| ENSTAR GROUP INC ITEM 1A RISK FACTORS The following risk factors, in addition to other information provided in the Companyapstas periodic and interim reports, should be considered when evaluating the Company |
| The risks described below are not the only ones that the Company faces |
| There may be additional risks and uncertainties |
| If any of the following risks actually occur, the Companyapstas business, financial condition or results of operations could be materially and adversely affected and the trading price of the Companyapstas common shares could decline significantly |
| RISKS RELATED TO THE COMPANY &apos S BUSINESS THE COMPANY HAS MADE, AND EXPECTS TO CONTINUE TO MAKE, STRATEGIC ACQUISITIONS AND INVESTMENTS, AND THESE ACTIVITIES MAY NOT BE FINANCIALLY BENEFICIAL TO THE COMPANY OR ITS SHAREHOLDERS The Company and its partially owned equity affiliates, Castlewood Holdings and BH Acquisition, and their subsidiaries, have made several acquisitions and investments and expect to continue to make such acquisitions and investments |
| See "e Business -- Activities Related to the Reinsurance Industry "e and "e Business -- Other Activities "e included in Item 1 of this Annual Report on Form 10-K The Company cannot assure you that any of these acquisitions or investments will be financially advantageous for the Company or its shareholders |
| In addition, as described below, the Companyapstas entry into the reinsurance industry, through the operations of its partially-owned equity affiliates, Castlewood Holdings and BH Acquisition, and their subsidiaries, exposes the Company to risks and uncertainties inherent in the reinsurance industry which could materially and adversely affect the business, financial condition and results of operations of the Company |
| The business of any future acquisition target may be subject to numerous, unpredictable risks |
| For example, an acquisition target may be subject to government regulation |
| In sum, the Company cannot assure you that it will make any acquisition that will bring value or prove financially advantageous to the Company or its shareholders |
| ACQUISITIONS ARE A COMPONENT OF THE COMPANY &apos S GROWTH STRATEGY, AND ITS FAILURE TO COMPLETE FUTURE ACQUISITIONS SUCCESSFULLY COULD REDUCE ITS EARNINGS AND SLOW ITS GROWTH The Companyapstas business strategy has emphasized growth through acquisitions, but it may not be able to continue to identify operating businesses for acquisition or it may not be able to make acquisitions on terms that it considers economically acceptable |
| 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 |
| In addition, there may be certain financing contingencies that will restrict the ability of the Company to make a given acquisition |
| THE COMPANY IS DEPENDENT ON ITS EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY PERSONNEL The success of the Company is highly dependent on the ability of Nimrod T Frazer, the Companyapstas Chairman and Chief Executive Officer, and the other executive officers and directors of the Company to identify and consummate acquisitions on favorable terms |
| J Christopher Flowers has been a director since October 1996 and for the period December 1998 to July 2003 served as Vice Chairman of the Board of Directors |
| Additionally, in March 2000, John J Oros was named Executive Vice President and elected as a director of the Company |
| Oros was subsequently elected President and Chief Operating Officer in June 2001 |
| The Company believes Mr |
| Oros &apos extensive business and financial talent and experience greatly enhance the Companyapstas ability to locate operating businesses |
| The Company would be materially and adversely affected if it were unable to retain the services of Messrs |
| Frazer, Flowers or Oros |
| Additionally, the success of the Company is also dependent, in part, on key personnel at its partially-owned equity affiliates |
| The experiences and reputations of the key personnel in the reinsurance industry are important factors in their ability to attract new business |
| 6 THE COMPANY &apos S STOCK PRICE MAY EXPERIENCE VOLATILITY, THEREBY CAUSING A POTENTIAL LOSS OF VALUE TO ITS INVESTORS The market price for the Companyapstas common stock may fluctuate substantially due to, among other things, the following factors: - announcements with respect to an acquisition or investment; - changes in the value of the Companyapstas 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, from time to time the stock market experiences significant price and volume fluctuations |
| This volatility affects the market prices of securities issued by many companies for reasons unrelated to their operating performance |
| SIGNIFICANT FLUCTUATION IN THE MARKET PRICE OF THE COMPANY &apos S COMMON STOCK COULD RESULT IN SECURITIES CLASS ACTION CLAIMS AGAINST IT Significant price and value fluctuations have occurred with respect to the securities of insurance and insurance-related companies |
| In the past, following periods of downward volatility in the market price of a companyapstas securities, class action litigation has often been pursued against such companies |
| If similar litigation were pursued against the Company, it could result in substantial costs and a diversion of managementapstas attention and resources |
| FUTURE ACTUAL OR POTENTIAL STOCK SALES BY THE COMPANY &apos S MAJOR STOCKHOLDERS COULD CAUSE ITS STOCK PRICE TO FALL A substantial amount of the Companyapstas common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of the stock to fall or prevent it from increasing, particularly given the relatively low trading volumes of the Companyapstas stock |
| Also, actual or potential sales by officers or directors could be viewed negatively by other investors |
| THE COMPANY &apos S LACK OF INDUSTRY DIVERSIFICATION MAKES IT MORE VULNERABLE TO ECONOMIC DOWNTURNS The Company does not plan to diversify across several industries |
| In fact, the Company may decide to acquire additional businesses operating in a single industry |
| The concentration of investments in the insurance industry makes the Company more vulnerable to adverse effects of occurrences that may affect this industry |
| PROVISIONS IN THE COMPANY &apos S ARTICLES OF INCORPORATION AND BYLAWS AND UNDER GEORGIA LAW MAY INHIBIT A TAKEOVER, WHICH COULD ADVERSELY AFFECT THE VALUE OF THE COMPANY &apos S COMMON STOCK The Companyapstas Articles of Incorporation and Bylaws contain provisions that may discourage other persons from attempting to acquire control of the Company |
| Such provisions include, among others, a classified board of directors and procedural requirements in connection with shareholder nominations for election of directors |
| The Company is a Georgia corporation and has elected to be governed by the "e business combination "e provisions of the Georgia Code, that could be viewed as having the effect of discouraging an attempt to obtain control of the Company |
| The business combination provisions generally would prohibit the Company from engaging in various business combination transactions with any interested stockholder for a period of five years after the date of the transaction in which the person became an interested stockholder unless certain designated conditions are met |
| 7 The Company has also adopted a share purchase rights plan, which could make it uneconomical for a third party to acquire the Company on a hostile basis |
| The market price of the Companyapstas common stock may be affected by the forgoing provisions and agreements which inhibit or discourage take-over attempts |
| CONFLICTS OF INTEREST MIGHT PREVENT THE COMPANY FROM PURSUING DESIRABLE INVESTMENT AND BUSINESS OPPORTUNITIES The Companyapstas directors and executive officers may have ownership interests or other involvement with entities that could compete against it, either in the pursuit of acquisition targets or in general business operations |
| The Company has procedures in place to ensure that directors do not deliberate or vote on transactions where the Companyapstas interests conflict with those of entities with which the director is involved |
| However, these procedures cannot guarantee that the Company will pursue all advantageous transactions that it would otherwise pursue in the absence of a conflict |
| REGULATORY CHALLENGES TO THE COMPANY &apos S TAX FILING POSITIONS COULD RESULT IN ADDITIONAL TAXES The Company has claimed deductions for net operating loss carryforwards ( "e NOLs "e ) totaling approximately dlra94dtta8 million on its federal income tax returns for its taxable years ended August 31, 1997 through 2004 |
| Although the Company believes that it is entitled to the deductions for NOLs that it has claimed on its federal income tax returns for the taxable years ended August 31, 1997 through 2004, there can be no assurance that the Internal Revenue Service will not challenge the Companyapstas position or as to the result of any such challenge |
| FLUCTUATIONS IN CURRENCY EXCHANGE RATES MAY CAUSE THE GROUP TO EXPERIENCE LOSSES The Group maintains a portion of its investment portfolio in investments denominated in currencies other than United States dollars |
| Consequently, the Company may experience foreign exchange losses |
| The Company publishes its consolidated financial statements in US dollars |
| Therefore, fluctuations in exchange rates used to convert other currencies, particularly other European currencies including the Euro and British pound, into US dollars will impact the Companyapstas reported consolidated financial condition, results of operations and cash flows from year to year |
| RISKS RELATED TO THE REINSURANCE INDUSTRY Through the Companyapstas partially owned equity affiliates, Castlewood Holdings and BH Acquisition, and their subsidiaries, the Company has acquired and manages books of reinsurance business |
| The Company is exposed to the following risks and uncertainties, among others, through its participation in the reinsurance industry |
| FLUCTUATIONS IN THE REINSURANCE INDUSTRY COULD CAUSE THE GROUP &apos S OPERATING RESULTS TO FLUCTUATE The reinsurance industry historically has been subject to significant fluctuations and uncertainties |
| Factors that affect the industry in general could also cause the Groupapstas operating results to fluctuate |
| The industryapstas profitability may be affected significantly by: - fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital and may impact the ultimate payout of loss amounts and the costs of administering books of reinsurance business; - volatile and unpredictable developments and catastrophic events which could adversely affect the recoverability of reinsurance from the Groupapstas reinsurers; - changes in reserves resulting from different types of claims that may arise and the development of judicial interpretations relating to the scope of insurers &apos liability; and - the overall level of economic activity and the competitive environment in the industry |
| 8 IF THE REINSURANCE SUBSIDIARIES &apos LOSS RESERVES ARE INADEQUATE TO COVER THEIR ACTUAL LOSSES, THE REINSURANCE SUBSIDIARIES &apos NET INCOME WOULD BE REDUCED OR THEY COULD INCUR A LOSS The reinsurance subsidiaries of Castlewood Holdings and BH Acquisition (the "e Reinsurance Subsidiaries "e ) are required to maintain reserves to cover their estimated ultimate liability of losses and loss adjustment expenses for both reported and unreported claims incurred |
| These reserves are only estimates of what the Reinsurance Subsidiaries think the settlement and administration of claims will cost based on facts and circumstances known to the Reinsurance Subsidiaries |
| Because of the uncertainties that surround estimating loss reserves and loss adjustment expenses, the Reinsurance Subsidiaries cannot be certain that ultimate losses will not exceed these estimates of losses and loss adjustment reserves |
| If the Reinsurance Subsidiaries &apos reserves are insufficient to cover their actual losses and loss adjustment expenses, the Reinsurance Subsidiaries would have to augment their reserves and incur a charge to their earnings |
| These charges could be material and could ultimately reduce the Companyapstas net income |
| The difficulty in estimating the Reinsurance Subsidiaries &apos reserves is increased because the Reinsurance Subsidiaries &apos loss reserves include reserves for potential asbestos and environmental liabilities |
| Asbestos and environmental liabilities are especially hard to estimate for many reasons, including the long waiting periods between exposure and manifestation of any bodily injury or property damage, difficulty in identifying the source of the asbestos or environmental contamination, long reporting delays and difficulty in properly allocating liability for the asbestos or environmental damage |
| Developed case law and adequate claim history do not exist for such claims, especially because significant uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience |
| In view of the changes in the legal and tort environment that affect the development of such claims, the uncertainties inherent in valuing asbestos and environmental claims are not likely to be resolved in the near future |
| Ultimate values for such claims cannot be estimated using traditional reserving techniques and there are significant uncertainties in estimating the amount of the Reinsurance Subsidiaries &apos potential losses for these claims |
| The Reinsurance Subsidiaries have not made any changes in reserve estimates that might arise as a result of any potential federal reform of asbestos litigation |
| There can be no assurance that the reserves established by the Reinsurance Subsidiaries will be adequate or will not be adversely affected by the development of other latent exposures |
| THE VALUE OF THE REINSURANCE SUBSIDIARIES &apos INVESTMENT PORTFOLIOS AND THE INVESTMENT INCOME IT RECEIVES FROM THOSE PORTFOLIOS COULD DECLINE AS A RESULT OF MARKET FLUCTUATIONS AND ECONOMIC CONDITIONS The fair market value of the fixed income securities and equity securities in the Reinsurance Subsidiaries &apos investment portfolios and the investment income from these assets fluctuate depending on general economic and market conditions |
| For example, the fair market value of the Reinsurance Subsidiaries &apos fixed income securities generally increases or decreases in an inverse relationship with fluctuations in interest rates |
| The fair market value of its fixed income securities can also decrease as a result of any downturn in the business cycle that causes the credit quality of those securities to deteriorate |
| The net investment income that the Reinsurance Subsidiaries realize from investments in fixed income securities will generally increase or decrease with interest rates |
| The changes in the market value of the Reinsurance Subsidiaries &apos securities that are classified as available for sale are reflected in its financial statements |
| As a result, a decline in the value of the securities in the Reinsurance Subsidiaries portfolio could reduce its net income or cause it to incur a loss |
| THE REINSURANCE SUBSIDIARIES &apos REINSURERS MAY NOT SATISFY THEIR OBLIGATIONS TO THEM The Reinsurance Subsidiaries are subject to credit risk with respect to their reinsurers because the transfer of risk to a reinsurer does not relieve the Reinsurance Subsidiaries of their liability to the insured |
| In addition, reinsurers may be unwilling to pay the Reinsurance Subsidiaries even though they are able to do so |
| The failure of one or more of the Reinsurance Subsidiaries &apos reinsurers to honor their obligations in a timely fashion would impact the Reinsurance Subsidiaries &apos and the Groupapstas cash flows and reduce their net income and could cause the Reinsurance Subsidiaries and the Company to incur a significant loss |
| 9 THE REINSURANCE INDUSTRY IS HIGHLY COMPETITIVE AND THE GROUP MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN THE FUTURE The Group competes in international markets with domestic and international reinsurance companies |
| Some of these competitors have greater financial resources than the Group, have been operating for longer than the Group and have established long-term and continuing business relationships throughout the reinsurance industry, which can be a significant competitive advantage |
| As such, the Group may not be able to compete successfully in the future |
| INSURANCE LAWS AND REGULATIONS RESTRICT THE GROUP &apos S ABILITY TO OPERATE AND ANY FAILURE TO COMPLY WITH THOSE LAWS AND REGULATIONS COULD HAVE A MATERIAL ADVERSE ON THE GROUP &apos S BUSINESS The Group, through its Reinsurance Subsidiaries, is subject to extensive regulation under foreign insurance laws |
| These laws limit the amount of dividends that can be paid to the Company, Castlewood Holdings and BH Acquisition by their Reinsurance Subsidiaries, impose restrictions on the amount and type of investments that they can hold, prescribe solvency standards that must be met and maintained by them and require them to maintain reserves |
| The Groupapstas failure to comply with these laws could subject it to fines and penalties and restrict it from conducting business |
| The application of these laws could affect the Companyapstas liquidity and ability to pay dividends on its common shares and could restrict the Companyapstas ability to expand its business operations through acquisitions involving the Companyapstas partially owned affiliates and their subsidiaries |
| IF THE GROUP FAILS TO COMPLY WITH APPLICABLE INSURANCE LAWS, RULES AND REGULATIONS, THE GROUP COULD BE SUBJECT TO DISCIPLINARY ACTIONS, DAMAGES, PENALTIES OR RESTRICTIONS THAT COULD SIGNIFICANTLY HARM THE GROUP &apos S BUSINESS The Company cannot assure that the Group has or can maintain all required licenses and approvals or that its business fully complies with the wide variety of applicable laws and regulations or the relevant authorityapstas interpretation of the laws and regulations |
| In addition, some regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals |
| If the Group does not have the requisite licenses and approvals or does not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend the Group from carrying on some or all of its activities or monetarily penalize the Group |
| These types of actions could have a material adverse effect on the Companyapstas business |