DIRECTORS
J. Morton Davis
Judah Feinerman
Jerome Fisch
Dov Perlysky
Leonard Toboroff
OFFICERS
J. Morton Davis, Chairman of the Board
and President
David Nachamie, Secretary
Gilbert Jackson, Treasurer
CUSTODIAN
Summit Bank
210 Main Street, Hackensack, N.J. 07601
TRANSFER AGENT
Continental Stock Transfer & Trust Co.
2 Broadway, New York, N.Y. 10017
212-509-4000
INDEPENDENT ACCOUNTANTS
Richard A. Eisner & Company, LLP
575 Madison Avenue
New York, NY 10022-2597
ENGEX, INC.
44 Wall Street
New York, N.Y. 10005
212-495-4200
ENGEX, INC.
FINANCIAL STATEMENTS
AND
ANNUAL REPORT
YEAR ENDED
SEPTEMBER 30, 2000
ENGEX, INC. is listed on the
American Stock Exchange (AMEX)
Symbol EGX.
<PAGE>
October 16, 2000
Dear Engex Stockholder,
I am pleased to report that during this fiscal year ending September 30th,
2000 your Fund had an excellent performance. The net asset value of the Fund
increased from $14.20 on September 30th, 1999 to $27.49 on September 30th, 2000,
an increase of 93.6% and the shares traded on AMEX have gone from $13 1/2 on
September 30, 1999 to $29 1/2 on September 30th, 2000, an increase of 118.5%.
During the past year, our principal holding, Enzo Biochem, has had a remarkable
period of internal development and investor recognition. It has been listed on
the New York Stock Exchange and its stock has gone from $28 3/8, on September
30th, 1999 to $48 1/2 on September 30th, 2000. We continue to believe strongly
in its future prospects for outstanding growth and continued capital
appreciation.
During the last year the Fund has made several venture capital investments
in privately held companies. Notably, we invested $1 million in Enramp Inc. an
exciting startup that plans to build personal computers at a very competitive
price. We hope this one could be a winner for your Fund.
During 2000, we also invested $2.1 million in a software startup,
OpenReach.com, for approximately 30% of the equity. When a major venture
capitalist invested $15 million based on a pre-investment valuation of $75
million, Engex sold a small portion of its equity and received additional funds
for waiving certain first refusal rights. At this time, Engex has recouped most
of its original investment and still retains approximately 19.3% of OpenReach's
equity on a fully diluted basis. OpenReach has yet to achieve any revenues and
its shares are totally illiquid. The Engex Board has determined to carry this
position at $8.3 million, reflecting its present fair value, which represents a
substantial discount from the price at which the venture capitalist's investment
was made. There is no assurance it will be a success, but I hope that this will
continue to prove a highly successful investment for your Fund
We are continuing to seek other investments that hopefully will have a
positive impact on the Fund's future performance, although investing in early
stage companies always carries a very high level of risk.
With best wishes for everything great always, I am.
Sincerely,
J. MORTON DAVIS
Chairman of the Board
1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of Engex, Inc.
We have audited the accompanying statement of assets and liabilities of
Engex, Inc., including the schedule of portfolio investments, as of September
30, 2000, the related statement of operations for the year ended September 30,
2000, the statement of changes in net assets, the statement of cash flows and
selected per share data and ratios for the year ended September 30, 2000. 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 selected per share data and ratios for the years ending
September 30, 1996 to September 30, 1999 were audited by other auditors whose
reports, dated October 23, 1997 and November 5, 1999, expressed an unqualified
opinion on such information.
We conducted our audit 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, 2000 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 audit provides 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. as of September 30, 2000 and the results of its
operations, the changes in its net assets and selected per share data and ratios
for the year ended September 30, 2000, in conformity with generally accepted
accounting principles.
As discussed more fully in Note 1, the financial statements include
investments valued at $10,595,019 (40% of net assets), whose values have been
estimated by the Company's Board of Directors in the absence of readily
ascertainable market values. We have reviewed the procedures used by the
Company's Board of Directors in arriving at its estimate of value of such
securities and have inspected underlying documentation and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, those estimated values may differ significantly from the
values that would have been used had a ready market for the investments existed,
and the differences could be material.
/s/ Richard A. Eisner & Company, LLP
New York, New York
November 29, 2000
2
<PAGE>
ENGEX, INC.
<TABLE>
<S> <C> <C>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2000
ASSETS:
Investment in securities at market (identified cost--$10,360,449)
(Notes 1(a) and (c)) .................................................................... $30,412,997
Venture Capital Investments at fair value (identified cost--$3,946,254)
(Note 1(a)) ............................................................................. 10,595,019
Other assets .............................................................................. 440,207
-----------
TOTAL ASSETS ........................................................................ $41,448,223
LIABILITIES:
Accrued expenses .......................................................................... 66,420
Loan Payable (Notes 5, 6 and 7) ........................................................... 3,873,650
Income taxes (Notes 1(b) and 4) ........................................................... 10,639,874
-----------
TOTAL LIABILITIES ................................................................... 14,579,944
-----------
COMMITMENT AND CONTINGENCIES (Note 7)
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL SHARES ......................................... $26,868,279
===========
NET ASSETS VALUE PER SHARE .................................................................. $ 27.49
===========
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 appreciation on investments .................................................... 11,185,287
Undistributed net realized gain from investment transactions .............................. 3,939,601
Undistributed net investment income ....................................................... 1,975,989
-----------
NET ASSETS .................................................................................. $26,868,279
===========
The accompanying notes are an integral part of this statement.
</TABLE>
3
<PAGE>
ENGEX, INC.
<TABLE>
<CAPTION>
SCHEDULE OF PORTFOLIO INVESTMENTS
September 30, 2000
NUMBER OF
SHARES MARKET VALUE
----------- ------------------------------
<S> <C> <C> <C>
COMMON STOCK (114.29%)
Biotechnology (103.27%)
Enzo Biochem, Inc.(a) ............................................... 545,862 shs. $26,474,307
Genstar Therapeutics Corp.(a) ....................................... 13,000 shs. 143,000
Keryx Biopharmaceuticals(a) ......................................... 55,700 shs. 724,100
Tanox Inc.(a) ....................................................... 1,100 shs. 37,263
Cypress Biosciences Inc.(a) ......................................... 14,400 shs. 24,300 $27,402,970
-----------
Insurance (.01%)
Accel International Corp.(a) ........................................ 7,200 shs. 3,600
Technology (.57%)
PRWW LTD(a) ......................................................... 9,000 shs. 100,125
Leisure Planet Holdings(a) .......................................... 33,600 shs. 33,600
Global Technologies(a) .............................................. 4,500 shs. 19,406 153,131
-----------
Gaming Industry (3.46%)
American Vantage Company(a) ......................................... 474,500 shs. 919,344
Telecommunications (2.91%)
U.S. Wireless Corp(a) ............................................... 47,600 shs. 755,650
General Datacomm Industries(a) ...................................... 3,600 shs. 18,675 774,325
-----------
Distribution (.29%)
U.S. China IND Exchange(a) .......................................... 6,710 shs. 77,165
Financial Services (.91%)
BKF Capital Group, Inc.(a) .......................................... 5,400 shs. 105,300
Techsys Inc.(a) ..................................................... 16,300 shs. 136,513 241,813
-----------
Education (1.35%)
Whitman Education Group, Inc.(a) .................................... 169,100 shs. 359,338
Environmental (1.52%)
U.S. Home & Garden, Inc.(a) ......................................... 215,900 shs. 404,811
-----------
TOTAL INVESTMENT IN COMMON
STOCK (COST--$10,196,618) ..................................... 30,336,497
UNITS (.28%)
Leisure Planet Holdings(a) .......................................... 18,000 shs. 76,500
TOTAL UNITS (COST--$163,914) 76,500
TOTAL MARKETABLE SECURITIES (114.57%)
(COST--$10,360,449) ........................................... $30,412,997
===========
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
VENTURE CAPITAL INVESTMENTS(A)
CapitalCube LLC ..................................................... 350,000 shs. 350,000
Enramp Inc. Common Stock ............................................ 400,000 shs. 1,000,000
GMP Companies ....................................................... 50,000 shs. 900,000
OpenReach.com, Inc.(b) .............................................. 2,780,623 shs. 8,341,869
Surgivision Series A Pfd ............................................ 300,000 shs. 3,000
Worldwide Web Networx Corp Wts. ..................................... 150,000 shs. 150
-----------
TOTAL PRIVATE INVESTMENTS (39.93%)
(COST--$3,946,254) ............................................ $10,595,019
===========
----------------
(a) Non-income producing securities.
(b) Affiliate as defined in the Investment Company Act of 1940.
The accompanying notes should be read in conjunction with this schedule.
</TABLE>
5
<PAGE>
ENGEX, INC.
<TABLE>
<S> <C> <C>
STATEMENT OF OPERATIONS
For The Year Ended September 30, 2000
INVESTMENT GAIN:
INCOME:
Dividends ........................................................................... $ 20,114
Other (Note 2) ...................................................................... 1,257,000
Interest ............................................................................ 6,518
-----------
Total income ................................................................... $ 1,283,632
EXPENSES:
Custodian and transfer fees ......................................................... 23,422
Professional fees ................................................................... 145,350
Directors' fees and expenses ........................................................ 21,000
Other taxes ......................................................................... 2,508
Insurance ........................................................................... 43,602
Registration and filing fees ........................................................ 17,669
Management fees (Note 2) ............................................................ 227,562
Interest Expense (Note 5) ........................................................... 193,334
Miscellaneous ....................................................................... 1,840
-----------
Total Expenses ................................................................. 676,287
-----------
INVESTMENT INCOME BEFORE INCOME TAXES .................................................. 607,345
INCOME TAX EXPENSE (Notes 1(b) and 4) .................................................. 234,385
-----------
NET INVESTMENT INCOME .................................................................. 372,960
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized (gain) from security transactions:
Proceeds from sales ................................................................. 5,505,846
Cost of securities sold ............................................................. 3,866,333
-----------
1,639,513
Income tax provision (Notes 1(b) and 4) ............................................. 632,744
-----------
Net realized gain (Notes 1(c) and 3) ................................................... 1,006,769
Unrealized appreciation on investments:
Beginning of period ................................................................. 8,373,899
End of period ....................................................................... 26,701,281
-----------
18,327,382
Deferred income tax expense (Notes 1(b) and 4) ......................................... 6,713,188
-----------
NET INCREASE IN UNREALIZED APPRECIATION ................................................ 11,614,194
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ........................................ 12,620,963
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................... $12,993,923
===========
The accompanying notes are an integral part of this statement.
</TABLE>
6
<PAGE>
ENGEX, INC.
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For The Years Ended September 30, 2000 and 1999
2000 1999
----------- -----------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment gain (loss) ................................................................. $ 372,960 $ (268,726)
Net realized gain (loss) on securities transactions ........................................ 1,006,769 (414,689)
Increase in unrealized appreciation from investment activities ............................. 11,614,194 7,063,619
----------- -----------
NET INCREASE IN NET ASSETS .................................................................... 12,993,923 6,380,204
NET ASSETS--BEGINNING OF PERIOD ............................................................... 13,874,356 7,494,152
----------- -----------
NET ASSETS--END OF PERIOD ..................................................................... $26,868,279 $13,874,356
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
7
<PAGE>
ENGEX, INC.
<TABLE>
STATEMENT OF CASH FLOWS
Year Ended September 30, 2000
<S> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net investment income .......................................................................................... $ 372,960
Net realized and unrealized gain on investments ................................................................ 12,620,963
Adjustments to reconcile net income to net cash used in operating activities
Deferred income tax expense ............................................................................... 6,713,188
Changes in operating assets:
Securities owned ........................................................................................ (14,901,798)
Investments at fair value ............................................................................... (10,595,019)
Receivable from clearing broker ......................................................................... 1,502,395
Other assets ............................................................................................ (408,781)
Changes in operating liabilities:
Accounts payable and accrued expenses ................................................................... (23,007)
Current taxes payable ................................................................................... 845,449
-----------
Net cash used by operating activities ................................................................. (3,873,650)
-----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Repayment on loans payable ..................................................................................... (635,434)
Advances on loan payable ....................................................................................... 4,509,084
-----------
Net cash provided by activities ................................................................................ 3,873,650
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS:
Cash and cash equivalents--October 1, 1999 ..................................................................... 0
-----------
Cash and cash equivalents--September 30, 2000 .................................................................. 0
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ......................................................................... $ 28,048
See notes to financial statements.
</TABLE>
8
<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, 2000. 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.
Investments for which quotations are not readily available are valued
at fair value, as determined by the Board of Directors (see Note 2).
These estimated values may not reflect amounts that could be realized
upon immediate sale, nor amounts that ultimately may be realized. The
estimated fair values also may differ from the values that would have
been used had a liquid market existed, and such differences could be
significant.
(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 the Agreement, Advisors serve as the 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, 2000, Advisors
earned a management fee of $227,562, of which $21,457 was due to Advisors at
September 30, 2000 and is included in accrued expenses in the accompanying
statement of assets and liabilities.
OpenReach.com, Inc. is an affiliate as defined in the Investment Company
Act 1940, Unrealized appreciation related to this affiliate was $6,290,765 at
September 30, 2000. During the year, the Fund sold a small portion of its equity
and received additional funds in the amount of $1,257,000 for waiving certain
first refusal rights.
NOTE 3. PORTFOLIO TRANSACTIONS
The following summarizes the securities transactions by the Fund for the
year ended September 30, 2000:
Purchases .................................. $6,850,226
==========
Sales ...................................... $5,505,846
==========
9
<PAGE>
ENGEX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 at September 30, 2000:
Current:
Federal ..................................... $ 717,525
State and local ............................. 149,604
----------
$ 867,129
==========
Deferred:
Federal ..................................... $6,231,309
State and local ............................. 481,879
----------
$6,713,188
==========
The effective tax rate for the Fund is reconcilable to the federal
statutory tax rate, as follows:
Statutory rate ................................ 34%
State and local income
taxes ....................................... 4%
--
38%
==
NOTE 5. BORROWINGS
Loans during the year were made at a negotiated rate between the Fund and
the Fund's custodian bank. The interest paid during the year ranged from a rate
of 7.25% to 8.25% per annum. The weighted average interest rate during the year
was 7.84%. The maximum loan outstanding and the weighted average amount of loans
(computed on a daily basis) during the twelve-month period were $4,509,084 and
$3,020,544, respectively. The loans were collateralized by the Fund's investment
portfolio.
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has estimated that the carrying amount of the Fund's loan
payable approximates the fair value based upon its analysis of the credit risk
inherent in the loan.
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.
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 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>
(b) As of September 30, 2000, all of the Fund's investments in securities
were held at one bank, the Fund's custodian.
NOTE 8. CHANGE IN INDEPENDENT ACCOUNTANTS
On September 18, 2000, Grant Thornton LLP resigned as independent
accountants of the Fund. The reports of Grant Thornton LLP on the financial
statements of the Fund for the past two fiscal years contained no adverse
opinion or disclaimer of opinion and were not modified as to uncertainty, audit
scope or accounting principle. In connection with its audits for the two most
recent fiscal years and through September 18, 2000, there have been no
disagreements with Grant Thornton LLP on any matter of accounting principles or
practices, financial statement dislosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Grant Thornton LLP, would
have caused them to make reference thereto in their report on the financial
statements for such years. The Fund, with the approval of its board of directors
and audit committee, engaged Richard A. Eisner & Company, LLP on November 14,
2000.
11
<PAGE>
<TABLE>
ENGEX, INC.
SCHEDULE 1
SUPPLEMENTARY INFORMATION--SELECTED PER SHARE DATA AND RATIOS
Selected data for each share of Capital Stock outstanding throughout each year:
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------
2000(1) 1999(1) 1998(1) 1997(1) 1996(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Investment income .............................................. $ 1.31 $ 0.04 $ 0.01 $ 4.28 $ 0.14
------- ------- ------- ------- -------
Expenses:
Interest .................................................... 0.20 0.01 0.05 0.17 0.21
Other ....................................................... 0.49 0.45 0.54 0.31 0.31
------- ------- ------- ------- -------
Total expenses ........................................ 0.69 0.46 0.59 0.48 0.52
------- ------- ------- ------- -------
Investment (loss) income before income tax
(benefit) .................................................... 0.62 (0.42) (0.58) 3.80 (0.38)
------- ------- ------- ------- -------
Deferred and current income tax (benefit) ...................... 0.24 (0.15) (0.19) (0.15) (0.14)
------- ------- ------- ------- -------
Net investment (loss) income ................................... 0.38 (0.27) (0.39) 3.95 (0.24)
------- ------- ------- ------- -------
Realized and unrealized gain (loss) before
provision (benefit) for income taxes ........................ 20.43 10.10 (9.03) (4.87) 2.87
Deferred and current income tax provision
(benefit) .................................................... 7.52 3.30 (2.49) 0.20 1.12
------- ------- ------- ------- -------
Net realized and unrealized gain (loss) ........................ 12.91 6.80 (6.54) (5.07) 1.75
------- ------- ------- ------- -------
Net increase (decrease) in net asset value ..................... 13.29 6.53 (6.93) (1.12) 1.51
Net asset value:
Beginning of year ........................................... 14.20 7.67 14.60 15.72 14.21
------- ------- ------- ------- -------
End of year ................................................. $27.49 $14.20 $ 7.67 $14.60 $15.72
======= ======= ======= ======= =======
Number of shares outstanding at end of year .................... 977,223 977,223 977,223 977,223 977,223
======= ======= ======= ======= =======
Ratios:
Expenses to average net assets .............................. 3.32% 4.52% 5.78% 3.32% 3.32%
Net investment (loss) income to average
net assets ................................................ 1.83% (2.71)% (2.02)% 26.88% (1.55)%
Portfolio turnover .......................................... 21.54% 33.63% 16.24% 26.48% 4.29%
----------
(1) During these years, the Fund did not pay dividends from net investment
income or make any distributions of net realized gains from securities
transactions.
The accompanying notes should be read in conjunction with this supplementary schedule.
</TABLE>
12
