Engex, Inc.
FINANCIAL STATEMENTS
and
ANNUAL REPORT
YEAR ENDED
SEPTEMBER 30, 1998
ENGEX, INC. is listed on the
American Stock Exchange (AMEX)
Symbol EGX.
<PAGE>
November 27, 1998
Dear Engex Stockholder,
We are pleased to submit our annual report for your Fund.
Our immediate investment philosophy is to continue to invest in emerging
growth companies and other undervalued or turnaround situations. We seek
opportunities that can appreciate in value and generate capital gains.
Our long-term goal is to seek majority stakes in new and small companies
in order to ultimately permit Engex to deregister as an investment company.
While the first step in this Plan, the acquisition of Research Devices, Inc. in
1992, did not meet our original expectations, we will continue to look to
acquire one or more growth companies that may eventually permit us to deregister
the Fund and thus put Engex in a position to hopefully sell at an attractive
multiple of earnings.
As always, we appreciate the confidence of our loyal stockholders and will
continue to work to achieve the results you deserve and that we ourselves as
major stockholders would hope to produce.
Sincerely,
J. MORTON DAVIS
Chairman of the Board
President
1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of Engex, Inc.
We have audited the accompanying statements of assets and liabilities of Engex,
Inc., including the schedule of portfolio investments, as of September 30, 1998,
the related statement of operations, the statements of changes in net assets,
and selected per share data and ratios for the year ended September 30, 1998.
These financial statements and selected per share data and ratios are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and selected per share data and ratios
based on our audits. The statement of changes in net assets for the year ended
September 30, 1997 and selected per share data and ratios for the years ending
September 30, 1994 to September 30, 1997 were audited by other auditors whose
report, dated October 23, 1997, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per share data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.'
In our opinion, the financial statements and selected per share data and ratios
referred to above present fairly, in all material respects, the financial
position of Engex Inc. at September 30, 1998, and the results of its operations,
the changes in its net assets and selected per share data and ratios for the
year then ended, presented in conformity with generally accepted accounting
principles.
Grant Thornton, LLP
New York, New York
November 6, 1998
2
<PAGE>
ENGEX, INC.
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investment in securities at fair value (identified cost--$9,042,080) .. $ 6,919,061
Receivable from Broker Dealer ......................................... 757,510
Other assets .......................................................... 29,689
-----------
TOTAL ASSETS ....................................................... $ 7,706,260
Liabilities:
Accrued expenses ...................................................... 128,592
Current income taxes .................................................. 83,516
-----------
TOTAL LIABILITIES .................................................. 212,108
-----------
COMMITMENT AND CONTINGENCIES
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL SHARES .................... $ 7,494,152
===========
NET ASSET VALUE PER SHARE .............................................. $7.67
=====
NET ASSETS APPLICABLE TO OUTSTANDING SHARES:
Common stock--$.10 par value:
Authorized--2,500,000 shares, Issued--977,223 shares ................. $ 97,722
Additional paid-in capital ............................................ 9,669,680
Unrealized depreciation on investments ................................ (7,492,527)
Undistributed net realized gain from investment transactions .......... 3,347,522
Undistributed net investment income ................................... 1,871,755
-----------
NET ASSETS ............................................................. $ 7,494,152
===========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
ENGEX, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
September 30, 1998
<TABLE>
<CAPTION>
Number of
Shares Market Value
----------- ---------------------------
<S> <C> <C> <C>
COMMON STOCK (83.59%):
Biotechnology (53.38%):
Enzo Biochemical, Inc.* .......................... 487,962 shs. $ 3,415,742
Interneuron Pharmaceuticals, Inc.* ............... 194,800 shs. 584,400
------------
$ 4,000,142
Networking Products (14.39%):
Cabletron Systems* ............................... 95,864 shs. 1,078,470
Environmental (12.17%):
U.S. Home & Garden, Inc.* ........................ 194,500 shs. 911,816
Financial Services (0.93%):
Southwest Securities* ............................ 3,780 shs. 69,930
Electronics (0.80%)
Siliconix Inc.* .................................. 4,300 shs. 59,662
Gaming Industry (0.79%)
American Vantage Company* ........................ 54,000 shs. 59,076
Manufacturing (0.57%):
Alyn Corp.* ...................................... 9,000 shs. 42,750
Media and Entertainment (0.56%):
Avenue Entertainment Group* ...................... 16,800 shs. 42,000
------------
TOTAL INVESTMENT IN COMMON
STOCK (IDENTIFIED COST--$8,230,702) ........... 6,263,846
UNITS (8.74%):
Advanced Aerodynamics & Structures, Inc.* ........ 105,800 shs. 641,465
First South Africa Corp. Units* .................. 11,000 shs. 13,750
------------
TOTAL UNITS (IDENTIFIED COST--$811,378) ........ 655,215
------------
TOTAL MARKETABLE SECURITIES
(IDENTIFIED COST--$9,042,080) ................. 6,919,061
OTHER ASSETS, LESS LIABILITIES (7.67%) ............ 575,091
------------
NET INVESTMENT ASSETS (100.00%) ................... $ 7,494,152
============
</TABLE>
- ----------
* Nonincome-producing securities
The accompanying notes should be read in conjunction with this schedule.
4
<PAGE>
ENGEX, INC.
STATEMENT OF OPERATIONS
For The Year Ended September 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT (LOSS):
Income:
Dividends ............................................. $ 7,988
Interest .............................................. 253
------------
Total income ....................................... $ 8,241
Expenses:
Custodian and transfer fees ........................... 16,149
Professional fees ..................................... 60,383
Shareholders' reports and printing .................... 20,788
Directors' fees and expenses .......................... 18,235
Other taxes ........................................... 238,498
Insurance ............................................. 47,585
Registration and filing fees .......................... 7,988
Management fees ....................................... 119,151
Interest Expense ...................................... 45,558
Miscellaneous ......................................... 2,964
------------
Total Expenses ..................................... 577,299
------------
INVESTMENT (LOSS) BEFORE (BENEFIT) FOR INCOME TAXES ...... (569,058)
DEFERRED INCOME TAX (BENEFIT) ............................ (193,480)
------------
NET INVESTMENT (LOSS) .................................... (375,578)
------------
REALIZED AND UNREALIZED (LOSS) ON INVESTMENTS:
Realized gain from security transactions:
Proceeds from sales ................................... 7,835,529
Cost of securities sold ............................... 7,047,593
------------
787,936
Income tax provision ..................................... 267,598
------------
Net realized gain ........................................ 520,038
Unrealized depreciation on investments:
Beginning of period ................................... 7,492,725
End of period ......................................... (2,123,019)
------------
(9,615,744)
Deferred income tax (benefit) ............................ (2,700,860)
------------
NET (DECREASE) IN UNREALIZED APPRECIATION ................ (6,914,884)
------------
NET REALIZED AND UNREALIZED (LOSS) ON INVESTMENTS ........ (6,394,846)
------------
NET (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ... $ (6,770,424)
============
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
ENGEX, INC.
STATEMENTS OF CHANGES IN NET ASSETS
For The Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
From Investment Activities:
Net investment income (loss) ......................................... $ (375,578) $ 3,856,988
Net realized gain on securities transactions (on average cost basis
$1,132,744 and $1,786,543, respectively) ........................... 520,038 1,762,528
(Decrease) in unrealized appreciation from investment activities ..... (6,914,884) (6,717,427)
------------ ------------
NET (DECREASE) IN NET ASSETS ............................................ (6,770,424) (1,097,911)
NET ASSETS--BEGINNING OF PERIOD ......................................... 14,264,576 15,362,487
------------ ------------
NET ASSETS--END OF PERIOD (Including undistributed net investment
income of $1,871,755 and $2,247,333 respectively) .................... $ 7,494,152 $ 14,264,576
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
ENGEX, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The Fund is registered under the Investment Company Act of 1940, as a
nondiversified, closed-end investment company (see Note 7(a)). The following is
a summary of significant accounting policies followed by the Fund in the
preparation of its financial statements:
(a) SECURITY VALUATION--Investments in securities traded on a national
securities exchange are valued at the last reported sales price on
September 30, 1998. Securities traded on the over-the-counter market
and listed securities for which no sale was reported on that date
are valued at the last reported bid price.
Securities sold, but not yet purchased, represent obligations of the
Company to deliver the specified security at the contracted price
and thereby create a liability to purchase the security at
prevailing future market prices. Accordingly, these transactions
result in off-balance sheet risk, as the Company's ultimate
obligation to satisfy the sale of securities sold, but not yet
purchased, may exceed the amount recognized in the financial
statements.
Investments for which quotations are not readily available are
valued at fair value, as determined by the Board of Directors.
(b) FEDERAL INCOME TAXES--Commencing with the fiscal year ending
September 30, 1993, the Fund no longer qualified under Subchapter M
of the Internal Revenue Code as a regulated investment company, and,
accordingly, is taxed as a regular corporation..
(c) OTHER--As is common in the industry, security transactions are
accounted for on the trade date the securities are purchased or
sold. Dividend income and distributions to shareholders are recorded
on the ex-dividend date.
(d) USE OF ACCOUNTING ESTIMATES--The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Note 2. Investment Advisor and Transactions with Affiliated Persons
The Fund has entered into an investment advisory agreement (the
"Agreement") with American Investors Advisors, Inc. ("Advisors"), which is
wholly owned by an officer of the Fund. Certain officers of Advisors are also
officers of the Fund. Under this agreement, Advisors will serve as an investment
advisor of the Fund for a fee computed at an annual rate of 1.0% of the Fund's
average weekly net assets. For the year ended September 30, 1998, Advisors
earned a management fee of $119,151, of which $60,859 was due to Advisors at
September 30, 1998 and is included in accrued expenses in the accompanying
statement of assets and liabilities.
For the year ended September 30, 1998, D.H. Blair & Co., Inc. received
brokerage commissions of $9,920 on purchases and sales of Fund investments. D.H.
Blair & Co., Inc. is wholly owned by children of an officer of the Fund, and
sons-in-law of an officer of the Fund. As of September 30, 1998, D.H. Blair &
Co., Inc. ceased operations and is no longer a registered broker/dealer.
Note 3. Portfolio Transactions
The following summarizes the securities transactions by the Fund for the
year ended September 30, 1998:
Purchases .......................................... $4,065,053
==========
Sales .............................................. $7,835,529
==========
Net realized gain .................................. $ 520,038
==========
The Fund uses the specific identification method of accounting for the
cost of securities sold for both federal income tax and reporting purposes.
Therefore, for federal income tax purposes, the identified cost of investments
owned at September 30, 1998 and September 30, 1997 was the same as the total
cost of investments. Had the average cost basis been used for financial
statement purposes, net
7
<PAGE>
ENGEX, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
realized gain from securities transactions would have been increased and net
unrealized appreciation would have been decreased by $612,706 and $24,015.
Note 4. Income Taxes
Deferred tax reflects the impact of temporary differences between amount
of assets and liabilities recorded for financial reporting purposes and such
amounts as measured in accordance with tax laws.
The Fund provides deferred federal, state and local income taxes on
unrealized appreciation on investments, based on the regular corporate tax
rates.
The following is a summary of the components of the Fund's income tax
provision (benefit) at September 30, 1998:
Current:
Federal ............................ $ 72,516
State and local .................... 11,000
---------
$ 83,516
=========
Deferred:
Federal ............................ $(721,827)
State and local .................... (42,460)
---------
Total Deferred tax asset ........... (764,287)
---------
Less Valuation allowance ........... 764,287
---------
Net deferred tax asset ............. $ --
=========
The valuation allowance has been provided because of the uncertainty that
the fund would generate future income to fully realize its deferred tax assets.
The effective tax rate for the Fund is reconcilable to the federal
statutory tax rate, as follows:
Statutory rate (benefit) ............. (34%)
State and local income
taxes--net of federal
income tax benefit ................. (2%)
---
(36%)
===
Note 5. Borrowings
Loans during the year were made at a negotiated rate between the Fund and
the Fund's custodian broker. The interest paid during the year was 6.75% per
annum. The maximum loan outstanding and the weighted average amount of loans
(computed on a daily basis) during the twelve-month period were $3,114,376 and
$770,012, respectively. The loans were collateralized by the Fund's investment
portfolio. As of September 30, 1998 the Fund has no outstanding balance due to
the Custodian.
Note 6. Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time, are subjective
in nature, and involve uncertainties and matters of significant judgment.
Settlement of the Fund's debt obligations at fair value may not be possible and
may not be a prudent management decision to enter.
Note 7. Concentrations of Credit Risk
(a) The Fund presently intends to seek investment opportunities in one or
more additional companies in which it would acquire a controlling interest.
While any such further acquisitions are likely to bring the Fund closer to its
expressed intention of seeking to deregister under the Investment Company Act of
1940, they are likely to require a substantial investment of the Fund's assets,
and a further concentration of the Fund's investments in particular companies or
industries, which will increase the risk of loss that may be experienced by the
Fund from the negative results or financial condition of any particular company
and/or industry.
The Fund has borrowed funds in connection with its investment portfolio,
and plans to continue to do so, and to consider various alternative means of
doing so which may be available to it. Such borrowings are presently limited by
certain asset coverage requirements under the Investment Company Act of 1940. By
increasing the amount of such leverage utilized by the Fund, opportunities may
be enhanced, but certain risks are created, including a higher volatility of the
net asset value of the Fund's common stock and a potentially higher volatility
in its market value. When monies are borrowed by the Fund, creditors have a
fixed dollar claim on the Fund's assets and income, which is prior to any claims
of the stockholders; therefore, any decline in the value of the Fund's assets or
the income it receives will cause the net asset value of the Fund's stock and
any income available to it to decline more sharply than if there were no such
prior claims.
(b) As of September 30, 1998, all of the Fund's investments in securities
were held with one broker, the Fund's custodian.
8
<PAGE>
ENGEX, INC. Schedule 1
SUPPLEMENTARY INFORMATION--SELECTED PER SHARE DATA AND RATIOS
Selected data for each share of Capital Stock outstanding throughout each year:
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------------------------------
1998(1) 1997(1) 1996(1) 1995(1) 1994(1)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Investment income ............................ $ 0.01 $ 4.28 $ 0.14 $ 0.18 $ 0.13
---------- ---------- ---------- ---------- ----------
Expenses:
Interest .................................. 0.05 0.17 0.21 0.34 0.18
Other ..................................... 0.54 0.31 0.31 0.22 0.40
---------- ---------- ---------- ---------- ----------
Total expenses ......................... 0.59 0.48 0.52 0.56 0.58
---------- ---------- ---------- ---------- ----------
Investment income (loss) before (benefit) for
income taxes .............................. (0.58) 3.80 (0.38) (0.38) (0.45)
---------- ---------- ---------- ---------- ----------
Deferred and current income tax (benefit) .... (0.19) (0.15) (0.14) (0.14) (0.16)
---------- ---------- ---------- ---------- ----------
Net investment income (loss) ................. (0.39) 3.95 (0.24) (0.24) (0.29)
---------- ---------- ---------- ---------- ----------
Realized and unrealized gain (loss) before
provision (benefit) for income taxes ...... (9.03) (4.87) 2.87 5.98 (3.91)
Deferred and current income tax provision
(benefit) ................................. (2.49) 0.20 1.12 1.98 (1.31)
---------- ---------- ---------- ---------- ----------
Net realized and unrealized gain (loss) ...... (6.54) (5.07) 1.75 4.00 (2.60)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net asset value ... (6.93) (1.12) 1.51 3.76 (2.89)
Net asset value:
Beginning of year ......................... 14.60 15.72 14.21 10.45 13.34
---------- ---------- ---------- ---------- ----------
End of year ............................... $ 7.67 $ 14.60 $ 15.72 $ 14.21 $ 10.45
========== ========== ========== ========== ==========
Number of shares outstanding at end of year .. 977,223 977,223 977,223 977,223 977,223
========== ========== ========== ========== ==========
Ratios:
Expenses to average net assets ............ 5.78% 3.32% 3.32% 4.90% 4.81%
Net investment increase (loss) to average
net assets ............................... 2.02% 26.88% (1.55%) (2.23%) (2.40%)
Portfolio turnover ........................ 16.24% 26.48% 4.29% 0.40% 7.56%
</TABLE>
- ----------
(1) During these years, the Fund did not pay dividends from net investment
company income or make any distributions of net realized gains from
securities transactions.
The accompanying notes should be read in conjunction
with this supplementary schedule.
9
<PAGE>
ENGEX, INC.
ADDITIONAL INFORMATION
The Fund presently intends to seek investment opportunities in one or more
companies in which it would acquire a controlling interest. While any such
acquisitions are likely to bring the Fund closer to its expressed intention of
seeking to deregister under the Investment Company Act of 1940, they are likely
to require a substantial investment of the Fund's assets, and a further
concentration of the Fund's investments in particular companies or industries
which will increase the risk of loss that may be experienced by the Fund from
the negative results or financial condition of any particular company and/or
industry.
The Fund has borrowed funds in connection with its investment portfolio,
and plans to continue to do so, and to consider various alternative means of
doing so which may be available to it. Such borrowings are presently limited by
certain asset coverage requirements under the Investment Company Act of 1940. By
increasing the amount of such leverage utilized by the Fund, opportunities may
be enhanced, but certain risks are created, including a higher volatility of the
net asset value of the Fund's common stock and a potentially higher volatility
in its market value. When monies are borrowed by the Fund, creditors have a
fixed dollar claim on the Fund's assets and income which is prior to any claims
of the stockholders; therefore, any decline in the value of the Fund's assets or
the income it receives will cause the net asset value of the Fund's stock and
any income available to it to decline more sharply than if there were no such
prior claims.
10
<PAGE>
Directors
Jerome Fisch
Judah Feinerman
Leonard Toboroff
J. Morton Davis
Officers
J. Morton Davis, Chairman of the Board and President
David Nachamie, Secretary
Martin Bell, Assistant Secretary
Gilbert Jackson, Treasurer
Custodian
Prudential Securities Inc.
1 NY Plaza, New York, N.Y. 10292
Transfer Agent
Continental Stock Transfer & Trust Co.
2 Broadway, New York, N.Y. 10017
212-509-4000
Independent Accountants
Grant Thornton LLP
7 Hanover Square, New York, NY 10004
ENGEX, Inc.
44 Wall Street
New York, N.Y. 10005
212-495-4200
