UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
-------- SECURITIES EXCHANGE ACT OF 1934, as amended (the "Act")
FOR THE FISCAL YEAR ENDED: June 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
------- SECURITIES ACT OF 1934, as amended
FOR THE TRANSITION PERIOD FROM ________TO ________
Commission File Number: 0-9083
Enercorp, Inc.
(Exact name of Registrant as specified in its charter)
Colorado 84-0768802
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
32751 Middlebelt Road, Suite B
Farmington Hills, Michigan 48334
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 851-5651
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, 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 a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: X
As of October 25, 2002 there were 695,897 shares of common stock outstanding
and the aggregate market value of the common stock (based upon the average of
the bid and asked prices of these shares on the over-the-counter market of the
Registrant) held by non-affiliates was approximately $ 75,853.
Enercorp, Inc.
Form 10-K Filing for the Year Ended June 30, 2002
INDEX
PAGE
PART I
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security
Holders 13
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 13
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 6A. Quantitative and Qualitative Disclosure About
Market Risk 16
Item 7. Financial Statements and Supplementary Data 16
Item 8. Changes in and Disagreements with Accountants
on accounting and Financial Disclosure 16
PART III
Item 9. Directors and Executive Officers of the Registrant 16
Item 10. Executive Compensation 18
Item 11. Security Ownership of Certain Beneficial Owners
and Management 19-20
Item 12. Certain Relationships and Related Transactions 20
PART IV
Item 13. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 21
SIGNATURES 23
2
Enercorp, Inc.
FORM 10-KSB
PART 1
------------
Item 1. Business
General. Enercorp, Inc. (the "Registrant" or "Company") is a closed-end, non-
diversified Investment Company under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Registrant was incorporated under
the laws of the State of Colorado on June 30, 1978. The Registrant elected to
become a business development company under the Investment Company Act on June
30, 1982. A business development company is a type of investment company that
generally must maintain 70% of its assets in new, financially troubled or
otherwise qualified companies and offers significant managerial assistance to
such companies. The Registrant presently has four investee companies to which
it provides management assistance. Business development companies are not
subject to the full extent of regulation under the Investment Company Act, as
amended. (See "Regulation-Business Development Companies" below). The
Registrant is primarily engaged in the business of investing in and providing
managerial assistance to developing companies, which, in its opinion, have
significant potential for growth. The Registrant's investment objective is to
achieve long-term capital appreciation, rather than current income, on its
investments. Currently, the Registrant's investment activity is limited by its
working capital. There is no assurance that the Company's objective will be
achieved.
On March 7,2001, the Registrant sold 1,077,800 shares of the common stock it
held in its largest investee, Williams Controls, Inc., and on March 12, 2001
the Registrant sold an additional 574,529 shares of Williams Controls, Inc.,
for a total of 1,652,329 shares, representing all the shares of Williams
Controls, Inc. common stock owned by the Registrant at the time of this filing.
These shares were acquired by the Registrant in transactions between April
1991and August 1998. The shares were sold in open market transactions through
an unaffiliated broker. Upon settlement of the trades, the Registrant received
total net proceeds of approximately $2,424,800. These proceeds were used to pay
off the Company's demand loan from a bank with a balance of $2,141,649, plus
accrued interest and make certain payments of or toward other debt obligations
and payables that the Company had outstanding.
Investment Decisions and Policies. The Registrant's investment decisions are
made by its Management in accordance with policies approved by its Board of
Directors. The Registrant is not a registered investment advisor nor does it
operate pursuant to a written investment advisory agreement that must be
approved periodically by stockholders. The Registrant relies solely upon its
Management, particularly its Officers, on a day-to-day basis, and also on the
experience of its directors in making investment decisions.
Consistent with its objective of long-term capital appreciation, the Registrant
consults with its investees with respect to obtaining capital and offers
managerial assistance to selected businesses that, in the opinion of the
Registrant's Management, have a significant potential for growth.
3
In addition to acquiring investment positions in new and developing companies,
the Registrant also may occasionally invest in more mature privately and
publicly-held companies, some of which may be experiencing financial
difficulties, but which, the Registrant believes, have potential for further
development or revitalization, and which, in the long-term, could experience
growth and achieve profitability.
Should its working capital position allow it to do so, the Registrant plans to
take advantage of other opportunities to maintain and create independent
companies with a significant potential for growth. The Registrant's priorities
for the future will be to attempt to (1) maximize the value and liquidity of
its present investees, (2) increase its cash flow and intermediate term value
through the acquisition of securities or assets of more established companies,
and (3) make new higher risk investments in new and developing companies.
The Registrant has no fixed policy as to the business or industry group in
which it may invest or as to the amount or type of securities or assets that it
may acquire. To date, the Registrant has made investments primarily in new and
developing companies the securities of which had no established public market.
Most of these companies initially were unable to obtain significant capital on
reasonable terms from conventional sources. The Registrant endeavors to
assist its investee companies and their management teams in devising realistic
business strategies and obtaining necessary financing.
The Registrant believes that it will be most likely to succeed in its
investment strategies if its investee companies have strong management teams.
Generally, the Registrant focuses as much or more on finding and supporting
business executives who have the ability, entrepreneurial motivation and
experience required to build independent companies with a significant potential
for growth, as it does on identifying, selecting and financing investment
opportunities based on promising ideas, products or marketing strategies.
Consistent with this belief, the Registrant's managerial assistance often is
provided in ways designed to build strong, independent management rather than
simply providing management services. For example, the Registrant encourages
its investee companies to afford their management teams opportunities for
meaningful equity participation and assists them in planning means to
accomplish this result. The Registrant also assists in arranging financing,
provides guaranties from time to time and occasionally provides limited
financing to its investee companies to assist management of its investee
companies to achieve their goals with limited supervision from the Registrant.
The Registrant has never paid cash dividends nor does it have any present
intent to do so. The Registrant's future dividend policy is to make limited in
kind distributions to its stockholders of its larger investment positions if
and when its Board of Directors deems such distributions appropriate. The
Registrant, to date, has not made any distributions of its investment
portfolio, nor does it have any immediate plans to do so.
Business development is by nature a high-risk activity that often results in
substantial losses. The companies, in which the Registrant invests and will
invest, especially in the early stages of an investment but to some extent with
established investees, often lack effective management, face operating problems
and have incurred substantial losses. Potential investees include established
businesses which may be experiencing severe financial or operating difficulties
or may, in the opinion of their management, be managed ineffectively and yet
have the potential for substantial growth or for reorganization into separate
independent companies.
4
The Registrant will attempt to reduce the level of its investment risks through
one or more of the following factors:
- carefully investigating potential investees;
- financing only what it believes to be practical business
opportunities, as contrasted to research projects;
- selecting effective, entrepreneurial management for its
investees;
- providing managerial assistance and support to investees in
areas, where the need is apparent;
- obtaining, alone or with others, actual or working control of its
investees;
- supporting the investees in obtaining necessary financing, and
where feasible, arranging major contracts, joint ventures or mergers and
acquisitions; and
- where possible, maintaining sufficient capital resources to make
follow-on investments where necessary, appropriate and feasible.
As a business development company, the Registrant is subject to the provisions
of Sections 55 through 65 of the Investment Company Act of 1940, as amended,
and certain additional provisions of that Act made applicable to business
development companies by Section 59 of that Act. Under these regulations, the
Registrant's investment policies are defined and subject to certain
limitations. See "Regulation-Business Development Companies." Furthermore,
under Section 58 of that Act, the Registrant may not withdraw its election to
be so regulated without the consent of a majority of its issued and outstanding
voting securities.
The Registrant has no fixed policy as to any particular business or industry
group in which it may invest or as to the amount or type of securities or
assets that it may acquire. The Registrant has in the past, and may continue
in the future to invest in assets that are not qualifying assets as defined by
Section 55 of the Investment Company Act; however, no such additional assets
have been identified as of June 30, 2001, and the Registrant does not intend to
fall below the 70% requirement as set forth in Section 55of that Act.
The Registrant endeavors to achieve its objectives in accordance with the
following general policies:
(1) The Registrant acquires securities through negotiated private placement
transactions directly from the investee company, its affiliates, or third
parties, or through open market transactions.
(2) The Registrant attempts to acquire, if possible and consistent with the
Registrant's capital resources, a large or controlling interest in its
investees through purchases of equity securities, including warrants,
options, and other rights to acquire such securities combined, if
appropriate, with debt securities, including demand notes, term loans and
guarantees, or debt instruments or preferred stock, convertible into, or
with warrants to purchase additional equity securities.
(3) The Registrant may make additional or "follow-on" investments in its
investees, when appropriate to sustain the investees or to enhance or
protect the Registrant's existing investment.
(4) The Registrant will determine the length of time it will retain its
investment by evaluating the facts and circumstances of each investee and
the Registrant's relationship with such investee. The Registrant generally
will retain its investments for a relatively long period, sometimes as long
as many years, with the result that its rate of portfolio turnover is low.
5
Investments are retained until, in the sole opinion of the Registrant, the
investee company has a demonstrated record of successful operations and
there is a meaningful public market for its securities which reflects the
investment value the Registrant sought (or such a market can be readily
established) or until the Registrant, in its sole discretion, decides that
its investment is not likely to result in future long-term capital
appreciation.
At the time of sale of the Registrant's portfolio securities, there may not be
a market of sufficient stability to allow the Registrant to sell its entire
position, potentially resulting in the Registrant not being able to sell such
securities at prevailing market prices or at the prices at which the Registrant
may have valued its position in the investee's securities.
Valuation-Policy Guidelines
------------------------------
The Registrant's Board of Directors is responsible for the valuation of the
Registrant's assets in accordance with its approved guidelines. The
Registrant's Board of Directors is responsible for (1) recommending overall
valuation guidelines and (2) the valuation of the specific investments.
There is a range of values which are reasonable for an investment at any
particular time. Fair value is generally defined as the price at which the
investment in question could change hands, assuming that both parties to the
transaction are under no unusual pressure to buy or sell and both have
reasonable knowledge of all the relevant facts. To increase objectivity in
valuing the securities, the Registrant uses external measures of value such as
public markets or significant third-party transactions whenever possible.
Neither a long term workout value nor an immediate liquidation value is used,
and no increment of value is included for changes, which may take place in the
future. The Registrant's largest investee, Williams Controls, Inc., represents
over 80% of the total value of the Registrant's investment portfolio and is
valued by the public market method, subject to the judgment of its Board of
Directors, except for valuing the majority of the warrants held by the
Registrant, which are valued under the appraisal method and using the best
judgment of its Board of Directors. Certain members of the Company's Board of
Directors may hold minor positions in some of the Registrant's investee
companies and certain members of the Board may hold officer or director
positions with some of the Company's investee companies. No such positions held
by any of the Registrant's Board or Officers exceed 5% of the investee
company's issued and outstanding securities.
Valuations assume that, in the ordinary course of its business, the Registrant
will eventually sell its position in the public market or may distribute its
larger positions to its stockholders. Accordingly, no premiums are placed on
investments to reflect the ability of the Registrant to sell block positions or
control of companies, either by itself or in conjunction with other investors.
In fact, in certain circumstances, the Registrant may have to sell the
securities it owns of its investees in the open market at discounts to market
prices at the time of sale, due to the large position it may hold relative to
the average daily trading volume.
The Registrant uses four basic methods of valuation for its investments and
there are variations within each of these methods. The Registrant's Board of
Directors, in its sole discretion, has determined that the Registrant's four
basic valuation methods constitute fair value. As an investee evolves, its
progress may sometime require changes in the Registrant's method of valuing the
investee's securities. The Registrant's investment is separated into its
component parts (such as debt, preferred stock, common stock or warrants), and
each component is valued separately to arrive at a total value. The Company
believes that a mixture of valuation methods is often essential to represent a
fair value of the Registrant's investment position in any particular investee.
For example, one method may be appropriate for the equity securities of a
company while another method may be appropriate for the senior securities of
the same company. In various instances of valuation, the Board of Directors of
the Registrant may modify the valuation methods mentioned below based on the
Board's best judgment of any particular situation.
6
The Cost Method values an investment based on its original cost to the Company,
adjusted for the amortization of original issue discount, accrued interest and
certain capitalized expenditures of the Company. While the cost method is the
simplest method of valuation, it is often the most unreliable because it is
applied in the early stages of an investee's development and is often not
directly tied to objective measurements. All investments are carried at cost
until significant positive or adverse events subsequent to the date of the
original investment warrant a change to another method. Some examples of such
events are: (1) a major recapitalization; (2) a major refinancing; (3) a
significant third-party transaction; (4) the development of a meaningful public
market for the investee's common stock; and (5) material positive or adverse
changes in the investee's business.
The Appraisal Method is used to value an investment position based upon a
careful analysis of the best available outside information when there is no
established public or private market in the investee company's securities and
it is no longer appropriate to use the cost method. Comparisons are made using
factors (such as earnings, sales or net worth) that influence the market value
of similar public companies or that are used in the pricing of private
transactions of comparable companies. Major discounts, usually 50%, are taken
when private companies are appraised by comparing them to similar public
companies. Liquidation value may be used when an investee is performing
substantially below plan and its continuation as an operating entity is in
doubt. Under the appraisal method, the differences among companies in terms of
the source and type of revenues, quality of earnings, and capital structure are
carefully considered.
An appraisal method value can be defined as the price at which the investment
in question could change hands, assuming that both parties to the transaction
are under no unusual pressure to buy or to sell, and both have reasonable
knowledge of all the relevant facts. In the case of start-up companies where
the entire assets may consist of only one or more of the following: (1) a
marketing plan, (2) management or (3) a pilot operation, an evaluation may be
established by capitalizing the amount of the investment that could reasonably
be obtained for a predetermined percentage of the particular company.
Valuations under the appraisal method are considered to be more subjective than
the cost, public market or private market methods.
The Private Market Method uses third-party transactions (actual or proposed) in
the investee's securities as the basis for valuation. This method is
considered to be an objective measure of value since it depends upon the
judgment of a sophisticated, independent investor. Actual firm offers are used
as well as historical transactions, provided that any offer used was seriously
considered and well documented.
The public market method is the preferred method of valuation when there is an
established public market for the investee's securities, since that market
provides the most objective basis for valuation. In determining whether the
public market is sufficiently established for valuation purposes, the
Registrant examines the trading volumes, the number of stockholders and the
number of market makers. Under the public market method, as well as under the
other valuation methods, the Registrant may discount investment positions that
are subject to significant legal, contractual or practical restrictions. When
an investee's securities are valued under the Public Market Method, Common
Stock equivalents such as presently exercisable warrants or options are valued
based on the difference between the exercise price and the market value,
subject to management and board discretion, of the underlying common stock.
Although the Registrant believes that a public market could be created for the
options and warrants of certain of its investees, thereby possibly increasing
the value of these rights above their arbitrage value, the Registrant does not
reflect this possibility in its valuation.
7
Regulation - Business Development Companies
-------------------------------------------
The following is a summary description of the Investment Company Act of 1940,
as amended, as applied to business development companies. This description is
qualified in its entirety by reference to the full text of the Act and the
rules adopted thereunder by the Securities and Exchange Commission (the "SEC").
The Small Business Investment Incentive Act of 1980 became law on October 21,
1980. This law modified the provisions of the Investment Company Act of 1940,
as amended, that are applicable to a company, such as the Registrant, which
elects to be treated as a "business development company." The Registrant
elected to be treated as a business development company on June 30, 1982. The
Registrant may not withdraw its election without first obtaining the approval
of a majority of its outstanding voting securities.
A business development company must be operated for the purpose of investing in
the securities of certain present and former "eligible portfolio companies" and
certain bankrupt or insolvent companies and must make available significant
managerial assistance to its investee companies. An eligible portfolio company
generally is a United States company that is not an investment company (except
for wholly-owned SBIC's licensed by the Small Business Administration) and (1)
does not have a class of securities included in the Federal Reserve Board's
over-the-counter margin list, (2) is actively controlled by the business
development company and has an affiliate of the business development company
on its board of directors, or (3) meets such other criteria as may be
established by the SEC. Control, under the Investment Company Act of 1940, as
amended, is presumed to exist where the business development company, and its
affiliates or related parties, own 25% or more of the issued and outstanding
voting securities of the investee.
The Investment Company Act of 1940, as amended, prohibits or restricts the
Registrant from investing in certain types of companies, such as brokerage
firms, insurance companies, investment banking firms and investment companies.
Moreover, the Investment Company Act of 1940, as amended, limits the type of
assets that the Registrant may acquire to "qualifying assets" and certain
assets necessary for its operations (such as office furniture, equipment and
facilities) if, at the time of the acquisition, less than 70% of the value of
the Registrant's assets consists of qualifying assets. The effect of the
regulation is to require that at least 70% of a business development company's
assets be maintained in qualifying assets. Qualifying assets include: (1)
securities of companies that were eligible portfolio companies at the time the
Registrant acquired their securities; (2) securities of bankrupt or insolvent
companies that are not otherwise eligible portfolio companies; (3) securities
acquired as follow-on investments in companies that were eligible at the time
of the Registrant's initial acquisition of their securities but are no longer
eligible, provided that the Registrant has maintained a substantial portion of
its initial investment in those companies; (4) securities received in exchange
for or distributed on or with respect to any of the foregoing; and (5) cash
items, government securities and high-quality, short-term debt. The Investment
Company Act of 1940, as amended, also places restrictions on the nature of the
transactions in which, and the persons from whom, securities can be purchased
in order for the securities to be considered to be qualifying assets. The
Registrant believes that, as of June 30, 2002, that more than 90% of its assets
would be considered qualifying assets.
8
The Registrant is permitted by the Investment Company Act of 1940, as amended,
under specified conditions, to issue multiple classes of senior debt and a
single class of preferred stock, if its asset coverage, as defined in the
Investment Company Act of 1940, as amended, is at least 200% after the issuance
of the debt or the preferred stock. The Registrant currently has no policy
regarding issuing of multiple classes of senior debt or a class of preferred
stock.
The Registrant may issue, in limited amounts, warrants, options and rights to
purchase its securities to its directors, officers and employees (and provide
loans to such persons for the exercise thereof) in connection with an executive
compensation plan, if certain conditions are met. These conditions include the
authorization of such issuance by a majority of the Registrant's voting
securities (as defined below) and the approval by a majority of the independent
members of the Board of Directors and by a majority of the Directors who have
no financial interest in the transaction. The issuance of options, warrants or
rights to Directors who are not also Officers requires the prior approval of
the SEC.
As defined in the Investment Company Act of 1940, as amended, the term
"majority of the Registrant's outstanding voting securities" means the vote of
(a) 67% or more of the Registrant's common stock present at a meeting, if the
holders of more than 50% of the outstanding common stock are present or
represented by proxy, or (b) more than 50% of the Registrant's outstanding
common stock, whichever is less.
The Registrant may sell its securities at a price that is below the prevailing
net asset value per share only upon the approval of the policy by the holders
of a majority of its voting securities, including a majority of the voting
securities held by non-affiliated persons, at its last Annual Meeting or within
one year prior to the transaction. In addition, the Registrant may repurchase
its Common Stock, subject to the restrictions of the Investment Company Act of
1940, as amended.
In accordance with the Investment Company Act of 1940, as amended, a majority
of the members of the Registrant's Board of Directors must not be "interested
persons" of the Registrant, as that term is defined in the Investment Company
Act of 1940, as amended. Generally, "interested persons" of the Registrant
include all affiliated persons of the Registrant and members of their immediate
families, any "interested person" of an underwriter or of an "investment
advisor" to the Registrant, any person who has acted as legal counsel to the
Registrant within the last two fiscal years, or any broker or dealer, or
affiliate or a broker or dealer.
Most of the transactions involving the Registrant and its affiliates (as well
as affiliates of those affiliates) which were prohibited without the prior
approval of the SEC under the Investment Company Act of 1940, as amended, prior
to its amendment by the Small Business Investment Incentive Act now require the
prior approval of a majority of the Registrant's independent Directors and a
majority of the Directors having no financial interest in the transactions.
The effect of this Amendment is that the Registrant may engage in certain
affiliated transactions that would be prohibited, absent prior SEC approval in
the case of investment companies, which are not business development companies.
However, transactions involving certain closely affiliated persons of the
Registrant, including its Directors, Officers and employees, still require the
prior approval of the SEC. In general, "affiliated persons" of a person
include: (a) any person who owns, controls or holds with power to vote, more
than five percent of the Registrant's issued and outstanding Common Stock, (b)
any Director, Executive Officer or General Partner of that person, (c) any
person who directly or indirectly controls, is controlled by, or is under
common control with that person, and (d) any person five percent or more of
whose outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote, by such other person. Such persons
generally must obtain the prior approval of a majority of the Registrant's
independent directors and, in some situations, the prior approval of the SEC,
before engaging in certain transactions involving the Registrant or any company
controlled by the Registrant. In accordance with the Investment Company Act of
1940, as amended, a majority of the members of the Registrant's Board of
Directors are not interested persons as defined in the Act of 1940, as amended.
The Investment Company Act generally does not restrict transactions between the
Registrant and its investee companies.
9
Finally, notwithstanding restrictions imposed under Federal Securities Laws, it
is anticipated that the Registrant will acquire securities of investee
companies pursuant to stock purchase agreements or other agreements that may
further limit the Registrant's ability to distribute, sell or transfer such
securities. And as a practical matter, even if such transfers are legally or
contractually permissible, there may be no market, or a very limited market,
for such securities. Economic conditions may also make the price and terms of
a sale or transfer transactions unattractive.
Other Securities Law Considerations
-----------------------------------
In addition to the above-described provisions of the Investment Company Act of
1940, as amended, there are a number of other provisions of the Federal
Securities Laws which affect the Registrant's operations. For example,
restrictions imposed by the Federal Securities Laws, in addition to possible
contractual provisions, may adversely affect the ability of the Registrant to
sell or otherwise to distribute or dispose of its portfolio securities.
Most if not all securities which the Registrant acquires as venture capital
investments will be "restricted securities" within the meaning of the
Securities Act of 1933 ("Securities Act") and will not be permitted to be
resold without compliance with the Securities Act of 1933, as amended. Thus,
the Registrant will not be permitted to resell portfolio securities unless a
registration statement has been declared effective by the SEC with respect to
such securities or the Registrant is able to rely on an available exemption
from such registration requirements. In most cases the Registrant will
endeavor to obtain from its investee companies "registration rights," pursuant
to which the Registrant will be able to demand that an investee company
register the securities owned by the Registrant at the expense of the investee
company. Even if the investee company bears this expense, however, the
registration of any securities owned by the Registrant is likely to be a time-
consuming process, and the Registrant always bears the risk, because of these
delays, that it will be unable to resell such securities, or that it will not
be able to obtain an attractive price for such securities.
At times the Registrant will not register portfolio securities for sale but
will seek to sell and sometimes seek an exemption from registration. The most
likely exemption available to the Registrant is section 4(1) of the Securities
Act of 1933, as amended, which, in effect, exempts sales of securities not
involving a public distribution of the securities. This exemption will likely
be available to permit a private sale of portfolio securities, and in some
cases a public sale, if the provisions of Rule 144 under the Securities Act of
1933, as amended, are complied with. Among other things, Rule 144 generally
requires that securities be sold in "broker transactions," and imposes a one-
year holding period prior to any resale of restricted securities.
The Registrant may elect to distribute in-kind securities of investee companies
to its stockholders. Prior to any such distribution, the Registrant expects
that it will need to file, or cause the issuers of such distributed securities,
to file, a registration statement or, in the alternative, an information
statement, which when declared effective by the SEC, will permit the
distribution of such securities and also permit distributee stockholders of the
Registrant to sell such distributed securities.
Federal Income Tax Matters
---------------------------
For federal and state income tax purposes, the Registrant is taxed at regular
corporate rates on ordinary income and realized gain. It is not entitled to
the special tax treatment available to more regulated investment companies,
although the Registrant plans to conduct its affairs, if possible, to minimize
or eliminate federal and state income taxes. Distributions of cash or
property by the Registrant to its stockholders will be taxable as ordinary
income only to the extent that the Registrant has current or accumulated
earnings and profits.
10
The "alternative tax" rate at which corporations are taxed on long-term capital
gains is up to 35% pursuant to the Tax Reform Act of 1986 (the "Tax Reform
Act"). A corporation generally may offset capital loss only against capital
gain. Generally, if the Registrant realizes a net capital loss for any taxable
year, it can carry back such net capital loss only against capital gain. Such
a net capital loss for any taxable year can generally be carried back to each
of the three preceding taxable years, and then any unused portion thereof may
be carried over into the subsequent taxable years for a period of five years.
Future Distributions
----------------------
The Registrant does not currently intend to pay cash dividends. The
Registrant's current dividend policy is to make in-kind distributions of its
larger investment positions to its stockholders when the Registrant's Board of
Directors deems such distributions appropriate. Because the Registrant does
not intend to make cash distributions, stockholders would need to sell
securities distributed in-kind, when and if distributed, in order to realize a
return on their investment.
An in-kind distribution will be made only when, in the judgment of the
Registrant's Board of Directors, it is in the best interest of the Registrant's
stockholders to do so. The Board of Directors will review, among other things,
the investment quality and marketability of the securities considered for
distribution; the impact of a distribution of the investee's securities on the
investee's customers, joint venture associates, other investors, financial
institutions and management; tax consequences and the market effects of an
initial or broader distribution of such securities. Securities of the
Registrant's larger investment positions in more mature investee companies with
established public markets are most likely to be considered for distribution.
It is possible that the Registrant may make an in-kind distribution of
securities that are substantially liquid irrespective of the distributee's
stockholder rights to sell such securities. Any such in-kind distribution
would require stockholder approval only if the distribution represents
substantially all of the Registrant's assets. It is possible that the
Registrant may make an in-kind distribution of securities which have
appreciated or depreciated from the time of purchase depending upon the
particular distribution. The Registrant has not established a policy as to the
frequency or size of distributions and indeed there can be no assurance that
any distributions will be made. To date, no such distributions have been made
and the Registrant is not considering doing so, but the Registrant may consider
doing so in the future.
Managerial Assistance
---------------------
The Registrant believes that providing managerial assistance to its investees
is critical to its business development activities. "Making available
significant managerial assistance" as defined in the Investment Company Act of
1940, as amended, with respect to a business development company such as the
Registrant means (a) any arrangement whereby a business development company,
through its directors, officers, employees or general partners, offers to
provide, and, if accepted, does so provide, significant guidance and counsel
concerning the management, operations, or business objectives and policies of a
portfolio company; or (b) the exercise by a business development company of a
controlling influence over the management or policies of a portfolio company by
the business development company acting individually or as a part of a group
acting together which controls such portfolio company. The Registrant is
required by the Investment Company Act of 1940, as amended, to make significant
managerial assistance available at least with respect to investee companies
that the Registrant treated as qualifying assets for purposes of the 70% test.
The nature, timing and amount of managerial assistance provided by the
Registrant varies depending upon the particular requirements of each investee
company.
11
The Registrant may be involved with its investees in recruiting management,
product planning, marketing and advertising and the development of financial
plans, operating strategies and corporate goals. In this connection, the
Registrant may assist clients in developing and utilizing accounting procedures
to record efficiently and accurately, transactions in books of account which
will facilitate asset and cost control and the ready determination of results
of operations. The Registrant may also seek capital for its investees from
other potential investors and occasionally subordinates its own investment to
those of other investors. Where possible, the Registrant may introduce its
investees to potential suppliers, customers and joint venture partners and
assists its investees in establishing relationships with commercial and
investment bankers and other professionals, including management consultants,
recruiters, legal counsel and independent accountants. The Registrant also
assists with joint ventures, acquisitions and mergers.
In connection with its managerial assistance, the Registrant may be represented
by one or more of its Officers or Directors who are members of the Board of
Directors of an investee. As an investment matures and the investee develops
management depth and experience, the Registrant's role will become
progressively less active. However, when the Registrant owns or, on a pro
forma basis, could acquire a substantial proportion of a more mature investee
company's equity, the Registrant remains active in, and will frequently be
involved in, the planning of major transactions by the investee. The
Registrant's goal is to assist each investee company in establishing its own
independent and effective board of directors and management. Currently, the
Registrant provides managerial assistance to CompuSonics Video Corporation,
Williams Controls, Inc. Ajay Sports, Inc. and Pro Golf International, Inc.
Competition
--------------
The Registrant is subject to substantial competition from business development
companies, venture capital firms, new product development companies, marketing
companies and diversified manufacturers, most of whom are larger than the
Registrant and have significantly larger net worth, financial and personnel
resources than does the Registrant. In addition, the Registrant competes with
companies and individuals engaged in the business of providing management
consulting services.
Employees
-------------
As of September 30, 2002 the Registrant had no employees.
Item 2. Properties
-----------
The Registrant subleases office space from a stockholder of the Registrant.
The Registrant occupies an office and shares a common area with such
stockholders. The Registrant believes that the lease rate paid for this space
represents current market rates. The sublease is on a month-to-month basis.
Item 3. Legal Proceedings
------------------
None.
12
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Annual Shareholders Meeting
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
-----------------------------------------------------------------
Market Information
--------------------
From April 11, 1996 through September 17, 1998, the Registrant's common stock
was listed for trading on the Nasdaq SmallCap Market under the stock symbol
ENCP. In early 1998, Nasdaq implemented new increased standards for continued
listing. The Registrant was not able to meet these new standards and Nasdaq
delisted the common stock after the close of business on September 17, 1998.
Since September 18, 1998, the principal market in which the Registrant's common
stock is traded has been the Over-The-Counter (OTC) market, through the OTC
electronic bulletin board. The ranges of the high and low bid quotations as
published by the OTC electronic bulletin board for the periods from September
30, 2001 through June 30, 2002, are as set forth below. The "OTC" electronic
bulletin board pricing information reflects inter-dealer prices, without retail
mark-up or mark-down or commissions and may not necessarily represent actual
transactions.
HIGH BID LOW BID
--------- --------
Fiscal 2001 - Quarters Ended:
-----------------------------
September 30, 2000 $1.25 $1.14
December 31, 2000 $0.97 $0.88
March 31, 2001 $0.91 $0.77
June 30, 2001 $0.77 $0.35
Fiscal 2002-Quarters Ended:
----------------------------
September 30, 2001 $1.00 $0.65
December 31, 2001 $0.89 $0.30
March 31, 2002 $0.30 $0.05
June 30, 2002 $0.37 $0.10
Holders
-----------
The approximate number of record holders of the Registrant's common stock as of
June 30, 2002 was approximately 1,340. This number does not include beneficial
owners whose shares are held on account in "street name" by banks or brokerage
firms.
Dividends
----------
The Registrant has paid no dividends on its common stock within the past five
years, and has no intention to pay cash dividends in the future.
Recent Sales of Securities.
---------------------------
None.
13
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Capital Resources and Liquidity.
-------------------------------
Due to limited working capital, beginning at May 31, 2000, the Registrant
executed a promissory note to borrow working capital funds from its President
in order to meet its working capital needs and to pay the interest on its
outstanding bank loan. As of March 22, 2001, the Note which was made payable
to the Registrant's President was $187,000 plus accrued interest of $7,960.
Upon the sale of the Williams Controls, Inc. common stock, the full principal
of the promissory note plus $2,000 of the $7,960 of accrued interest on the
Note were repaid to the Registrants President. The balance due of $5,960 was
paid on September 29, 2001.
Currently, the Registrant's investment activity and operations are limited by
its limited working capital position. Capital required for the Registrant's
investment activities, if available, is expected to be generated from new
investments, the sale of portfolio securities or from additional offerings of
the Registrant's restricted and legended common stock, of which there can be no
assurance of any success in any of those efforts. The ability of the
Registrant to liquidate portfolio held securities is dependent on market
conditions over which the Registrant has no control. The Registrant had no
material commitments for capital expenditures as of June 30, 2001.
On March 7, 2001, the Registrant sold 1,077,800 shares of the common stock it
held in its largest investee, Williams Controls, Inc., and on March 12, 2001
the Registrant sold an additional 574,529 shares of Williams Controls, Inc.,
for a total of 1,652,329 shares, representing all the shares of Williams
Controls, Inc., common stock owned by the Registrant at the time of this
Filing. All of the shares were acquired by the Registrant in transactions
between April 1991 and August 1998. The shares were sold in open market
transactions through an unaffiliated broker. Upon settlement of the trades,
the Registrant received total net proceeds of approximately $2,424,800.
These proceeds were used to pay off the Company's demand loan payable to a
bank with a balance of $2,141,649, plus accrued interest and make payments,
of or toward other debt obligations and payables that the Company owed and
were outstanding.
Total assets for the fiscal year ending June 30, 2002 were $1,046,965 an
aggregate increase of $61,476 from the total assets at June 30, 2001 of
$985,489. The changes in total assets at June 30, 2002 versus June 30, 2001
were mainly the result of the change in portfolio value of the Registrant's
securities.
Net assets as of June 30, 2002 were $ 954,562 as compared to $929,922 in 2001.
The increase in net assets from 2001 to 2002 was due to the change in the value
of the Registrant's investment portfolio. For the years ended June 30, 2001,
and June 30, 2002, the Company's cash flow was dependent primarily upon cash
received from the Wen group, proceeds from the sale of investee shares and
advances from the Registrant's bank lines of credit, and loans made to the
Company by Officers.
The Registrant's liquidity is affected primarily by the business success,
securities prices and marketability of its investee companies and by the amount
and timing of new or incremental investments it makes, along with its ability
to borrow funds and make sales of its portfolio securities, when, and to the
extent, the Board of Directors decides such sales are appropriate or necessary.
One of the Registrant's investees is Ajay Sports, Inc (" Ajay"). Through its
operating subsidiaries including Pro Golf, Ajay is a franchisor of retail golf
stores. The Registrant's President is a Director and CEO of Ajay, and is
Chairman of Pro Golf International, Inc. ("PGI") and ProGolf.com, Inc, two
majority owned operating subsidiaries of Ajay.
14
One of the Registrant's other current investee is CompuSonics Video Corporation
("CPVD"). The Registrant's president is also chairman of the Board of
CPVD. which is in the business of licensing its patented technology
related to audio and video analog-to-digital signal compression.
One of the Registrant's other current investee is Pro Golf International, Inc.
(PGI), a majority-owned subsidiary of Ajay Sports, Inc., which was formed
during 1999, and owns 100 % of the outstanding stock of Pro Golf of America,
Inc.(PGOA) and a majority of the stock of ProGolf.Com, Inc. (PG.Com). PGOA
is the franchiser of Pro Golf Discount Retail Stores.
ProGolf. Com, Inc. is a Company formed to help direct traffic to its franchise
stores and to sell golf equipment and other golf-related products and services
over the Internet. It is anticipated that traditional sales and distribution
methods will be enhanced by the ProGolf. Com Internet site.
Management of the Registrant devoted time and resources to providing
significant managerial assistance to Ajay Sports, Pro Golf International,
ProGolf.com and CPVD, in varying degrees, during the fiscal year ended June 30,
2002
Material Changes in Financial Condition:
-----------------------------------------
The Registrant received $300,000 for the sale of 240,000 shares of the
Company's common stock, with commitments for future funding in November 2001 of
$1,000,000 and in February of 2002 of $2,000,000, as a result of the
Subscription Agreement with the Wen Group. As a condition of the Subscription
Agreement, $240,000 of the $300,000 was invested, at the request of the Wen
Group, in a PRC company, TIDE, headquartered in China, leaving the Registrant
with a total of $60,000 cash on hand remaining from the Wen Group's initial
investment.
A payment of $ 30,000, less Registrant's expenses of $ 2,174.50 was returned to
the Wen Group and a note for the remaining $ 30,000 was executed by the
Registrant subject to certain conditions.
On November 26, 2001 a Settlement Agreement was manually executed by the
Registrant and the Wen Group. As at September 14, 2001, the Subscription
Agreement was rescinded.
There are no specific terms as to how the $30,000 note will be paid or how the
Registrant intends to raise the funds for such repayment or how to fund current
operations. The Registrant's current plan is to bring in other investors,
borrow against collateral or sell a portion of its security holdings.
Results of Operations.
--------------------------
The Company had total revenues of $ 4,455 in this fiscal year ended June 30,
2002 as compared to $1,475,824 in the fiscal year ended June 30, 2001.
$1,471,369 decrease in total revenues was principally due to the decrease in
the net realized gain on sales of investments.
15
For the year ended June 30, 2002, the Registrant had a net loss from operations
of $(38,092) compared to a net gain from operations of $1,128,112 for the year
ended June 30, 2001. This decrease in revenues in 2002 from those achieved in
2001 was principally due to the absence of any sale of investments.
The Registrant recorded an unrealized gain on investments of $ 61,798 for the
fiscal year ended June 30, 2002, as compared to a unrealized loss on
investments of $(1,353,471) for the fiscal year ended June 30, 2001. The
change in the unrealized gain for the years indicated is largely the result of
the increase in market value of the common stock of the Registrant's largest
investee, CompuSonics Video Corporation, and the disposal of Williams Controls,
Inc. stock in fiscal year 2001.
Item 6A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 7. Financial Statements and Supplementary Data
Financial statements and supporting schedules reporting
supplementary financial information are attached hereto, made a
part hereof, and are listed in Item 13 of Part IV of this
Form 10-K.
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers and Treasurer of the Registrant
(a)(b) Identification of Directors and Executive Officers
Commencement Date of
Service as Officer
and/or
Name Position with Company Age Director
-----------------------------------------------------------------------------
Thomas W Itin Chairman of the Board 67 5/1/2001
Chief Executive Officer,
President, Treasurer
& a Director
H. Samuel Greenawalt Director 73 6/28/1993
Jeffrey E. Rautio Director 41 10/16/2002
Salvatore M.Parlatore Director 28 10/16/2002
There were no arrangements or understandings between or among any of the above
Officers and Directors pursuant to which any one of such persons was elected
to any such office or position. The last two Directors were elected at the
last Annual Meeting of the Company Shareholders to serve until their
successors are duly elected and qualified.
Robert R. Hebard had resigned as an Officer of the Registrant effective April
30, 2001, and as a Director of the Company, effective May 1, 2001. There were
no disputes between Mr. Hebard and the Company. Effective May 2, 2001, the
Board appointed and elected Thomas W. Itin as a Director, Chairman of the
Board, Chief Executive Officer and President. Mr. Itin is a significant
stockholder of the Registrant. Mr. Hebard had been a Director of the Company
since June 1993.
H. Samuel Greenawalt resigned as a Director of the Registrant, effective
October 16, 2002. The Registrant expressed appreciation for his services as
Director. Effective October 16, 2002 the Board appointed Salvatore M.
Parlatore and Jeffrey E. Radio as Directors of the Registrant.
(c) Significant Employees
----------------------
Not applicable
(d) Family Relationships
--------------------
None
(e) Business Experience
-------------------
Thomas W. Itin. Mr. Itin was elected Chairman of the Board and President of
the Company in May of 2001. Mr. Itin has been a Director of Williams Controls,
Inc., a publicly held company since its inception in November 1988. He also
served as Chairman of the Board and Chief Executive Officer of Williams
Controls, Inc. from March 1989 until January 2001 and also as President and
Treasurer from June 1993 until January 2001. He has served as principal or
Chairman of the Board, Chief Executive Officer and Chief Operating Officer of
LBO Capital Corp. since its inception. As an owner of TWI International, Inc.,
Mr. Itin has served as Chairman of the Board and in various executive offices
since he founded that firm in 1967.. TWI International acts as a consultant
involving mergers, acquisitions, financial structuring, new ventures and asset
management. As an owner of Acrodyne Corporation, Mr. Itin has served in
various executive capacities or as a director since he founded that firm in
1962. In April 2001, Mr. Itin became Chief Executive Officer of CompuSonics
Video Corp., a publicly held Colorado company. In April 2001 Mr. Itin became
Chief Executive Officer of Enercorp, Inc., a publicly held Colorado company.
He holds a Bachelor of Science degree from Cornell University and an MBA from
New York University. Mr. Itin has served on the Cornell University Council and
was Chairman of the Technology Transfer Committee.
H. Samuel Greenawalt has served as a Director of the Registrant since June 28,
1993. Mr. Greenawalt received a Bachelor of Science degree from the Wharton
School of the University of Pennsylvania in 1951, and is a 1960 graduate of the
University of Wisconsin Banking School. From 1954 to 1958, Mr. Greenawalt was
employed by the investment firm McNaughton-Greenawalt Company. He began his
career at Michigan National Corporation and affiliates in 1958,working in
various commercial lending capacities, beginning at that time. From 1987 to
June 1995, Mr. Greenawalt was a Senior Vice President, Business Development,
for Michigan National Bank. Mr. Greenawalt retired from Michigan National in
June 1995 and is now an independent consultant to that Bank, and is a member
of the Board of Directors of Williams Controls, Inc., an investee of the
Registrant.
Dr. Rautio, O.D. Optometry, has been a Director of Refractive Services at the
Beitman Laser Eye Institute since 2000. He has also been affiliated with
WorldWide Tee Time, LLC, since 1998. From 1987-1999, he served as Senior Staff
Optometrist at the Henry Ford Hospital and as Team Optometrist for the Detroit
Lions, Inc. from 1991-1999. From 1999-2000, he was a Director of Optometry at
Oculus Laser Vision Correction & Advanced Vision Centers of Derma Vogue. In
1981, Dr. Rautio completed an A.A.S. degree (Associate in Applied Science) at
Ferris State University, Big Rapids-MI and, in May 1986, he was awarded the
O.D. degree (Doctor of Optometry) by that university.
Mr. Parlatore was co-founder, Director of Operations and Director of Strategy,
from 1997 - 2001 for Nexiv, Inc., a "startup" website, hosting and internet
services company. From 1997-1999, he was Senior Project Manager with Webstyles,
LLC. Earlier he was retained or employed by Gettys Group, Inc. 1996-1997 as
a management consultant, where he specialized in commercial real estate
evaluations and renovations nationally, particularly hotel projects. A summer
2002 internship at Whirlpool provided experience as an Associate Brand Manager.
A native of Southampton, Long Island, Mr. Parlatore attended Brentwood College
School, Vancouver Island, Canada then later earned a BS in Business
Administration in 1996 at Cornell U., Ithaca - NY. Currently, he is a
candidate for an MBA degree in May 2003 majoring in marketing and information
technology at the University of Illinois, Urbana-Champaign.
16
Mr.Parlatore is the nephew of the wife of the Chairman.
(f) Involvement in Certain Legal Proceedings
----------------------------------------
None
(g) Promoters and Control Persons
-----------------------------
Not applicable
(h) Section 16(a) Beneficial Ownership Reporting Compliance
--------------------------------------------------------
Section 16(a) of the Exchange Act requires executive officers and directors,
and persons who beneficially own more than ten percent of the Registrant's
stock to file initial reports of ownership on Form 3, reports of changes in
ownership on Form 4 and annual statements of changes in ownership on Form 5
with the Securities and Exchange Commission. Executive officers, directors and
greater than ten percent beneficial owners are required under the regulations
related to Section 16 to furnish the Registrant with a copy of each report
filed.
Based solely upon a review of the copies of the reports received by the
Registrant during the fiscal year ended June 30, 2002, and written
representations of the persons required to file said reports, the Registrant
believes that all reports were filed and done so on a timely basis.
Item 10. Executive Compensation
-----------------------
Summary Compensation Table
--------------------------
The following table sets forth information regarding compensation paid to the
Company's chief executive officer for the three years ending June 30, 2002. No
other person who is currently an executive officer of the Company earned
compensation exceeding $100,000 during any of those years.
Annual Compensation Awards
Annual Compensation (in dollars) Awards
Securities
Other Annual Underlying
Name and Principal Position Year Salary Bonus Compensation Stock Options
-------------------------------------------------------------------------------
Thomas W Itin, President,
Chief Executive Officer &
Treasurer. 2002 -0- -0- -0- -0-
2001 -0- -0- -0- -0-
Robert R. Hebard, 2002 -0- -0- -0- -0-
Former Director, President, 2001 78,500 -0- -0- -0-
Chief Executive Officer and
Treasurer of Registrant
18
Option/SAR Grant Table
----------------------
No stock options or stock appreciation rights were granted during the fiscal
year ended June 30, 2002.
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
No stock options were exercised during the fiscal year ended June 30, 2002.
Stock Options for Robert R. Hebard, former President of the Registrant, have
expired, based on the Separation Agreement, effective April 30,2001.
Compensation of Directors
---------------------------
The Registrant has an arrangement with its disinterested non-employee Directors
to pay them a fee of $500 for each regular and non-scheduled Board meeting
attended, either in person or by telephone.
Item 11. Security Ownership of Certain Beneficial Owners and Management
---------------------------------------------------------------
Security Ownership of Certain Beneficial Owners and Security Ownership of
Management
-------------------------------------------------------------------------
Set forth below is information as to each person known by the Company to be the
beneficial owner of more than five percent of the Common Stock, the Company's
Directors and named Executive Officers, individually, and Executive Officers
and Directors as a group, as of September 30, 2002.
Amount and Nature
Name and Address of of Beneficial
Beneficial Owner Ownership Of Class Percent
Robert R. Hebard 32,668 4.7%
2644 Hunter Heights Drive (1)(2)
W. Bloomfield, MI 48324
H. Samuel Greenawalt 14,333 2.1%
2600 W. Big Beaver, Ste. 200
Troy, MI 48084
Thomas W. Itin 49,149 7.1%
32751 Middlebelt Road, Suite B (3)(4)
Farmington Hills, MI 48334
Charles Maginnis 60,000 8.6%
P.O. Box 267
Little Switzerland, NC 28749
19
Dr. Vasant Chheda 50,000 7.2%
7 Highland Place
Great Neck, NY 11020
Executive Officers and 43,400 5.8%
Directors as a group (1)(2)
(two persons)
(1) Includes 1,333 shares held in a custodian account under the Uniform
Gifts to Minors Act for the benefit of Mr. Hebard's daughter. Mr. Hebard
disclaims beneficial ownership of these 1,333 shares in the custodial account.
(2) Does not include 28,443 shares held in trust for Mr. Hebard's minor
children.
(3) Based upon information contained in the Schedule 13D and amendments
thereto filed with the Securities and Exchange Commission, and includes shares
held personally and through partnerships or other entities in which
stockholder holds a beneficial interest. Does not include shares held in
various trusts for the benefit of Mr. Itin's minor grandchildren.
(4) Includes the following:
Company Shares Relationship to Mr. Itin
-------------------------------------------------------------------
LBO Capital 15,341 Chairman & principal
stockholder
TICO 16,000 Managing Partner
SICO 2,667 Partner
First Equity Corporation 4,875 Spouse is President
Thomas W. Itin IRA Trust 5,333 Trustee
IOC, Inc. Profit Sharing Trust 4,933 Trustee
----------------
49,149
=======
A change in control of the Company has occurred since April 30, 2001. On
April 30, 2001, Robert R. Hebard resigned as Director, Chairman of the Board,
and from all officer- ship positions in the Company. Effective May 2, 2001 the
Board of Directors appointed Thomas W. Itin as a Director, Chairman of the
Board, Chief Executive Officer and President. Mr. Itin is a significant
stockholder of the Registrant.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
Except as otherwise may be disclosed in this Report, the Registrant does not
have any other relationships, nor has it entered into related party
transactions with Management or others.
20
PART IV
Item 13. Exhibits, Financial Statements Schedules and Reports on Form 8-K
----------------------------------------------------------------
(a) The following documents are filed as part of this report immediately
following the signature page, or are incorporated by reference
(1) Financial Statements
Independent Auditor's Report F-1
Statements of Assets and Liabilities, June 30,
2002 and 2001 F-2
Schedule of Investments, June 30, 2002 and June 2001 F-3 to F-5
Statements of Changes in Stockholders' Equity for
the Years Ended June 30, 2002 and 2001 F-6
Statements of Operations for the Years Ended
June 30, 2002 and 2001 F-7
Statements of Cash Flows for the Years Ended June
30, 2002 and 2001. F-8 to F-9
Notes to Financial Statements F-10 to F-15
(3) Exhibits:
3.1 Amended and Restated Articles of Incorporation as
Filed with the Secretary of State, State of
Colorado, April 2, 1996****
3.2 Bylaws*
10.4 Comerica Loan documents with Enercorp, Inc. dated
July 30, 1997.*****
10.5 Amended Comerica Loan document with Enercorp,
Inc. regarding increase in line of credit.******
20.1 Statement of Risk to Stockholders ******
27 Financial Data Schedule FILED HEREWITH
*Incorporated by reference from Exhibits 3.1 and 3.2 to the Registrant's Form
10-K for the fiscal year ended June 30, 1981.
**Incorporated by reference from Exhibit 10.1 to the Registrant's Form 10-K for
the fiscal year ended June 30, 1989.
***Incorporated by reference from Exhibits 10.2 to 10.3 and 20.1 to the
Registrant's Form 10-K for the fiscal year ended June 30, 1990.
**** Incorporated by reference from Exhibits 3.1 to the Registrant's Form 10-K
for the fiscal year ended June 30, 1996.
***** Incorporated by reference from Exhibits 10.1 to 10.5 to the Registrant's
Form 10-Q for quarter ending September 30, 1997.
****** Incorporated by reference from Exhibits 10.5 to 20.1 to the Registrant's
Form 10-K for the fiscal year ended June 30, 1998.
21
(b) Reports on Form 8-K.
(c) Required exhibits are incorporated by reference.
(d) Financial statement schedules are attached hereto.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ENERCORP, INC.
---------------
(Registrant)
By \S\ Thomas W. Itin
------------------------
Thomas W Itin, President
Date: December 20, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf
of the Registrant and in the capacities specified and on the dates indicated.
Date: December 12, 2002 \S\ Thomas W Itin
--------------------
Thomas W. Itin, (Principal Executive
Office, Chief Financial Officer
Date: December 12, 2002 \S\ Jeffrey E.Rautio, Director
-----------------------
Jeffrey E. Rautio, Director
Date: December 12, 2002 \s\ Salvatore M. Parlatore, Director
--------------------------------
Salvatore M. Parlatore, Directo
23
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors
of Enercorp, Inc.
We have audited the accompanying statements of assets and liabilities of
Enercorp, Inc., including the schedules of investments, as of June 30, 2002 and
2001, and the related statements of changes in stockholders' equity, operations
and cash flows for the years ended June 30, 2002, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements 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
June 30, 2002 by correspondence with the custodian and brokers. 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 referred to above present fairly, in
all material respects, the financial position of Enercorp, Inc. as of June 30,
2002 and 2001, and the results of its operations and its cash flows for the
years ended June 30, 2002, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ J L Stephan Co., PC
----------------------
J L Stephan Co., PC
Traverse City, Michigan
October 16, 2002
F-1
Enercorp, Inc.
Statements of Assets and Liabilities
June 30, June 30,
2002 2001
-------- --------
ASSETS
Investments, at fair value, cost of $1,231,638
at June 30, 2002 and 2001 $ 1,045,842 $ 984,214
Cash 1,123 342
Accounts receivable-related party -0- -0-
Accrued interest receivable -0- -0-
Notes receivable - related parties -0- -0-
Furniture and fixtures, net of accumulated
Depreciation. -0- 933
Other assets -0- -0-
---------- --------
$1,046,965 $ 985,489
=========== ==========
LIABILITIES AND NET ASSETS
Liabilities
Notes payable $ 30,000 $ -0-
Notes payable-related party 27,000 -0-
Accounts payable 15,403 44,634
Accrued management fee-related party 20,000 10,000
Deferred tax liability -0- -0-
---------- ----------
92,403 54,634
Net assets
Common stock, no par value: 10,000,000
shares authorized, 695,897 shares issued
and outstanding at June 30, 2002 and
June 30, 2001 1,888,251 1,888,251
Preferred stock, no par value: 1,000,000
shares authorized, -0- issued and
outstanding -0- -0-
Accumulated deficit (747,893) (709,802)
Other Comprehensive Income (185,796) (247,594)
---------- ----------
954,562 930,855
---------- ----------
$ 1,046,965 $ 985,489
=========== ==========
See notes to financial statements
F-2
Enercorp, Inc.
Schedule of Investments
June 30, 2002
Affiliated Description Expir. No. of Share Cost
Fair Mkt Net Fair
Companies of Business Date Restrictions Shares Price Equity
Value Discount Market Value
Common Stocks-Public Market Method of Valuation
-----------------------------------------------
CompuSonics Video
Corp Digital Video
Product & Web 1,751 0.055
96 96
Site Dev. 10,000,000 0.055 106,477
550,000 (165,000) 385,000
Ajay Sports, Golf & Casual 294,118 0.01 600,000
2,941 2,941
Furniture
Manufacturer 16,667 0.01 37,500
167 167
Preferred Stocks-Public Market Method of Valuation
--------------------------------------------------
Ajay Sports, Golf & Casual 2,000 0.01 20,000
20 20
Furniture Manufacturer
Common Stocks-Board Appraisal Method of Valuation
-------------------------------------------------
Pro Golf Franchisor of a & b 7,450 195,000
447,000 (89,400) 357,600
Intern'l Retail Golf Stores
ProGolf.com, Web Sales of a & b 300,000 2.5 252,000
750,000 (450,000) 300,000
Inc. Golf Equipment
------------------
-----------------------------------
Subtotal $1,210,977
1,750,224 (694,400) 1,045,824
Warrants and Stock Options-Board Appraisal Method of Valuation
==============================================================
CompuSonics Digital Video
Video Product
Corporation 300,000
Williams Manuf. Of Sensors &
Controls, Control Systems
Inc. 08/04/04 b 25,000
05/03/05 b 25,000
09/13/06 b 50,000
03/12/06 b 50,000
10/02/08 b 50,000
See notes to financial statements
F-3
Unaffiliated Companies
Common Stocks-Public Market Method of Valuation
-----------------------------------------------
Vitrio Diagnostics 300 .06 1,500
18 18
Proconnextions, Inc.-Sports Memor'blia a 191,610 19,161
- ---------------------------------
-------------------------------------
Total All Companies $1,231,638
$1,750,242 (694,400) 1,045,842
===================================
a No public market for this security
b Subject to Rule 144
See notes to financial statements
F-4
Enercorp, Inc.
Schedule of Investments
June 30, 2001
Affiliated Description of No. of Share Cost/ Fair Market
Net Fair
Companies Business Restrictns Shares Price Equity Value
Discount Market Value
Common Stocks-Public Market Method of Valuation
-----------------------------------------------
CompuSonics Video
Corp Digital Video
Product & 1,751
28 28
Web Site Development 10,000,000 0.03 106,477 300,000
(100,000) 200,000
Ajay Sports, Golf & Casual 294,118 0.02 600,000 5,882
5,882
Inc. Furniture Manuf
16,667 0.02 37,500 333
333
Preferred Stocks-Public Market Method of Valuation
--------------------------------------------------
Ajay Sports, Golf & Casual 2,000 20,000 500
500
Inc. Furniture Manufacturer
Common Stocks-Board Appraisal Method of Valuation
-------------------------------------------------
Pro Golf Franchisor of a & b 7,450 195,000 447,000
(44,700) 402,300
International Retail Golf
ProGolf.com Web Sales of Golf b 300,000 2.5 252,000 750,000
(375,000) 375,000
------------------
-------------------
Subtotal 1,210,977 1,503,744
(519,700) 984,044
Unaffiliated Companies
-----------------------
Common Stocks-Public Market Method of Valuation
------------------------------------------------
Vior Diagnostics 300 1,500
170 170
Proconnextions, Inc.
Sports Memorabilia 91,610 19,161
-------------------
----------------------
Total All Companies 1,462,977 1,503,744
(519,700) 984,044
=======================
a No public market for this security
b Subject to Rule 144
See notes to financial statements
F-5
Enercorp, Inc.
Statement of Changes in Stockholders' Equity
For the Years Ended June 30, 2002, 2001.
Retained Earnings
---------------------
Common Stock (Accumulated) Other Comprehensive
Shares Amount Deficit) Income Total
------ ------ -------- -------- -------
Balance at June 30, 2000 695,897 $1,888,251 $(1,268,084) $1,105,877 $1,726,044
Increase in Common Stock -- -- -- -- --
Net Gain -- -- 558,282 -- 558,282
Unrealized gain on investments,
net of taxes -- -- -- (1,353,471)(1,353,471)
------- --------- -------- --------- ---------
Balance at June 30, 2001 695,897 $1,888,251 $(709,802) $(247,594) $930,855
======= ========= ========= ========= ========
Increase in Common Stock -- -- -- -- --
Net Loss -- -- (38,092) -- (38,092)
Unrealized Gain on Investments,
net of taxes -- -- -- 61,798 61,798
------- ----------- --------- --------- -------
Balance at June 30, 2002 695,897 $1,888,251 $(747,893) $(185,796) $954,562
======== ========= ========= ========= =======
See notes to financial statements
F-6
Enercorp, Inc.
Statements of Operations
For the Years ended June 30,
---------------------------
2002 2001
----- -----
REVENUES
Interest Income $ -0- $ 6
Interest income from related entities -0- 1,634
Consulting fees from related companies -0- -0-
Net realized gain on sale of investments -0- 1,474,184
Divided income form affiliated company -0- -0-
Miscellaneous income 4,455 -0-
--------- ---------
4,455 1,475,824
EXPENSES
Salaries - officer -0- 78,500
Bonus expense - officer -0- -0-
Directors' fees -0- 2,000
Staff salaries -0- 15,355
Legal, accounting and other professional
Fees 7,392 29,224
Management fees 30,000
Interest expense - other 1,612 173,773
Bad debt expense -0- 28,673
Other general and administrative expenses 3,543 20,187
------- ---------
42,547 347,712
------- ---------
Net gain (loss) from operations
before taxes (38,092) 1,128,112
Income taxes (569,830)
---------- ---------
Net gain (loss) from operations
after taxes (38,092) 558,282
-------- --------
Net unrealized gain (loss) on investments before
Taxes 61,798 (1,353,471)
Income taxes
--------- -------------
Net unrealized gain (loss) on
investment after taxes 61,798 (1,353,471)
-------- -------------
Increase (decrease) in net assets
resulting from operations $ 23,706 $(795,189)
=========== ==========
Increase (decrease) in net assets
per share $ 0.03 $ (1.14)
============ ========
See notes to financial statements
F-7
Enercorp, Inc.
Statements of Cash Flow
For the Years Ended June 30,
2002 2001
----- ------
Cash flows from operating activities:
Increase (decrease in net assets $23,706 $ (795,189)
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation 935 1,870
Bad debt provision on notes receivable
and interest net of write offs -0- 3,086
Stock received for consulting services -0- -0-
Gain on sale of investments -0- 1,474,189
(Gain) Loss on sale of fixed assets -0- -0-
Unrealized (gain) loss on
Investments (61,798) (1,353,471)
(Increase) in accounts receivable -
related party -0- 17,848
(Increase) in interest receivable -0- 6,105
(Increase) Decrease in other assets -0- 1,318
Increase (Decrease) in accounts payable
and accrued expenses (19,061) 29,507
Increase (Decrease) in accrued salaries -0- -0-
Increase (Decrease) in deferred taxes -0- -0-
-------- ---------
Total adjustments (79,925) 180,447
--------- --------
Net cash (used) by operating activities (56,219) (614,742)
--------- ---------
Cash flows from investing activities:
Purchase of investments -0- (120,713)
Sale of investments -0- 2,889,601
Payments received on note receivable -0- -0-
Issuance of notes receivable -0- -0-
Proceeds from sale of fixed assets -0- -0-
Purchase of furniture and fixtures -0- -0-
-------- -------
Net cash provided (used) by investing
Activities -0- 2,768,888
See notes to financial statements
F-8
Enercorp, Inc.
Statements of Cash Flow (continued)
For the Years Ended June 30,
--------------------------
2002 2001
------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock -0- -0-
Proceeds from notes payable 58,500 (36,000)
Principal payments of notes
Payable (1,500) (2,141,649)
---------- -----------
Net cash provided by investing
Activities 57,000 (2,177,649)
---------- ---------
Increase (Decrease) in cash 781 (23,502)
Cash, beginning of period 342 23,844
---------- ---------
Cash, end of period $ 1,123 $ 342
======== =========
Supplemental disclosures of cash flow information:
Interest paid $ -88- $ 173,768
=========== ===========
Taxes paid $ -0- $ -0-
=========== ============
See notes to financial statements
F-9
Notes to Financials
-------------------
Note 1: Summary of Significant Accounting Policies
------------------------------------------
Significant accounting policies are as follows:
a. Business History
----------------
Enercorp, Inc. (the "Company") was incorporated under the laws of the State of
Colorado on June 30, 1978. During the fiscal year ended June 30, 1982, the
Company elected to become a "Business Development Company" (BDC) as that term
is defined in the Small Business Investment Incentive Act of 1980, which Act
is an amendment to the Investment Company Act of 1940, as amended. This change
resulted in the Company becoming a specialized type of investment company. For
the years ended June 30, 2001, 2000, and 1999 the Company's cash flows have
been dependent primarily upon sale of stock and the proceeds emanating from
loans.
b. Investment Valuation
-----------------------
The investment valuation method adopted in 1982 provides for the Company's
Board of Directors to be responsible for the valuation of the Company's
investments (and all other assets) based on recommendations of a Valuation
Committee of the Board, comprised of the independent, disinterested Directors
of the Company. In the development of the Company's valuation methods,
factors that affect the value of investees' securities, such as significant
escrow provisions, trading volume and significant business changes are taken
into account. These investments are carried at fair value using the following
four basic methods of evaluation:
1 Cost - The cost method is based on the original cost to the Company
adjusted for amortization of original issue discounts and accrued interest
for certain capitalized expenditures made by of the Corporation. Such
method is to be applied in the early stages of an investee's development
until significant positive or adverse events subsequent to the date of the
original investment require a change to another method.
2 Private market - The private market method uses actual or proposed third
party transactions in the investee's securities as a basis for valuation,
utilizing actual firm offers, as well as historical transactions, provided that
any offer used is seriously considered and well documented by the investee.
3 Public market - The public market method is the preferred method of
valuation when there is an established public market for the investee's
securities. In determining whether the public market method is sufficiently
established for valuation purposes, the corporation is directed to examine the
trading volume, the number of shareholders and the number of market makers in
the investee's securities, along with the trend in trading volume as compared
to the Company's proportionate share of the investee's securities. If the
security is restricted, the value is discounted at an appropriate rate.
F-10
4 Appraisal - The appraisal method is used to value an investment position
after analysis of the best available outside information where there is no
established public or private market method which have restrictions as to their
resale as denoted in the schedule of investments are also considered to be
restricted securities.
All portfolio securities valued by the cost, private market and appraisal
methods are considered to be restricted as to their disposition. In addition,
certain securities valued by the public market method which have restrictions
as to their resale as denoted in the schedule of investments are also
considered to be restricted securities.
c. Statement of Cash Flows
------------------------
Consistent with the reporting requirements of a BDC, cash and cash
equivalents consist only of demand deposits in banks and cash on hand.
Financial statement account categories such as investments and notes
receivable, which relate to the Company's activity as a BDC, are included as
operating activities in the statement of cash flows.
d. Furniture and Equipment
-----------------------
Expenditures for furniture and equipment and for renewals and betterment,
which extend the originally estimated economic life of assets or convert the
assets to a new use, are capitalized at cost. Expenditures for maintenance,
repairs and other renewals of items are charged to expense. When items are
disposed of, the cost and accumulated depreciation are eliminated from the
accounts and any gain or loss is included in the results of operations. The
provision for depreciation is calculated using the straight-line method over a
five or seven year life.
e. Securities Transactions
-----------------------
Purchases and sales of securities transactions are accounted for on the
trade date, which is the date the securities are purchased or sold. The value
of securities sold is reported on the first-in first-out basis for financial
statement presentation.
f. Revenue Recognition
----------------------
Due to the uncertainty of collection, the Company recognizes all types of
consulting fee revenues from portfolio companies as cash is received. All
other revenues are recognized on the accrual basis.
g. Net Assets per Share
--------------------
In accordance with the fair value accounting method used by regulated
investment companies, net assets (total stockholders' equity) per share at June
30, 2002 and June 30, 2001, respectively was $1.37 and $1.34 per share based
on 695,897 shares outstanding in 2002 and 2001.
F-ll
Note 2 Investments
---------------
Investments consist of holdings of securities in publicly and privately
held companies.
Note 3: Related Party Transactions
--------------------------
a Accounts Receivable- Related Party
----------------------------------
In September 1999, the Registrant entered into an arrangement with one of its
investees, CompuSonics Video Corporation("CVC") whereby the Registrant would
provide managerial assistance to CVC and CVC would pay consulting fees to the
Registrant at the rate of $2,000 per month. The Account Receivable balance from
CVC was $0 at the end of June 30,2002 and $ 0 for June 30, 2001.
b. Notes Receivable - Related Entities
-----------------------------------
The Company has notes receivable from ProConnextions, Inc., ("PCI"). All of
the notes are due on demand. The notes have interest rates of 12% and 10%.
There is no collateral for the notes. The Company is a shareholder in PCI.
The notes receivable balance, net of allowance for uncollectible note
receivable, from PCI was $0 and $0 at June 30, 2002 and 2001, respectively.
c. Notes payable -Related Entities
-------------------------------
1) Note Payable-Dearborn Wheels
-----------------------------
The Registrant has a $ 27,000 Note Payable to Dearborn Wheels, Inc. The
interest on the note is 10% per annum. The note was due on March 06, 2002. The
interest expense accrued on this note was $ 1,523.85 on June 30, 2002. There
was no interest expense, or principal paid to related party during the fiscal
year ending June 30, 2002.
2) Note Payable- Robert R. Hebard
------------------------------
Due to limited working capital, beginning at May 31, 2000, the Company borrowed
working capital funds from its former President in order to meet its working
capital needs and to pay the interest on the Comerica loan. The note payable
bears an interest rate of prime plus .75%, the same rate at which the Company
borrows from Comerica. As of June 30, 2002 the note has been repaid in full.
d. Accounts Payable-Related Parties
---------------------------------
The Company had an Account Payable to Acrodyne, a Company controlled by its
President relating to management services. Balance of Accrued Management Fees-
Related Party respectively was $ 20,000 and $ 10,000 on June 30, 2002, and June
30, 2001. Management fee expense was respectively $ 30,000 and $ 10,000 during
fiscal years ending June 30, 2002 and 2001. The Registrant paid $ 20,000 of
management fees to Acrodyne Corporation during fiscal year ending June 30, 2002
and $ 0 during 2001.
F-12
Note 4 Note Payable Bank
------------------
In July 2000, the Registrant renewed its line of credit from Comerica Bank
("Comerica") under which it may borrow up to $2,250,000 at 3/4% over Comerica's
prime lending rate. The collateral for this line of credit is 1,652,329 shares
of Williams Controls, Inc. common stock owned by the Registrant and 310,784
shares of the post-split common stock of Ajay Sports, Inc. ("Ajay") owned by
the Registrant. On March 7,2001, the Registrant sold 1,077,800 shares of the
common stock it held in its largest investee, Williams Controls, Inc. and on
March 12, 2001 the Registration sold an additional 574,529 shares of Williams
Controls, Inc. common stock, for a total of 652,329 shares, representing all
the shares of Williams Controls, Inc. common stock owned by the Registrant at
the time of this filing. These shares were acquired by the Registrant in
transactions between April 1991 and August 1998. The shares were sold in open
market transactions through an unaffiliated broker. Upon settlement of the
trades, the Registrant received total net proceeds of approximately $2,424,800.
These proceeds were used to pay off the Company's demand loan from a bank with
a balance of $2,141,649, plus accrued interest and make payments of or toward
other debt obligations and payables that the Company had outstanding.
Note 5 Note payable-Chang
------------------
The Registrant has a Note Payable to Yueh Yun Chang (member of the "Wen Group")
in the amount of $ 30,000. The note bears no interest. No principal payments on
this note have been made during fiscal year ending June 30, 2002.
Note 6: Income Taxes
---------------
The Company adopted, effective July 1, 1992, Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting For Income Taxes", issued in February
1992. Under the liability method specified by SFAS 109, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted
tax rates which will be in effect when these differences reverse. Deferred tax
expense is the result of changes in deferred tax assets and liabilities.
Income tax expense for the years ended June 30, 2002 and 2001
consisted of:
2002 2001
---------- -----------
Current, net of $ -0- $ -0-
benefit of NOL
carryover
Deferred $ -0- 568,196
--------- --------
$ -0- $ 568,196
F-13
The components of the deferred tax asset (liability) at June 30,
2002 and 2001 consist of the following:
6/30/02 6/30/01
------- ----------
Unrealized loss/gain on investments $ 60,000 $ 86,500
Capital loss carryover -0- -0-
Accrued officer wages -0- (5,500)
Allowance for notes receivable -0- -0-
Net operating loss carry over 216,000 210,000
Valuation Allowance (276,000) (291,000)
------------- --------------
$ -0- $ -0-
======= ========
At June 30, 2002 the Company has net operating losses carry
forward available to offset future taxable income of approximately
$635,000 that expires during various years through June 30, 2014.
Note 7: Use of Estimates
-----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions
that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
Note 8: Capital Stock Transactions
--------------------------
On September 14, 2001, the Registrant entered into a Subscription Agreement
with Jack Wen, authorized agent for an investing group of qualified individuals
which included Jack Wen ("Wen Group"). Under this Subscription Agreement, on
September 26, 2001 upon the first payment, the Wen Group was to purchase
240,000 shares of common stock of the Registrant, representing approximately
26.4% of the Registrant's common stock issued and outstanding following the
transaction. These shares were to be purchased for $1.25 per share, the book
value at that time, of these with aggregate gross proceeds of $300,000 paid to
the Registrant. Under the Subscription Agreement, the Wen Group was committed
to make additional equity investments in the Registrant of $3,000,000 for the
purchase of 2,000,000 shares at $1.50 per share, with $1,000,000 being invested
on or before November 5, 2001 as the second payment; and, in the third payment,
$2,000,000,000 was to be invested at $1.50 per share on or before February 5,
2002. Prior to this transaction, no single shareholder or shareholder group
owned more than 10% of the Registrant's issued and outstanding common stock.
However, this transaction was not completed. The deal was rescinded, and the
stock was never issued.
Note 9: Board of director changes subsequently rescinded.
------------------------------------------------
Upon the Registrant's receipt of $300,000 on September 26, 2001, the following
changes in the Board of Directors and Officers of the Registrant were effected.
Under terms of the Subscription Agreement, in addition to Directors Thomas W.
Itin and H. Samuel Greenawalt, Jack Wen and George Burmann of the Wen Group
were elected to serve as Directors and, additionally, Jack Wen was elected
Chairman of the Board of Directors, Chief Executive Officer and President and
Don Johnson of the Wen Group was elected Treasurer and Chief Financial Officer.
Upon receipt of the first payment of $300,000 from the Wen Group under the
Subscription Agreement, Jack Wen requested that $240,000 be invested in TIDE, a
PRC company headquartered in Shanghai. This investment was completed. However,
upon the recission the $240,000 investment was returned to the Wen group,
therefore the investment in TIDE has not been accepted or made, and is not
reflected in financial statements.
F-14