<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 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 JUNE 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 July 28, 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, AS AMENDED, 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>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 339 $ 700
Certificates of deposit..................................... 3,446 3,322
Other....................................................... 470 484
Investment in First Union................................... 71,782 68,380
Property and equipment, net................................. 41 46
--------- ---------
Total assets...................................... $ 76,078 $ 72,932
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable................................................ $ 100 $ 513
Reserve for litigation settlements.......................... 1,949 1,877
Accounts payable and accrued liabilities.................... 42 47
Deferred liabilities........................................ 1,133 473
Other....................................................... 364 358
--------- ---------
Total liabilities................................. 3,588 3,268
--------- ---------
Shareholders' equity:
Common stock ($.01 par value; 55,000,000 shares
authorized, 4,549,060 shares issued at June 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........................... 43,314 37,606
Accumulated deficit....................................... (133,372) (134,825)
Treasury stock, at cost (413,676 and 84,126 shares at June
30, 1998 and December 31, 1997, respectively).......... (5,375) (1,040)
--------- ---------
Total shareholders' equity........................ 72,490 69,664
--------- ---------
Total liabilities and shareholders' equity........ $ 76,078 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Investment income................................... $ 561 $ 559 $ 2,731 $ 1,054
Litigation income (expense), net.................... 70 (6) 70 (35)
General and administrative expenses................. (476) (477) (1,215) (863)
Reorganization items, net........................... -- -- -- (484)
Interest expense.................................... (47) (333) (93) (651)
--------- --------- --------- ---------
Income (loss) before income taxes................... 108 (257) 1,493 (979)
Income taxes........................................ -- -- (40) --
--------- --------- --------- ---------
Net income (loss)................................... $ 108 $ (257) $ 1,453 $ (979)
========= ========= ========= =========
Weighted average shares outstanding................. 4,146,853 4,448,720 4,251,402 2,345,079
========= ========= ========= =========
Weighted average shares outstanding -- assuming
dilution.......................................... 4,211,913 4,448,720 4,300,205 2,345,079
========= ========= ========= =========
Net income (loss) per common share.................. $ 0.03 $ (0.06) $ 0.34 $ (0.42)
========= ========= ========= =========
Net income (loss) per common share -- assuming
dilution.......................................... $ 0.03 $ (0.06) $ 0.34 $ (0.42)
========= ========= ========= =========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------- ----------------
1998 1997 1998 1997
------ ------ ------ -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss).......................................... $ 108 $ (257) $1,453 $ (979)
Other comprehensive income:
Unrealized gains on investment in First Union:
Unrealized holding gains arising during period........... 1,771 9,708 8,526 15,789
Less: reclassification adjustment for gains included in
net income............................................ -- -- (2,818) --
------ ------ ------ -------
Other comprehensive income................................. 1,771 9,708 5,708 15,789
------ ------ ------ -------
Comprehensive income....................................... $1,879 $9,451 $7,161 $14,810
====== ====== ====== =======
</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>
SIX MONTHS ENDED
-------------------
JUNE 30, JUNE 30,
1998 1997
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 1,453 $ (979)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation........................................... 7 5
Gain on sale of First Union common stock............... (2,818) --
Loss on call option transactions....................... 1,127 --
Changes in assets and liabilities:
Accounts payable and accrued liabilities............... 67 (566)
Other.................................................. 91 (259)
------- -------
Net cash used in operating activities............. (73) (1,799)
------- -------
Cash flows from investing activities:
Proceeds from sale of First Union common stock............ 5,125 --
Proceeds from sale of call options........................ 363 --
Repurchases of call options sold.......................... (902) --
Purchases of certificates of deposit...................... (4,902) (4,513)
Maturities of certificates of deposit..................... 4,778 1,938
Purchase of property and equipment........................ (2) (16)
------- -------
Net cash provided by (used in) investing
activities....................................... 4,460 (2,591)
------- -------
Cash flows from financing activities:
Proceeds from note payable................................ 1,311 --
Repayment of note payable................................. (1,724) --
Purchase of treasury stock................................ (4,335) --
------- -------
Net cash used in financing activities............. (4,748) --
------- -------
Decrease in cash and cash equivalents....................... (361) (4,390)
Cash and cash equivalents at the beginning of the period.... 700 4,749
------- -------
Cash and cash equivalents at the end of the period.......... $ 339 $ 359
======= =======
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 17 $ 723
======= =======
Income taxes paid......................................... $ 48 $ --
======= =======
</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") 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 six months ended
June 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 February 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. At June 30, 1998, the Company
held 1,232,307 shares of First Union common stock. See Notes 6 and 8.
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 June 30, 1998, the Company had repurchased
25,850 shares of its common stock for approximately $380,000 as part of this
plan. See Note 8.
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 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
5
<PAGE> 8
THE ENSTAR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 six months ended June 30, 1998 and
1997, respectively, is made up of the following components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------------
1998 1997 1998 1997
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Gain on sale of First Union common stock.......... -- -- $ 2,818,000 --
Gain (loss) on call option transactions........... $ 47,000 -- (1,127,000) --
Dividend and interest income...................... 514,000 $559,000 1,040,000 $1,054,000
-------- -------- ----------- ----------
Total investment income................. $561,000 $559,000 $ 2,731,000 $1,054,000
======== ======== =========== ==========
</TABLE>
NOTE 6: FINANCIAL INSTRUMENTS
During the first quarter of 1998, the Company sold call options for 205,000
shares of its First Union common stock for total proceeds of approximately
$363,000. The options contained call prices of $50 and $55 a share and had
expiration dates ranging from February 21, 1998 to July 18, 1998. Call options
for 55,000 shares of the Company's First Union common stock, which had been
issued prior to December 31, 1997, expired unexercised resulting in a realized
gain of approximately $7,000. The 55,000 call options issued with an expiration
date of February 21, 1998 were exercised in conjunction with the sale of First
Union common stock. In March 1998, the Company repurchased call options for
290,000 shares of its First Union common stock for approximately $902,000. At
June 30, 1998, the Company had 205,000 call options outstanding with call prices
of $50 and $55 with an expiration date of July 18, 1998. See Note 8.
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 be required to register as an investment company under
the Investment Company Act of 1940 (the "1940 Act"). On March 19, 1998, the
Company filed a document with the Securities and Exchange Commission (the "SEC")
entitled "Application for an Order Pursuant to Sections 6(c) and 6(e) of the
Investment Company Act of 1940." This document requests a two year exemption
from registration requirements of 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. If such application is denied
and/or the Company is otherwise deemed to be an investment company, the Company
would be required to register under the 1940 Act and would thereafter be subject
to regulation thereunder. If this occurred, it would add complexity to the
Company's pursuit of its acquisition strategy, add to the administrative
expenses of the Company and fundamentally alter the presentation of the
Company's financial statements.
6
<PAGE> 9
THE ENSTAR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8: SUBSEQUENT EVENTS
In July 1998, the Company sold 205,000 shares of its First Union common
stock in conjunction with the exercise of call options outstanding at June 30,
1998. The Company received net proceeds of approximately $11 million and
realized a gain of approximately $8.8 million on the sale of the shares.
Additionally, the Company recognized a cumulative loss of approximately $2
million (approximately $614,000 through June 30, 1998) on mark-to-market
adjustments on such call options through the date of sale. Following the sale,
the Company holds 1,027,307 shares of First Union common stock. See Notes 2 and
6.
In connection with a second stock repurchase program announced in April
1998, the Company purchased 28,675 shares of its common stock in July 1998 for
approximately $435,000. Since the announcement of the plan, a total of 54,525
shares have been purchased for approximately $815,000. See Note 3.
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 June 30, 1998, and the related consolidated
statements of income, comprehensive income and cash flows for the three-month
and six-month periods ended June 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
July 28, 1998
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 $76.1 million at June 30,
1998, consisted primarily of 1,232,307 shares of the common stock of First Union
Corporation ("First Union Common Stock") (with a market value of $71.8 million),
cash, cash equivalents and certificates of deposit. Based on the average daily
trading volume of shares of First Union Common Stock, the Company believes that
its investment in First Union is readily marketable.
In February 1998, the Company sold 101,939 shares of First Union Common
Stock for net proceeds of approximately $5.1 million 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.
During the first quarter of 1998, the Company sold call options for 205,000
shares of its First Union Common Stock for net proceeds of approximately
$363,000. The options contained call prices of $50 and $55 a share and had
expiration dates ranging from February 21, 1998 to July 18, 1998. Call options
for 55,000 shares of the Company's First Union Common Stock, which had been
issued prior to December 31, 1997, expired unexercised resulting in a realized
gain of approximately $7,000. The 55,000 call options issued with an expiration
date of February 21, 1998 were exercised in conjunction with the sale of First
Union Common Stock. In March 1998, the Company repurchased call options for
290,000 shares of its First Union Common Stock for approximately $902,000. At
June 30, 1998, there were 205,000 call options outstanding with call prices of
$50 and $55 expiring on July 18, 1998. These options were exercised in July
1998, resulting in the receipt of net proceeds of approximately $11 million and
a realized gain of approximately $8.8 million on the sale. In addition, the
Company recognized a cumulative loss of approximately $2 million on
mark-to-market adjustments on such call options. The Company intends to continue
to evaluate ways in which it may attempt to maximize the value of its shares of
First Union Common Stock. This may include sales of First Union Common Stock at
prices deemed attractive by management, sales of covered call options on First
Union Common Stock, and other derivative transactions involving First Union
Common Stock, in compliance with applicable laws.
The Company is seeking to acquire an operating business. Until such time as
the Company uses its assets for an acquisition, the Company's only liquidity
needs are to fund operating expenses. In the event the Company fails to acquire
an operating business within a reasonable period of time, the Company will
consider other alternatives, including, but not limited to, liquidation of the
Company.
Financial Condition
The Company had total assets of $76.1 million at June 30, 1998 compared to
$72.9 million at December 31, 1997. The change in total assets was primarily due
to an increase in the market value of the Company's First Union Common Stock of
approximately $8.5 million less $5.1 million which represents the value of the
101,939 shares sold in February 1998.
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 June 30, 1998, the Company had repurchased 25,850 shares
of its common stock for approximately $380,000 as part of this plan.
9
<PAGE> 12
Results of Operations
The Company reported net income of $108,000 and $1,453,000 for the three
and six month periods ended June 30, 1998, compared to losses of $257,000 and
$979,000 for the same periods in the prior year. The increase in net income for
the three and six month periods ended June 30, 1998 is primarily attributable to
the increase in investment income and the reduction in interest expense,
partially offset by increases in certain general and administrative expenses.
Investment income increased by $2,000 and $1,677,000 in the three and six
month periods ended June 30, 1998, respectively, over the same periods in 1997.
The increase in investment income for the six month period ended June 30, 1998
over the same period in 1997 can be attributed to the gain of $2,818,000 on the
sale of 101,939 shares of First Union Common Stock in the first quarter of 1998,
reduced by losses of $1,127,000 on call option transactions on the Company's
First Union Common Stock. The losses on the call option transactions are
primarily mark-to-market adjustments on call options sold but not exercised at
June 30, 1998, and the net cost of repurchases of certain call options.
Investment income for the six months ended June 30, 1998 also includes dividend
and interest income of $1,040,000, compared to $1,054,000 for the same period in
the prior year.
General and administrative expenses were $476,000 and $1,215,000 for the
three and six months ended June 30, 1998, respectively, compared to $477,000 and
$863,000 for the same periods in 1997. The increase in the six month period
ended June 30, 1998 was primarily due to $213,000 in additional franchise taxes
and an increase in legal and professional fees, both of which occurred in the
first quarter of 1998.
Interest expense was $47,000 and $93,000 for the three and six month
periods ended June 30, 1998, respectively. Interest expense for the
corresponding periods in 1997 was $333,000 and $651,000, respectively, and
included $291,000 and $570,000, 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 six
months ended June 30, 1997 were $484,000.
Income tax expense was zero and $40,000 for the three and six month periods
ended June 30, 1998, respectively, and zero for the comparable periods in 1997
due to recognition of tax benefits of the Company's net operating loss
carryforwards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable.
10
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since May 31, 1991, the Company has been 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. Although the Company has accrued a liability for the
potential tax and accrued interest, the Company intends 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 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 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.
11
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 21, 1998.
Matters voted upon at the meeting and the number of votes cast for, against or
withheld, are as follows:
(1) To consider and act upon a proposal to elect the following
nominees to be Directors:
<TABLE>
<CAPTION>
VOTES
NOMINEE VOTES FOR WITHHELD
------- --------- --------
<S> <C> <C>
J. Christopher Flowers *................................ 3,250,326 118,493
Jeffrey S. Halis *...................................... 3,278,313 90,506
</TABLE>
- ---------------
* Elected to hold office until the 2001 annual meeting of shareholders.
In addition to Messrs. Flowers and Halis, the continuing directors are
Nimrod T. Frazer, T. Whit Armstrong and T. Wayne Davis. Mr. Frazer's term
expires in 1999 while Messrs. Armstrong and Davis' terms expire in the year
2000.
(2) To appoint Deloitte & Touche LLP as independent auditors for the
year ended December 31, 1998. Votes cast were: 3,249,846 for, 110,569
against and 8,404 abstentions.
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.
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).
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 (incorporated by reference to Ex-
hibit 99.1 to the Annual Report on Form 10-K/A-1, dated
April 21, 1998).
99.2 -- Application for an Order Pursuant to Sections 6(c) and 6(e)
of the Investment Company Act of 1940 (incorporated by
reference to Application for an Order Pursuant to Sections
6(c) and 6(e) of the Investment Company Act of 1940, dated
March 19, 1998).
99.3 -- Amendment No. 1 to the Application for an Order Pursuant to
Sections 6(c) and 6(e) of the Investment Company Act of 1940
(incorporated by reference to Amendment No. 1 to the
Application for an Order Pursuant to Sections 6(c) and 6(e)
of the Investment Company Act of 1940, dated May 22, 1998).
</TABLE>
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended June 30,
1998.
12
<PAGE> 15
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: August 4, 1998
13
<PAGE> 1
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
THE ENSTAR GROUP, INC.
ARTICLE I
The name of the Corporation is The Enstar Group, Inc.
ARTICLE II
The Corporation has authority to issue an aggregate of Fifty-Five Million
(55,000,000) shares of $.01 par value stock that together have unlimited voting
rights and that together are entitled to receive the net assets of the
Corporation upon dissolution. Said shares of stock may be referred to as
"Common Stock".
ARTICLE III
No shareholder shall have the preemptive right to subscribe for or purchase
any shares or other securities issued by the Corporation.
ARTICLE IV
The Corporation is to have perpetual existence.
ARTICLE V
The initial Board of Directors of the Corporation shall consist of four
(4) members whose names and addresses are as follows:
Nimrod T. Frazer
172 Commerce Street, 3rd Floor
Montgomery, Alabama 36104
T. Whit Armstrong
Citizens Bank
301 S. Edwards
Enterprise, Alabama 36311
T. Wayne Davis
Davis Foundation
1910 San Marco Boulevard
Jacksonville, Florida 32207
<PAGE> 2
J. Christopher Flowers
Goldman Sachs
18th Floor
85 Broad Street
New York, New York 10004
ARTICLE VI
The terms of the directors of the Corporation shall be staggered by
dividing the total number of directors into three groups, with each group
containing one-third of the total number of directors, or as close to such
fraction as is possible. The shareholders may remove a director only with
cause.
ARTICLE VII
The name of the Incorporator is Jennifer M. Crane, and her address is 1500
Marquis Two Tower, 285 Peachtree Center Avenue, Atlanta, Georgia 30303.
ARTICLE VIII
The address of the initial registered office of the Corporation shall be,
1201 Peachtree Street, N.E., Atlanta, Fulton County, Georgia 30361. The initial
registered agent of the Corporation at such address shall be CT Corporation
System.
ARTICLE IX
The mailing address of the initial principal office of the Corporation is
172 Commerce Street, 3rd Floor, Montgomery, Alabama 36104.
ARTICLE X
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be now or hereafter organized under the Georgia
Business Corporation Code, or by any other law of Georgia and by these Articles
of Incorporation, together with any powers incidental thereto.
ARTICLE XI
Subject to the provisions of Section 14-2-704 of the Georgia Business
Corporation Code, any action required by the Georgia Business Corporation Code
to be taken at a meeting of the shareholders of the Corporation or any action
which may be taken at a meeting of the shareholders may be taken without a
meeting if written consent, setting forth the action so taken, shall be signed
by persons who would be entitled to vote at a meeting those shares having
voting power to cast not less than the
- 2 -
<PAGE> 3
minimum number (or numbers in the case of voting by classes) of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote were present and voted.
ARTICLE XII
Special meetings of the shareholders of the Corporation for any purpose or
purposes may be called at any time by the Chairman, or by the written request
of a majority of the members of the Board of Directors, but such special
meetings may not be called by any other person or persons, except as may be
required by the Georgia Business Corporation Code.
ARTICLE XIII
No director of the Corporation shall be liable to the Corporation or its
shareholders for monetary damages for breach of duty of care or other duty as a
director, other than liability (i) for any appropriation, in violation of his
duties, of any business opportunity of the Corporation, (ii) for acts or
omissions which involve intentional misconduct or a knowing violation of law,
(iii) for the types of liability set forth in Section 14-2-832 of the Georgia
Business Corporation Code, or (iv) for any transaction from which the director
derived an improper personal benefit. If the Georgia Business Corporation Code
is hereafter amended to authorize the further limitation or elimination of the
liability of a director, then the liability of a director of the Corporation
shall be limited or eliminated to the fullest extent permitted by the amended
Georgia Business Corporation Code. Any repeal of modification of this Article
XIII shall be prospective only and shall not adversely affect any limitation or
elimination of the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
ARTICLE XIV
Any shareholder entitled to vote for the election of directors may submit
to the Board of Directors nominations for the election of directors only by
giving written notice (such written notice to include a statement of the
qualifications of the nominee) to the Secretary of the Corporation at least
sixty (60) days but not more than ninety (90) days prior to the annual meeting
of shareholders at which directors are to be elected, unless such requirement
is waived in advance of the meeting by the Board of Directors.
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Incorporation.
/s/ Jennifer M. Crane
------------------------------------
Jennifer M. Crane, Incorporator
- 4 -
<PAGE> 5
SECRETARY OF STATE DOCKET NUMBER: 981620463
CORPORATIONS DIVISION CONTROL NUMBER: 9638786
SUITE 315, WEST TOWER EFFECTIVE DATE: 06/10/1998
2 MARTIN LUTHER KING, JR., DR. REFERENCE : 0048
ATLANTA, GEORGIA 30334-1530 PRINT DATE : 06/11/1998
FORM NUMBER : 111
ERICA I. MOORE PARKER, HUDSON, RAINER
1500 MARQUIS TWO TOWER
285 PEACHTREE CENTER AVENUE, N.E.
ATLANTA GA 30303
CERTIFICATE OF AMENDMENT
I, Lewis A. Massey, the Secretary of State and the Corporation Commissioner of
the State of Georgia, do hereby certify under the seal of my office that
THE ENSTAR GROUP, INC.
A DOMESTIC PROFIT CORPORATION
has filed articles of amendment in the office of the Secretary of State and has
paid the required fees as provided by Title 14 of the Official Code of Georgia
Annotated. Attached hereto is a true and correct copy of said articles of
amendment.
WITNESS my hand and official seal in the City of Atlanta and the State of
Georgia on the date set forth above.
/s/ Lewis A. Massey
LEWIS A. MASSEY
SECRETARY OF STATE
[STATE OF GEORGIA SEAL]
<PAGE> 6
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
THE ENSTAR GROUP, INC.
1.
The name of the Corporation is The Enstar Group, Inc.
2.
The amendment to its Articles of Incorporation adopted by the Corporation
is to amend Article II of the Articles of Incorporation by adding the following
to the end of such Article II:
"All shares of the Corporation that have been issued and are reacquired by
the Corporation are treasury shares."
3.
Said amendment was adopted on May 21, 1998 at a meeting of the Board of
Directors of the Corporation.
4.
Said amendment was approved by the Board of Directors of the Corporation
without shareholder action, and shareholder action was not required in
accordance with the provisions of Section 14-2-631(d) of the Georgia Business
Corporation Code.
5.
IN WITNESS WHEREOF, The Enstar Group, Inc. has caused these Articles of
Amendment to be executed, its corporate seal to be affixed, and its seal and
execution hereof to be attested, all by its duly authorized officers, this 5th
day of June, 1998.
THE ENSTAR GROUP, INC.
[CORPORATE SEAL]
By: /s/ Nimrod T. Frazer
---------------------------------
Nimrod T. Frazer, Chief Executive
Officer
ATTEST:
/s/ Cheryl D. Davis
- ---------------------------
Cheryl D. Davis, Secretary
<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 SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 339
<SECURITIES> 75,228
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 96
<DEPRECIATION> 55
<TOTAL-ASSETS> 76,078
<CURRENT-LIABILITIES> 142
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 72,445
<TOTAL-LIABILITY-AND-EQUITY> 76,078
<SALES> 0
<TOTAL-REVENUES> 2,801
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,215
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> 1,493
<INCOME-TAX> 40
<INCOME-CONTINUING> 1,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,453
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
