations. This volatility has affected the market prices of
securities issued by many companies for reasons unrelated to their operating
performance.
INVESTMENT COMPANY ACT OF 1940
As a result of holding the 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"). Registration
under the
A-2
<PAGE> 3
1940 Act would subject the Company to many constraints not incurred by most
operating companies. On March 19, 1998, the Company filed an application with
the Securities 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 and cash equivalents. 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. If the Company were required to
register under the 1940 Act, registration could have material adverse
consequences on the Company's operations. The 1940 Act imposes, among other
things, significant restrictions and requirements on an investment company's
capital structure, the composition and duties of its board of directors, the
custody of its assets, the declaration of dividends, and transactions with its
affiliated persons.
GENERAL ECONOMIC RISKS AND BUSINESS CYCLES
Acquisitions are affected by the current economic conditions and the
business cycle. There can be no assurance that the economic conditions or status
of the business cycle will be favorable.
RISK OF NO DIVERSIFICATION
The Company does not plan to diversify across several industries. In fact,
the Company may decide to acquire only one business operating in one industry.
FINANCING LIMITATIONS
The Company may be outbid by another company with respect to any given
acquisition and there may be certain financing contingencies that will restrict
the ability of the Company to make a given acquisition.
ANTITAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws contain provisions that
may discourage other persons from attempting to acquire control of the Company.
One such provision involves procedural requirements in connection with
shareholder nominations for election of directors. The Company has also elected
to be subject to certain provisions of the Georgia Business Corporation Code and
has adopted a share purchase rights plan. The market price of the Company's
common stock may be affected by the forgoing provisions and agreements which
inhibit or discourage take-over attempts.
TAX CONSIDERATIONS
The Company has claimed deductions for net operating loss carryforwards
("NOLs") of approximately $8,400,000 on its federal income tax return for its
taxable year ended August 31, 1997, and anticipates claiming deductions for NOLs
of approximately $37,000,000 on its federal income tax return for the taxable
year ended August 31, 1998. The Company anticipates that after the use of its
NOLs on its federal income tax return for the taxable year ended August 31,
1998, it will have remaining NOLs of approximately $50,000,000 that may be
deductible in future taxable years (subject to applicable limitations under the
Internal Revenue Code). Although the Company believes that it is entitled to the
deductions for NOLs that it has claimed or intends to claim on its federal
income tax returns for the taxable years ended August 31, 1997 and August 31,
1998, there can be no assurance that the Internal Revenue Service will not
challenge the Company's position or as to the result of any such challenge.
Further, there can be no assurance that the Company will be able to deduct the
remainder of its NOLs for federal income tax purposes in future taxable years.
This Safe Harbor Statement supersedes the Safe Harbor Statement filed as
Exhibit 99.1 to the Company's Annual Report on Form 10-K/A-1, for the year ended
December 31, 1997.
A-3
