UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED: June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
------------ ------------
Commission File Number: 0-9083
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Enercorp, Inc.
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(Exact name of Registrant as specified in its charter)
Colorado 84-0768802
- ------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
Number)
7001 Orchard Lake Road, Suite 424
West Bloomfield, Michigan 48322
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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 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:
As of September 30, 1998, there were 590,897 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 $1,683,165.
1
Enercorp, Inc.
Form 10-K Filing for the Year Ended June 30, 1998
INDEX
PAGE
-----
PART I
Item 1. Business 3-12
Item 2. Properties 13
Item 3. Legal Proceedings 13
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 13-14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant 18-19
Item 11. Executive Compensation 19-20
Item 12. Security Ownership of Certain Beneficial Owners and
Management 20-22
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
of Form 8-K 23-24
SIGNATURES 25
2
Enercorp, Inc.
FORM 10-K
PART 1
------
Item 1. Business
(a) General Development of Business
-------------------------------
(a)(1) Enercorp, Inc. (the "Registrant" or "Company") is a closed-end,
non-diversified investment company under the Investment Company Act of 1940 (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 two 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. (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, would have a 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.
In July 1997, the Registrant was approved for a $2,250,000 line of credit
at 3/4% over prime by Comerica Bank ("Comerica"), replacing the previous
$2,000,000 loan with NBD Bank ("NBD"). The collateral for the line of credit was
all of the shares of Williams Controls common stock owned by the Registrant at
the time (1,660,000) and all of the shares of common stock of Ajay Sports, Inc.
("Ajay") owned by the Registrant at the time (1,864,706). Borrowing was limited
to 50% of the fair market value of the collateral, except that the maximum
amount that can be borrowed against the Ajay stock is $400,000. This loan was
scheduled to expire in July, 1998. In June 1998, the loan limit was increased to
$2,500,000 and renewed on the same basic remaining terms as were present in the
original loan. The balance of the Registrant's note payable to Comerica as of
September 30, 1998 was $2,121,749 and the balances of the Registrant's Notes
Payable-Bank at June 30, 1998 and 1997 were $2,081,749 and $1,712,900,
respectively.
In July 1998, Ajay entered into a new loan agreement with Wells Fargo
Bank. One of the conditions of the loan was that Williams would make additional
loans to Ajay and that Williams would assume responsibility for repaying the
$200,000 note receivable that the Registrant had from Ajay. In return, Williams
received shares in a new preferred stock issue of Ajay. On July 1, 1998, the
Registrant and Williams signed an agreement under which Williams would issue
42,329 shares of its common stock to the Registrant and issue a note payable to
the Registrant in the amount of $100,000, as payment in full for the $200,000
note originally due to the Registrant from Ajay. The balance of the original
note from Ajay at June 30, 1998 and 1997 was $200,000 and $200,000,
respectively. The balance of the note receivable from Williams, which replaced
the note receivable from Ajay, was $100,000 as of September 30, 1998.
On August 25, 1997, the Midwest Regional Office (the "MRO") of the
Securities and Exchange Commission (the "SEC") began an examination of the
Registrant's books and records. The field work portion of the examination was
completed on August 29, 1997. On October 23, 1997, upon completion of the MRO's
review, the Registrant received a letter from the MRO outlining the results of
its examination and deficiencies that the MRO cited in the books and records of
the Registrant. On November 21, 1997, the Registrant sent its response to the
MRO stating the actions it had taken or would be taking in order to comply with
the matters cited in the MRO's letter of October. Based on this response, the
Registrant believes that it has complied with the requests of the MRO on all
matters discussed in the examination.
3
During the fiscal year ended June 30, 1998, the Registrant was not
involved in any bankruptcy, receivership, or similar proceedings. During that
period, the Registrant did not undergo any material reclassification, merger or
consolidation, nor did it acquire or dispose of any material amount of assets.
During the period, the Registrant did not experience any material changes in the
mode of conducting its business.
(a)(2) Not Applicable.
(b) Financial Information About Industry Segments
---------------------------------------------
Not Applicable
(c) Narrative Description of Business
---------------------------------
Introduction
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(c)(1)(i) The Registrant is a closed-end, non-diversified investment
company under the Investment Company Act and has elected to become a Business
Development Company under the Investment Company Act. The Registrant's
investment objective is to achieve long-term capital appreciation, rather than
current income, on its investments. There can be no assurance that this
objective will be realized. 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.
In accordance with the 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.
In addition to acquiring investment positions in new and developing
companies, the Registrant also plans occasionally to invest in more mature
privately and publicly-held companies, some of which may be experiencing
financial difficulties, which the Registrant believes could be further developed
or revitalized.
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 (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 whose securities had no established public market. Most of
these companies were unable to obtain significant capital on reasonable terms
from conventional sources. The Registrant endeavors to assist its investee
companies and management teams in devising realistic business strategies and
obtaining necessary financing.
4
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 its Board of Directors
deems such distributions appropriate. The Registrant has not made any
distributions of its investment portfolio to date, nor does it currently intend
to do so.
The Registrant believes that the key to achieving its objectives is finding and
supporting business executives who have the ability, entrepreneurial motivation
and experience required to build independent companies with a significant
potential for growth. In the Registrant's view, it is more difficult to locate
and attract capable executives than to identify, select and finance promising
investment opportunities. The Registrant believes that its ability to attract
capable executives is enhanced by its policy for maintaining the independence of
its investee companies, supporting them when appropriate in contracts, arranging
or supplying necessary financing and assisting the investee's management in
obtaining a meaningful equity participation in the investee.
Business development is by nature a high-risk activity that can result in
substantial losses. The companies in which the Registrant invests and will
invest, especially in the early stages of an investment, often lack effective
management, face operating problems and incur substantial losses. Potential
investees include established businesses which may be experiencing severe
financial or operating difficulties or may, in the opinion of management, be
managed ineffectively and have the potential for substantial growth or for
reorganization into separate independent companies.
The Registrant will attempt to reduce the level of its investment risks
through one or more of the following:
o carefully investigating potential investees;
o financing only what it believes to be practical business
opportunities, as contrasted with research projects;
o selecting effective, entrepreneurial management for its investees;
o providing active managerial assistance and support to investees;
o obtaining, alone or with others, actual or working control of its
investees;
o supporting the investees in obtaining necessary financing and
arranging major contracts, joint ventures or mergers and
acquisitions where feasible; and
o maintaining sufficient capital resources to make follow-on
investments where necessary, appropriate and feasible.
Investment Policies
- -------------------
The Registrant has elected to be regulated as a Business Development
Company and is subject to the provisions of Sections 55 through 65 of the
Investment Company Act and also is subject to those provisions of the Investment
Company Act made applicable to business development companies by Section 59 of
the Investment Company Act. In accordance with those provisions of the
Investment Company Act, the Registrant's investment policies are defined and
subject to certain limitations. See "Regulation-Business Development Companies."
Furthermore, under Section 58 of the Investment Company Act, the Registrant may
not withdraw its election to be so regulated without the consent of a majority
of its outstanding voting securities.
The Registrant has no fixed policy as to 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 to invest in assets
that are not qualifying assets under Section 55 of the Investment Company Act;
however, no such additional assets have been identified as of June 30, 1998, and
the Registrant does not intend to fall below the 70% requirement as set forth in
Section 55.
5
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,
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 determines the length of time it will retain its
investment by evaluating the facts and circumstances of each investee and its
relationship with such investee. The Registrant generally retains its
investments for a relatively long period, sometimes many years, with the result
that its rate of portfolio turnover is low. Investments are retained until, in
the 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 decides that its investment is
not likely to result in future long-term capital appreciation.
Valuation-Policy Guidelines
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The Registrant's Board of Directors is responsible for the valuation of
the Registrant's assets in accordance with their 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 work-out 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, represents over 90% of the
total value of the Registrant's investment portfolio and is valued by the Public
Market Method, subject to the judgment of the 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 the 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 the Registrant's board or officers
exceed 5% of the investee company's 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.
6
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 has determined that the Registrant's four basic valuation methods
constitute fair value. As an investee evolves, its progress usually requires
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 total value. The Company believes that a mixture of
valuation methods is often essential to represent fairly the value of the
Registrant's investment position in an 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 their best judgment of the particular
situation.
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. Senior securities are discounted at a rate to yield 15% to 40% to
projected maturity. Depending on the relative uncertainty of the timing of
ultimate collection, 15% is used for relatively predictable positions, and 40%
for less predictable positions. 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 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 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.
7
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 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.
Regulation - Business Development Companies
- -------------------------------------------
The following is a summary description of the Investment Company Act as
applied to business development companies. This description is qualified in its
entirety by reference to the full text of the Investment Company Act of 1940 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 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, is
presumed to exist where the business development company, and its affiliates or
related parties, own 25% or more of the outstanding voting securities of the
investee.
The Investment Company Act 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 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 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, 1998, at least 95% of its
assets would be considered qualifying assets.
8
The Registrant is permitted by the Investment Company Act, 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,
is at least 200% after the issuance of the debt or the preferred stock. The
Registrant currently has no policy regarding issuing 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 those 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, 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.
In accordance with the Investment Company Act, 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. 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 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 the
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
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, a majority of the members of the Registrant's Board of Directors
are not interested persons as defined in the Act. The Investment Company Act
generally does not restrict transactions between the Registrant and its investee
companies.
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
the securities. Economic conditions may also make the price and terms of a sale
or transfer unattractive.
9
Other Securities Law Considerations
- -----------------------------------
In addition to the above-described provisions of the Investment Company
Act, 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 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. 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 the 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 the
securities.
Sometimes the Registrant will not register portfolio securities for sale
but will seek to rely upon an exemption from registration. The most likely
exemption available to the Registrant is section 4(1) of the Securities Act
which, in effect, exempts sales of securities not involving a 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 are satisfied. Among other things, Rule 144
requires that securities be sold in "broker transactions," and formerly imposed
a two-year holding period prior to the sale of restricted securities. In May
1997, the holding period for Rule 144 transactions was reduced to one year in
certain circumstances.
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 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.
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.
10
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.
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 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 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.
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 efficiently and accurately record transactions in books of account
which will facilitate asset and cost control and the ready determination of
results of operations. The Registrant also seeks capital for its investees from
other potential investors and occasionally subordinates its own investment to
those of other investors. The Registrant introduces 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.
11
In connection with its managerial assistance, the Registrant may be
represented by one or more of its officers or directors on 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 initiate 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 Williams
and Ajay.
(c)(1)(ii) Not applicable
(c)(1)(iii) Not applicable
(c)(1)(iv) The Registrant holds Patent No. 4186725 on its
solar collector, No. 4372291 on its solar heat exchanger and No. 4455374
on its solar fermentation process. However, the Registrant currently is not
engaged in any solar business operations.
(c)(1)(v) The operations of the Registrant are not considered to
be seasonal.
(c)(1)(vi) Not applicable
(c)(1)(vii) Not applicable
(c)(1)(viii) Not applicable
(c)(1)(ix) Not applicable
(c)(1)(x) 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 arelarger than the Registrant and have significantly larger net worths,
financial and personnel resources than the Registrant. In addition, the
Registrant competes with companies and individuals engaged in the business of
providing management consulting services.
(c)(1)(xi) During the last four fiscal years the Registrant spent no
amounts on Registrant-sponsored or customer-sponsored research and development
activities.
(c)(1)(xii) The Registrant is not subject to any federal, state or local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment.
(c)(1)(xiii) As of September 30, 1998 the Registrant had one
employee, who is also an officer of the Company.
(d) Financial Information About Foreign and Domestic Operations and
---------------------------------------------------------------
Export Sales
------------
The Registrant is not engaged in foreign operations.
12
Item 2. Properties
Prior to March 15, 1997, the Registrant had rented approximately 672
square feet of office space at a rate it considered to be current market rates.
On March 15, 1997, the Registrant entered into a lease of space with a
stockholder of the Registrant, in which the Registrant occupies an office and
common area and shares secretarial and accounting services, paying a rate of
$515 per month for such space. The Registrant believes that the rate paid for
this space represents current market rates.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
-------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information
------------------
The Registrant began trading on the Nasdaq SmallCap Market on April 11,
1996 under the stock symbol ENCP. Prior to this the principal market in which
the Registrant's common stock was traded was the Over-The-Counter (OTC) market.
On Thursday, September 17, 1998, after the stock market closed, the Registrant
was notified by the Nasdaq Stock Market, Inc. that the Registrant's common stock
no longer met the minimum public float share requirement for continued listing
on the Nasdaq SmallCap Market, was no longer eligible to trade on the SmallCap
Market, and was now eligible to trade on the OTC Bulletin Board beginning
September 18, 1998.
At the request of Nasdaq, and as a condition of an exception granted by
them to the Registrant on July 28, 1998, Enercorp filed a Form 8-K report on
August 14, 1998. This report stated that the Registrant met all Nasdaq continued
listing requirements, including the requirement that it have a minimum of
500,000 shares in the public float, reporting that it had 517,897 shares in the
public float as the result of a change in ownership by a principal stockholder
of the Registrant. In the absence of any NASD regulations as a guide, the
Registrant believed that it had complied with the relevant SEC rules, had
informed Nasdaq of this position, and was awaiting a response to its
correspondence when the Nasdaq delisting notice was delivered to the Registrant.
The Registrant believes that during this process it has complied with all Nasdaq
requirements and requests, and has filed an appeal with Nasdaq to attempt to
have its common stock reinstated as eligible to trade on the SmallCap Market.
There is no assurance that the Registrant will be successful in an appeal, which
is scheduled to be heard by a Nasdaq Hearings Panel in January 1999. During the
appeal process, the Registrant's common stock will continue to be eligible to
trade under the symbol "ENCP" on the OTC Bulletin Board.
13
On April 11, 1996, the Registrant began trading on the Nasdaq SmallCap Market,
and continued to do so through September 17, 1998, at which time the Registrant
began to be eligible to trade on the OTC Bulletin Board. The range of high and
low bid closing quotations for the Registrant for the last two fiscal years is
as follows:
HIGH LOW
----- ----
Fiscal 1997
-----------
September 30, 1996 $2.75 $1.88
December 31, 1996 $1.88 $1.88
March 31, 1997 $2.50 $1.50
June 30, 1997 $2.50 $1.50
Fiscal 1998
-----------
September 30, 1997 $1.50 $1.50
December 31, 1997 $2.25 $1.50
March 31, 1998 $2.69 $1.31
June 30, 1998 $5.25 $2.50
(b) Holders
-------
The approximate number of record holders of the Registrant's common stock
on June 30, 1998 was 1,408, and as of October 8, 1998, the number of the
Registrant's recordholders was 1,394. This amount does not include beneficial
owners whose shares are held on account in "street name" by banks or brokerage
firms.
(c) Dividends
---------
The Registrant has paid no dividends on its common stock within the past
four years, and has no intention to pay cash dividends in the future.
14
Item 6. Selected Financial Data
June 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
Total assets $4,776,505 $4,524,102 $ 4,123,756 $6,507,903 $4,732,185
Total liabilities $2,471,488 $2,159,138 $ 1,820,866 $2,588,871 $1,326,195
---------- ---------- ---------- ---------- -----------
Net assets $2,305,017 $2,364,964 $ 2,302,890 $3,919,032 $3,405,990
========== ========== ========== ========== ==========
Realized gain (loss)
on investments $ -0-$ 216,000 $ 269,410 $ 18,914 $ 398,355
Total revenues $ 47,241 $ 236,643 $ 490,338 $ 162,539 $ 441,634
Total expenses $ 324,901 $ 369,088 $ 367,489 $ 773,905 $ 527,539
Net income (loss)
from operations $ (277,660)$ (132,444)$ 122,849 $ (611,366) $ (85,905)
Unrealized gain (loss)
on investments $ 189,713 $ 229,517 $(2,569,991) $1,419,408 $2,127,201
Increase (decrease)
in net assets before cumulative
effect of income tax
accounting change $ (59,947) $ 62,074 $(1,616,142) $ 513,042 $1,384,296
========== ========= ============ =========== ===========
Increase (decrease)
in net assets
resulting from
operations $ (59,947) $ 62,074 $(1,616,142) $ 513,042 $1,384,296
=========== ======== ============ ========== ============
June 30,
---------------------------------------------
1998 1997 1996 1995 1994
*Increase (decrease) in net assets
per sharebefore income taxes and
cumulative effectof income tax
and accounting change $ .32 $ .39 $(4.14) $1.37 $3.45
===== ===== ======= ===== =====
*Increase (decrease) in net assets
per share before cumulative effect
of income tax accounting change $(.10) $ .11 $(2.74) $ .87 $2.34
====== ======= ======= ===== =====
*Increase (decrease) in net assets
per share resulting from
operations $(.10) $ .11 $(2.74) $ .87 $2.34
====== ===== ======= ===== =====
*Weighted average number of
shares outstanding 590,897 590,897 590,897 590,897 590,897
======= ======= ======= ======= =======
*Prior period numbers for shares outstanding and increase (decrease) per share
are restated to reflect the 1-for-75 reverse stock split approved on December
12, 1995.
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Capital Resources and Liquidity. In July 1997, the Registrant was approved for a
$2,250,000 line of credit at 3/4% over prime by Comerica Bank ("Comerica"),
replacing the previous $2,000,000 loan with NBD Bank ("NBD"). The collateral for
the line of credit was all of the shares of Williams Controls common stock owned
by the Registrant at the time (1,660,000) and all of the shares of common stock
of Ajay Sports, Inc. ("Ajay") owned by the Registrant at the time (1,864,706).
Borrowing was limited to 50% of the fair market value of the collateral, except
that the maximum amount that can be borrowed against the Ajay stock is $400,000.
This loan was scheduled to expire in July, 1998. In June 1998, the loan limit
was increased to $2,500,000 and renewed on the same basic remaining terms as
were present in the original loan. The balance of the Registrant's note payable
to Comerica as of September 30, 1998 was $2,121,749 and the balances of the
Registrant's Notes Payable-Bank at June 30, 1998 and 1997 were $2,081,749 and
$1,712,900, respectively.
Currently, the Registrant's investment activity is limited by its working
capital. Capital required for the Registrant's investment activities is expected
to be generated from borrowing against their credit line, the sale of portfolio
securities or from additional offerings of the Registrant's common stock, of
which there can be no assurance. The ability of the Registrant to liquidate
portfolio stock 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, 1998.
Working capital at June 30, 1998 was $2,667,423 as compared to $2,752,082 at
June 30, 1997. The decrease in working capital from 1997 to 1998 was mainly due
to the change in the value of the Registrant's investment portfolio. For the
years ended June 30, 1998, 1997 and 1996 the Registrant's cash flow was
dependent primarily upon proceeds from the sale of investee shares and advances
from the Registrant's bank lines of credit. On November 8 ,1997 the Registrant
exercised 150,000 stock options of Williams Controls, Inc. into 150,000 shares
of common stock. In March 1998, the Registrant received 50,000 options to
purchase Williams Controls, Inc. common stock at $2.44 per shares for management
services the Registrant provided to Williams Controls, Inc.
The Registrant's liquidity (ability to mobilize cash) 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.
The Registrant's largest investee company, Williams, is a publicly held company
in which the Registrant owns common stock, common stock warrants and options.
Williams, through its subsidiary companies, manufactures and markets sensors,
controls and communication systems serving the transportation, agriculture and
communications industries. Management of the Registrant devoted time and
resources to providing significant managerial assistance to Williams and its
subsidiaries during the year ended June 30, 1998.
The Registrant's second largest investee is Ajay. Ajay is a manufacturer and
distributor of golf bags, carts and accessories, and casual outdoor furniture.
The Registrant's president is a director and the corporate secretary of Ajay.
Management of the Registrant devoted time and resources to providing significant
managerial assistance to Ajay and its subsidiaries during the year ended June
30, 1998.
On July 1, 1998, the Registrant and Williams signed an agreement under which
Williams would issue 42,329 shares of its common stock to the Registrant and
issue a note payable to the Registrant in the amount of $100,000, as payment in
full for the $200,000 note originally due to the Registrant from Ajay. The
balance of the original note from Ajay at June 30, 1998 and 1997 was $200,000
and $200,000, respectively. The balance of the note receivable from Williams,
which replaced the note receivable from Ajay, was $100,000 as of September 30,
1998.
The Company does not anticipate the year 2000 compliance requirements will have
a material impact on earnings. The Company has initiated replacement of the
Company's most significant computer programs with new updates that are warranted
to be year 2000 compliant. Installation of these updates is anticipated to be
completed prior to December 31, 1998. All other programs subject to year 2000
concerns will be evaluated utilizing internal and external resources to
reprogram ,replace or test each of them.
16
The Registrant does not anticipate the year 2000 compliance requirements will
have a material impact on earnings. The Registrant has initiated replacement of
the Registrant's most significant computer programs with new updates that are
warranted to be year 2000 compliant. Installation of these updates is
anticipated to completed prior to December 31, 1998. All other programs subject
to year 2000 concerns will be evaluated utilizing internal and external
resources to reprogram, replace or test each of them.
Results of Operations. The Company had total revenues of $47,241 for the
fiscal year ended June 30, 1998 as compared to $236,643 during fiscal year ended
June 30, 1997 and $490,338 during the fiscal year ended June 30, 1996. The
$189,402 decrease from fiscal year June 30, 1997 to June 30, 1998 was due mainly
to the fiscal 1997 amount of $216,000 in the net realized gain on the sale of
investments offset by an increase of $23,212 in consulting fees from related
companies in 1998. The revenue decrease from fiscal year 1996 to 1997 was due
mainly to a lower net realized gain on sale of investments of $53,410 and an
increase in consulting fees from related companies of $165,950 in 1997. Total
assets for the fiscal year ending June 30, 1998 were $4,776,505, an aggregate
increase of $252,403 over the total assets at June 30, 1997 which were
$4,524,102. The changes in total assets at June 30, 1998 versus June 30, 1997
were mainly the result of changes in the value of Registrant's ownership in its
largest investee, Williams.
For the year ended June 30, 1998 the Registrant had a net loss from
operations of $277,660 compared to a net loss from operations of $132,444 for
the year ended June 30, 1997 and a net income from operations of $122,849 for
the year ended June 30, 1996. The $145,216 decline from 1997 to 1998 was due to
the decrease in net realized gain on sale of investments offset by the decrease
in staff salary expense. The $255,293 decline from 1996 to 1997 was due to a
decrease in net realized gain on sale of investments and a decrease in
consulting fees. The Registrant recorded an unrealized gain on investments of
$189,713 for the fiscal year ended June 30, 1998 as compared to a unrealized
gain on investments of $229,517 for the fiscal year ended June 30, 1997 and an
unrealized loss on investments of $2,569,991 for the fiscal year ended June 30,
1996. The change in the unrealized gain for the years indicated is largely the
result of the change in the market value of the Registrant's largest investee,
Williams.
Item 8. Financial Statements and Supplementary Data
Financial statements and supporting schedules reporting supplementary
financial information are attached hereto and are listed in Item 14 of Part IV
of this Form 10-K.
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
17
PART III
--------
Item 10. Directors and Executive Officers 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
- -------------- --------------------- --- --------
Robert R. Hebard Chairman of the Board, 45 6/29/93
Chief Executive Officer,
President, Treasurer
& Director
Carl W. Forsythe Director 41 6/28/93
H. Samuel Greenawalt Director 69 6/28/93
No arrangement exists between any of the above officers and directors
pursuant to which any one of those persons was elected to any such office or
position. All the officers and directors were elected at the last annual meeting
of the stockholders of Enercorp to serve one-year terms or until the next
election of directors at an annual meeting.
(c) Significant Employees
---------------------
Not applicable
(d) Family Relationships
--------------------
None
(e) Business Experience
-------------------
Robert R. Hebard has served as Chairman of the Board, Chief Executive
Officer, President, Treasurer and Director of the Registrant since June 29,
1993. After receiving a Bachelors Degree in Marketing/Management from Cornell
University in 1975, Mr. Hebard held various marketing/product management
positions with Goldome Bank, a $10 billion S & L in Buffalo, N.Y. While there,
he received an MBA in 1982 from Canisius College. Mr. Hebard joined Comerica
Bank, Detroit, Michigan in September 1982 as Business Development Manager -
Executives and Professionals. In July 1984 he left Comerica to become Vice
President of Marketing for U.S. Mutual Financial Corporation, then returned to
Comerica in January 1985 as Vice President/Group Product Manager for Consumer
Deposits. In June 1986 he was named First Vice President/Director of Product
Management for Comerica and in February 1992 was named Director of Retail
Marketing for the merged Comerica/Manufacturers Bank. He was a Director of
Kimbro Imaging Systems, Inc. from November 1994 to August 1995. Mr. Hebard also
serves as Vice President of Woodward Partners, Inc., a real estate development
company in suburban Detroit, Michigan. Mr. Hebard also has served as a Director
of Ajay Sports, Inc. since June 1989, and as Ajay's Secretary since September
1990.
18
Carl W. Forsythe has served as Director of the Registrant since June 28,
1993. Mr. Forsythe received a Master of Business Administration degree from
Cornell University in 1982 and a Bachelor of Arts degree from Columbia
University in 1979. From 1982 through 1984, Mr. Forsythe worked in Sales
Operations for the Ford Motor Company. From 1985 to 1989, he was a Group
Manager-Personal Banking and Manager-Installment Loans for Comerica Bank. From
1989 to 1990, Mr. Forsythe was Senior Vice President of Retail Banking for
Michigan National Bank. From 1990 through July 1994, Mr. Forsythe was Executive
Vice President of First Gibraltar Bank and First Madison Bank. From August 1994
to December 1995, he was Senior Vice President-Chief Retail Officer for Banc
One-Ohio Corporation. From January 1996 to the present he has been Executive
Vice President of Retail Banking and Marketing for Home Savings of America.
H. Samuel Greenawalt has served as 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 with 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 the
bank.
(f) Involvement in Certain Legal Proceedings
----------------------------------------
None
(g) Promoters and Control Persons
-----------------------------
Not applicable
(h) Compliance with Section 16(a) of the Securities Exchange Act of
---------------------------------------------------------------
1934 (the "Exchange Act")
-------------------------
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, 1998, and written
representations of the persons required to file said reports, the Registrant
believes that all reports were filed and filed timely.
Item 11. Executive Compensation
(b) Summary Table
-------------
During fiscal year ended June 30, 1998, the Registrant paid $87,000 to its
Chief Executive Officer.
(c) Option/SAR Grant Table
----------------------
Not applicable
19
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR
---------------------------------------------------------------
Value Table
-----------
11,357 stock options were outstanding at June 30, 1998.
(e) Long-Term Incentive Plan ("LTIP") Awards Table
----------------------------------------------
The Registrant has no LTIP's.
(f) Defined Benefit or Actuarial Plan Disclosure
--------------------------------------------
The Registrant has no defined benefit or actuarial plans.
(g) Compensation of Directors
-------------------------
The Registrant has an arrangement with its disinterested non-employee
directors, wherein, each director is paid a fee of $500 for all regular and
non-scheduled Board meetings.
(h) Employment Contracts and Termination of Employment and
------------------------------------------------------
Change-in-Control Arrangements
------------------------------
None
(i) Report or Repricing of Options/SARs
-----------------------------------
Not applicable
(j) Compensation Committee Interlocks and Insider Participation in
--------------------------------------------------------------
Compensation Decisions
----------------------
Not applicable
(k) Board Compensation Committee Report on Executive Compensation
-------------------------------------------------------------
Not applicable
(l) Performance Graph
-----------------
Not applicable
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a)(b) Security Ownership of Certain Beneficial Owners and
---------------------------------------------------
Security Ownership of Management
----------------------------------
Set forth below is information as to certain persons 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 15, 1998:
20
Amount and Nature
Name and Address of of Beneficial Percent
Beneficial Owner Ownership of Class
- ------------------- -------------- --------
Robert R. Hebard 69,248 11.5%
7001 Orchard Lake Road (1)(2)(3)
Suite 424
W. Bloomfield, MI 48322
H. Samuel Greenawalt 14,333 2.4%
27777 Inkster Road
Farmington Hills, MI 48333
Carl W. Forsythe -0- 0%
4900 Rivergrade
Irwindale, CA 91706
Thomas W. Itin 49,149 8.3%
7001 Orchard Lake Road, Ste. 424 (4)(5)
W. Bloomfield, MI 48322
Charles Maginnis 35,000 5.9%
c/o Corporate Securities Group, Inc.
7600 Southland Blvd. Suite 101
Orlando, FL 32809
Executive officers and 83,581 13.9%
directors as a group (1)(2)(3)
(three persons)
(1) Includes 15,467 shares owned by Mr. Hebard's spouse and
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 the
1,333 shares in the custodial account.
(2) Includes 10,581 shares of common stock options currently
exercisable or exercisable within 60 days from September 30,
1998.
(3) Does not include 28,443 shares held in trust for Mr.
Hebard's minor children. Mr. Hebard's mother-in-law is
trustee of these trusts.
(4) Based upon information contained in the Schedule 13D and
amendments thereto filed with the Securities and Exchange
Commission. Includes shares held personally and through
partnerships or other entities in which stockholder holds a
beneficial interest. Mr. Itin is the father-in-law of the
Registrant's president. Does not include shares held in
various trusts for the benefit of Mr. Itin's minor
grandchildren.
21
(5) 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
=======
No change in control of the Company has occurred since the beginning of
the last fiscal year.
The Company does not know of any arrangements, the operation of which may,
at a subsequent date, result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions
(d)(a) Transactions with Management and Others
---------------------------------------
On November 8 ,1997 the Registrant exercised 150,000 stock options of
Williams Controls, Inc. into 150,000 shares of common stock. In March
1998, the Registrant received 50,000 options to purchase Williams
Controls, Inc. common stock at $2.44 per shares for management services
rendered.
(b) Certain Business Relationships
------------------------------
Not applicable
(c) Indebtedness of Management
--------------------------
None
(d) Transactions with Promoters
---------------------------
Not applicable.
22
PART IV
Item 14. 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, 1998 and 1997 F-2
Schedule of Investments, June 30, 1998 and 1997 F-3 - F-6
Statements of Changes in Stockholders' Equity
for the Years Ended June 30, 1998 , 1997, and 1996 F-7
Statements of Operations for the Years Ended
June 30, 1998 , 1997, and 1996 F-8
Statements of Cash Flows for the Years Ended
June 30, 1998 , 1997 and 1996 F-9 - F-10
Notes to Financial Statements F-11 - F-15
(2) Financial Statement Schedules:
Amounts Receivable from Affiliated
Parties, Underwriters, Promoters,
and Employees Other than Related
Parties S-1
Valuation and Qualifying Accounts and Reserves S-2
(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*
10.1 Management Agreement between Enercorp, Inc. and
Williams Controls, Inc. dated May 1, 1989**
10.2 Amendment to Management Agreement between
Enercorp, Inc. and Williams Controls, Inc.
dated September 11,1990***
10.3 Amendment 2 to Management Agreement between
Enercorp, Inc. and Williams Controls, Inc.
dated December 14, 1990***
10.4 Comerica Loan documents with Enercorp, Inc. dated
July 30, 1997.*****
23
10.5 Amended Comerica Loan document with Enercorp, Inc.
regarding increasein line of credit. FILED HEREWITH
20.1 Statement of Risk to Stockholders FILED HEREWITH
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.
(b) Reports on Form 8-K.
A Form 8-K was filed on February 2 ,1998 regarding the Nasdaq plans
to delist the Registrant from the Nasdaq Small Cap Market.
(c) Required exhibits are incorporated by reference.
(d) Financial statement schedules are attached hereto.
24
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\Robert R. Hebard
------------------------------
Robert R. Hebard, President
Date: October 12, 1998
---------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: October 12, 1998 S\Robert R. Hebard
--------------------- --------------------------
Robert R. Hebard, Director
(Principal Executive, Accounting
and Financial Officer)
Date: October 12, 1998 S\Carl W. Forsythe
--------------------- ---------------------------
Carl W. Forsythe, Director
Date: October 12, 1998 S\H. Samuel Greenawalt
--------------------- ----------------------------
H. Samuel Greenawalt, Director
25
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors and Stockholders
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, 1998 and
1997, and the related statements of changes in stockholders' equity, operations
and cash flows for the years ended June 30, 1998, 1997 and 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998, 1997, and 1996 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,
1998, 1997 and 1996, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules on S-1 and S-2 are
presented for purposes of complying with rules of the Securities and Exchange
Commission and are not a required part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in our audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the 1998, 1997 and 1996 financial data required to be set
forth therein in relation to the basic financial statements taken as whole.
s/Hirsch, Silberstein & Sulbelsky, P.C.
- ------------------------------------------
Hirsch, Silberstein & Sulbelsky, P.C.
Farmington Hills, Michigan
September 22, 1998
F-1
Enercorp, Inc.
Statements of Assets and Liabilities
June 30, June 30,
ASSETS 1998 1997
---------- ----------
Investments, at fair value, cost of $1,684,888 and
$1,623,388 at June 30, 1998 and 1997, respectively $ 4,538,361 $ 4,287,148
Cash 16,128 99
Accounts receivable - related party 2,985
Accrued interest receivable - net of allowance for
uncollectible interest receivable of $14,908 and
$12,477 at June 30, 1998 and 1997, respectively 9,707 18,273
Notes receivable - related parties, net of allowance for
uncollectible notes receivable of $23,147 at June
30, 1998 and 1997, respectively 207,715 207,715
Furniture and fixtures, net of accumulated depreciation
of $6,238 and $4,747 at June 30, 1998 and 1997,
respectively 2,697 4,189
Other assets 1,897 3,693
--------------- ---------------
$ 4,776,505 $ 4,524,102
=============== ===============
LIABILITIES AND NET ASSETS
Liabilities
Note payable - bank 2,081,749 1,712,900
Accounts payable and accrued liabilities 22,739 51,238
Deferred tax liability 367,000 395,000
--------------- ---------------
2,471,488 2,159,138
--------------- ---------------
Net assets
Common stock, no par value: 10,000,000 shares
authorized, 590,897 shares issued and
outstanding at June 30, 1998 and 1997 1,468,251 1,468,251
Preferred stock, no par value: 1,000,000 shares
authorized, -0- issued and outstanding -0- -0-
Accumulated deficit (1,046,707) (861,049)
Unrealized net gain on investments, net of deferred
income taxes of $970,000 and $906,000 at
June 30, 1998 and 1997, respectively 1,883,473 1,757,762
--------------- ---------------
2,305,017 2,364,964
--------------- ---------------
$ 4,776,505 $ 4,524,102
=============== ===============
See notes to financial statements
F-2
Enercorp, Inc.
Schedule of Investments
June 30, 1998
Restrictions Number Cost
Expiration as to of and/or Fair
Company Description of Business Date Resale Shares Owned Equity Value
AFFILIATED COMPANIES
Common Stocks - Public Market Method of Valuation (d)
CompuSonics Video Corporation* Digital Video Product
Development 1,751 $ - $ 2
10,000,000 106,477 9,000
Williams Controls, Inc.* Manufacturer of sensor (e) 400,000 60,000 945,000
and control systems (e) 850,000 127,500 2,008,125
(e) 330,000 412,500 779,625
(e) 30,000 108,750 70,875
(e) 50,000 125,000 118,125
(b)(e)11/8/98 150,000 61,500 334,688
Ajay Sports, Inc.* Golf & Casual Furniture Manufacturer (e) 1,764,706 600,000 248,162
(e) 100,000 37,500 14,063
Preferred Stocks - Public Market Method of Valuation (d)
Ajay Sports, Inc.* Golf & Casual Furniture Manufacturer 2,000 20,000 5,850
Warrants and Stock Options - Board Appraisal Method of Valuation (d)
CompuSonics Video Corporation* Digital Video Product Development (c) 300,000 - -
Williams Controls, Inc.* Manufacturer of sensors 08/04/99 (c) 25,000 - -
and control systems 05/03/00 (c) 25,000 - -
09/13/99 (c) 50,000 - -
03/12/03 (c)(f) 50,000 - -
----------- -----------
1,659,227 4,533,515
See notes to financial statements
F-3
Enercorp, Inc.
Schedule of Investments (Continued)
June 30, 1998
Restrictions Number Cost
Expiration as to of and/or Fair
Date Resale Shares Owned Equity Value
Company Description of Business
UNAFFILIATED COMPANIES
Common Stocks - Public Market Method of Valuation (d)
Immune Response Holding Company 10,000,000 5,000 -
Vitro Diagnostics Diagnostic Test Kits 300 1,500 56
Proconnextions, Inc. Sports Memorabilia Marketing (a) 191,610 19,161 4,790
----------- -----------
Sub-total - UNAFFILIATED COMPANIES 25,661 4,846
----------- -----------
Total - ALL COMPANIES $ 1,684,888 $ 4,538,361
=========== ===========
(a) Non-public company whose securities are privately owned.
(b) May be sold under the provisions of Rule 144 of the Securities Act of
1933 after a holding period which expires in the month indicated.
(c) No public market exists for this security.
(d) The fair value of restricted securities is determined in good faith by
the Company's Board of Directors, which may take into account a variety
of factors including recent and historical prices of these securities,
recent transactions completed by the Company, and other factors that
the Board believes are applicable.
(e) Pledged as collateral against a line of credit with Comerica Bank.
(f) Options will vest at 25% on 9/12/98, 9/12/99, 9/12/00 & 9/12/01
consecutively.
* This entity is considered an affiliated company since the Company owns
more than 5% but less than 25% of the Investee company's outstanding
common stock. Because of this, the Company would be affected by a sales
limitation of one percent of the investee's outstanding common stock
during any three-month period, or the average of the last four weeks'
trading volume, whichever is greater.
See notes to financial statements
F-4
Enercorp, Inc.
Schedule of Investments
June 30, 1997
Restrictions Number Cost
Expiration as to of and/or Fair
Company Description of Business Date Resale Shares Owned Equity Value
AFFILIATED COMPANIES
Common Stocks - Public Market Method of Valuation (d)
CompuSonics Video Corporation* Digital Video Product Development 1,751 $ - $ 2
10,000,000 106,477 9,000
Williams Controls, Inc.* Manufacturer of sensors, controls (f) 400,000 60,000 866,160
and communication systems (f) 850,000 127,500 1,840,590
(f) 330,000 412,500 714,582
(b) 5/97 (f) 30,000 108,750 57,744
(b) 10/97 (f) 50,000 125,000 96,240
Ajay Sports, Inc.* Golf & Casual Furniture Manufacturer 1,764,706 600,000 397,059
(b) 12/96 100,000 37,500 22,500
Preferred Stocks - Public Market Method of Valuation (d)
Ajay Sports, Inc.* Golf & Casual Furniture Manufacturer 2,000 20,000 9,000
Warrants and Stock Options - Board Appraisal Method of Valuation (d)
CompuSonics Video Corporation* Digital Video Product Development (c) 300,000 - -
Williams Controls, Inc.* Manufacturer of sensors, controls 11/08/97 (c) 150,000 - 269,460
and communication systems 08/04/99 (c)(e) 25,000 - -
05/03/00 (c) 25,000 - -
09/13/99 (c) 50,000 - -
----------- -----------
1,597,727 4,282,337
See notes to financial statements
(Continued)
F-5
Enercorp, Inc.
Schedule of Investments (Continued)
June 30, 1997
Restrictions Number Cost
Expiration as to of and/or Fair
Date Resale Shares Owned Equity Value
Company Description of Business
UNAFFILIATED COMPANIES
Common Stocks - Public Market Method of Valuation (d)
Immune Response, Inc. Holding Company 10,000,000 5,000 -
Vitro Diagnostics Diagnostic Test Kits 300 1,500 21
Proconnextions, Inc. Sports Memorabilia Marketing (a) 191,610 19,161 4,790
----------- -----------
Sub-total - UNAFFILIATED COMPANIES 25,661 4,811
----------- -----------
Total - ALL COMPANIES $ 1,623,388 $ 4,287,148
=========== ===========
(a) Non-public company whose securities are privately owned.
(b) May be sold under the provisions of Rule 144 of the Securities Act of
1933 after a holding period which expires in the month indicated.
(c) No public market for this security exists.
(d) A discount factor as determined by the Company's Board of Directors has
been applied to those stocks valued by the public market method which
have restrictions as to resale.
(e) 75% currently vested; 25% vesting 8/97.
(f) Pledged as collateral against a line of credit with NBD Bank as of June
30, 1997.
* This entity is considered an affiliated company since the Company owns
more than 5% but less than 25% of the Investee company's outstanding
common stock. Because of this, the Company would be affected by a sales
limitation of one percent of the investee's outstanding common stock
during any three-month period, or the average of the last four weeks'
trading volume, whichever is greater.
See notes to financial statements
F-6
Enercorp, Inc.
Statement of Changes in Stockholders' Equity
For the Years Ended June 30, 1998, 1997 and 1996
Retained Earnings
----------------------
Common Stock (AccumulatedUnrealized
Shares Amount Deficit) Net Gain Total
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1995 590,897 1,468,251 (852,454) 3,303,235 3,919,032
Net loss -- -- 79,849 -- 79,849
Unrealized gain on investments,
net of taxes -- -- -- (1,695,991) (1,695,991)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996 590,897 $1,468,251 $(772,605) $1,607,244 $2,302,890
Net loss -- -- (88,444) -- (88,444)
Unrealized gain on investments,
net of taxes -- -- -- 150,518 150,518
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 590,897 $1,468,251 ($861,049) $1,757,762 $2,364,964
Net loss -- -- (185,660) -- (185,660)
Unrealized gain on investments,
net of taxes -- -- -- 125,713 125,713
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998 590,897 1,468,251 (1,046,709) 1,883,475 2,305,017
========== ========== =========== =========== ===========
See notes to financial statements
F-7
Enercorp, Inc.
Statements of Operations
For the years ended June 30,
-----------------------------------------
1998 1997 1996
------------ ------------ -------------
REVENUES
Interest income $ -0- $ -0- $ 400
Interest income from related entities 22,241 17,355 6,033
Consulting fees from related companies 25,000 1,788 167,738
Royalties and settlement income -0- -0- 2,445
Recovery of bad debt -0- -0- 42,942
Net realized gain on sale of investments -0- 216,000 269,410
Loss on sale of fixed assets -0- -0- -0-
Dividend income from affiliated company -0- 1,500 1,370
------------ ------------ -------------
47,241 236,643 490,338
------------ ------------ -------------
EXPENSES
Salaries - officer 87,000 122,000 72,000
Bonus expense - officer -0- -0- -0-
Directors' fees 1,000 -0- 1,000
Staff salaries -0- 20,332 38,200
Legal, accounting and other professional fees 14,686 11,537 31,926
Interest expense - related entity -0- -0- 29,303
Interest expense - other 181,123 162,538 115,354
Loss on worthless investments -0- -0- -0-
Bad debt expense 2,431 2,433 4,520
Other general and administrative expenses 38,661 50,248 75,186
------------ ------------ ------------
324,901 369,088 367,489
------------ ------------ ------------
Net gain (loss) from operations before (277,660) (132,444) 122,849
Income taxes (Note 5) 92,000 44,000 (43,000)
------------ ------------ ------------
Net gain (loss) from operations after taxes (185,660) (88,444) 79,849
------------ ------------ ------------
Net unrealized gain (loss) on investment before 189,713 229,517 (2,569,991)
Income taxes (Note 5) (64,000) (78,999) 874,000
------------ ------------ ------------
Net unrealized gain (loss) on investment after 125,713 150,518 (1,695,991)
Taxes ------------ ------------ ------------
Increase (decrease) in net assets $ (59,947) 62,074 $(1,616,142)
============ ============ ============
Increase (decrease) in net assets per share $ (0.10) $ 0.11 $ (2.74)
============ ============ =============
See notes to financial statements
F-8
Enercorp, Inc.
Statements of Cash Flows
For the years ended June 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Increase (decrease) in net assets $ (59,947) $ 62,074 $(1,616,142)
------------ ------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 1,491 659 1,723
Bad debt provision on notes receivable
and interest net of write offs 2,431 2,433 4,520
Stock received for consulting services -0- (125,000) (37,500)
Recovery of bad debt -0- -0- (42,942)
Gain on sale of investments -0- (216,000) (269,410)
(Gain) Loss on sale of fixed assets -0- (777) -0-
Write off of worthless investments -0- -0- -0-
Unrealized (gain) loss on investments (251,213) (229,517) 2,569,992
(Increase) in accounts receivable - related party -0- (2,985) (125,000)
(Increase) in interest receivable 6,135 (14,922) (6,028)
Decrease in accounts receivable from
related party 2,985 125,000 58
(Increase) Decrease in other assets 1,796 11,936 (5,736)
Increase (Decrease) in accounts payable and
accrued expenses 3,751 12,840 (71,520)
Increase(Decrease) in accrued salaries (32,250) 32,250 -0-
Increase (Decrease) in deferred taxes (28,000) 35,000 (831,000)
------------ ------------ ------------
Total adjustments (292,873) (369,083) 1,187,157
------------ ------------ -------------
Net cash (used) by operating activities (352,820) (307,009) (428,985)
------------ ------------ -------------
Cash flows from investing activities:
Purchase of investments -0- -0- (88,000)
Sale of investments -0- 250,000 303,410
Payments received on note receivable -0- -0- 78,364
Issuance of notes receivable -0- (200,000) -0-
Proceeds from sale of fixed assets -0- -0- -0-
Purchase of furniture and fixtures -0- (1,565) -0-
------------ ------------ ------------
Net cash provided (used) by investing activities -0- 48,435 293,774
------------ ------------ ------------
See notes to financial statements
F-9
Enercorp, Inc.
Statements of Cash Flows (Continued)
For the years ended June 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 368,849 508,179 1,905,825
Principal payments of notes payable -0- (250,000) (1,771,310)
------------ ------------ ------------
Net cash provided by investing activities 368,849 258,179 134,515
------------ ------------ ------------
Increase (Decrease) in cash 16,029 (396) (696)
Cash, beginning of period 99 495 1,191
------------ ------------ ------------
Cash, end of period 16,128 99 495
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid 165,099 148,982 152,332
============ ============ ============
Interest received 28,377 -0- 403
============ ============ ============
See notes to financial statements
F-10
Enercorp,Inc.
Notes to Financial Statements (Continued)
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.
This change resulted in the Company becoming a specialized type of
investment company. For the years ended June 30, 1998, 1997 and 1996 the
Company's cash flows have been dependent primarily upon sale of stock and
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 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.
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.
F-11
Enercorp, Inc.
Notes to Financial Statements (Continued)
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 betterments
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, 1998 and June 30, 1997, respectively was $ 4.00 and $3.90 per
share based on 590,897 shares.
h. Reclassifications
-----------------
Prior year share and per share amounts have been restated to reflect the 1
for 75 reverse stock split that occurred on December 13, 1995. Also
certain amounts as originally reported in the June 30, 1996 financial
statements were reclassified to conform with the June 30, 1998
presentations.
F-12
Enercorp, Inc.
Notes to Financial Statements (Continued)
Note 2: Investments
-----------
Investments consist of holdings of securities in publicly and privately
held companies. The Company's largest portfolio company is Williams
Controls, Inc. ("Williams"). At June 30, 1998 Williams represented 93.79%
of the company's investments at fair market value.
Note 3: Related Party Transactions
--------------------------
a. Accounts Receivable - Related Party
-----------------------------------
The Company has an account receivable from Ajay Sports, Inc. for various
traveling fees for services performed for the benefit of Ajay Sports, Inc.
At June 30, 1998 and 1997 accounts receivable related party was $0 and
$2,985.
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 at was $7,715 at June 30, 1998 and 1997.
On July 1, 1998, the Registrant and Williams signed an agreement under
which Williams would issue 42,329 shares of its common stock to the
Registrant and issue a note payable to the Registrant in the amount of
$100,000, as payment in full for the $200,000 note originally due to the
Registrant from Ajay. The balance of the original note from Ajay at June
30, 1998 and 1997 was $200,000 and $200,000, respectively. The balance of
the note receivable from Williams, which replaced the note receivable from
Ajay, was $100,000 as of September 30, 1998.
Note 4: Note Payable - Bank
-------------------
In July 1997, the Registrant was approved for a $2,250,000 line of credit
at 3/4% over prime by Comerica Bank ("Comerica"), replacing the previous
$2,000,000 loan with NBD Bank ("NBD"). The collateral for the line of
credit was all of the shares of Williams Controls common stock owned by
the Registrant at the time (1,660,000) and all of the shares of common
stock of Ajay Sports, Inc. ("Ajay") owned by the Registrant at the time
(1,864,706). Borrowing was limited to 50% of the fair market value of the
collateral, except that the maximum amount that can be borrowed against
the Ajay stock is $400,000. This loan was scheduled to expire in July,
1998. In June 1998, the loan limit was increased to $2,500,000 and renewed
on the same basic remaining terms as were present in the original loan.
The balance of the Registrant's note payable to Comerica as of September
30, 1998 was $2,121,749 and the balances of the Registrant's Notes
Payable-Bank at June 30, 1998 and 1997 were $2,081,749 and $1,712,900,
respectively.
F-13
Enercorp, Inc.
Notes to Financial Statements (Continued)
Note 5: 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, 1998, 1997 and 1996 consisted
of:
1998 1997 1996
---- ---- ----
Current $ -0- $ -0- $ -0-
Deferred 7,000 35,000 (831,000)
----- ------ ---------
$7,000 $35,000 $(831,000)
The components of the deferred tax liability at June 30, 1998 and 1997 consist
of the following:
6/30/98 6/30/97
-----------------------------
Unrealized gain on investments $ 970,000 $ 906,000
Capital loss carryover -0- -0-
Accrued officer wages -0 -0-
Allowance for notes receivable (12,00) (12,000)
Net operating loss carry over (591,000) ( 499,000)
--------- ----------
$ 367,000 $ 395,000
============= ===========
At June 30, 1998, the Company has net operating loss carry forward
available to offset future taxable income of approximately $1,742,000 that
expires at various years through June 30, 2013.
Note 6: Operating Leases
----------------
The company leased office space accounted for as an operating lease which
expired in March 1997. The Company is currently renting space from an
affiliate. Lease expense was $6,180, $8,090 and $9,915 for the years
ending June 30, 1998, 1997 and 1996, respectively. Future minimum lease
obligations are as follows:
6/30/98 $6,180
======
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.
F-14
Enercorp, Inc.
Notes to Financial Statements (Continued)
Note 8: Financial Statement Presentation
--------------------------------
On August 25, 1997, the Midwest Regional Office (the "MRO") of the
Securities and Exchange Commission (the "SEC") began an examination of the
Registrant's books and records. The field work portion of the examination
was completed on August 29, 1997. On October 23, 1997, upon completion of
the MRO's review, the Registrant received a letter from the MRO outlining
the results of its examination and deficiencies that the MRO cited in the
books and records of the Registrant. On November 21, 1997, the Registrant
sent its response to the MRO stating the actions it had taken or would be
taking in order to comply with the matters cited in the MRO's letter of
October. Based on this response, the Registrant believes that it has
complied with the requests of the MRO on all matters discussed in the
examination.
Note 9: Other Subsequent Events
-----------------------
At the request of Nasdaq, and as a condition of an exception granted by
them to the Registrant on July 28, 1998, Enercorp filed a Form 8-K report
on August 14, 1998. This report stated that the Registrant met all Nasdaq
continued listing requirements, including the requirement that it have a
minimum of 500,000 shares in the public float, reporting that it had
517,897 shares in the public float as the result of a change in ownership
by a principal stockholder of the Registrant. In the absence of any NASD
regulations as a guide, the Registrant believed that it had complied with
the relevant SEC rules, had informed Nasdaq of this position, and was
awaiting a response to its correspondence when the Nasdaq delisting notice
was delivered to the Registrant. The Registrant believes that during this
process it has complied with all Nasdaq requirements and requests, and has
filed an appeal with Nasdaq to attempt to have its common stock reinstated
as eligible to trade on the SmallCap Market. There is no assurance that
the Registrant will be successful in an appeal, which is scheduled to be
heard by a Nasdaq Hearings Panel in January 1999. During the appeal
process, the Registrant's common stock will continue to be eligible to
trade under the symbol "ENCP" on the OTC Bulletin Board.
F-15
Enercorp, Inc.
Amounts Receivable from Affiliated Parties
Underwriters, Promoters and Employees Other than Related Parties
- ---------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
--------------------------------------------------------------------------------------------------------
Deductions Balance at end of period
-----------------------------------------------------
Balance at (1) (2)
beginning of Amounts Amounts Non-
Name of Debtor Period Additions(a) Collected Written off Current Current
==================================================================================================================================
For the year ended
June 30, 1998
Notes receivable from Pro Connextions, Inc. 30,862 - - 30,862 -
affiliated companies Ajay Sports, Inc. $200,000 - 200,000
Accounts receivable from Ajay Sports, Inc. $2,985 $2,985 - 0 -
affiliated companies
------------------------------------------------------------------------------
$233,847 $0 $2,985 $0 $230,862 $0
==================================================================================================================================
For the year ended
June 30, 1997
Notes receivable from Pro Connextions, Inc. 30,862 - - 30,862 -
affiliated companies Ajay Sports, Inc. - $200,000 200,000
Accounts receivable from Ajay Sports, Inc. - $2,985 - - 2,985 -
affiliated companies
------------------------------------------------------------------------------
$30,862 $202,985 $0 $0 $233,847 $0
==================================================================================================================================
See notes to financial statements
S-1
Enercorp, Inc.
Valuation and Qualifying Accounts and Reserves
- ------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
- ------------------------------------------------------------------------------------------------------------
Balance at Charge to Charged to Balance at
beginning costs/ other accounts end
of period expenses describe Deductions of period
============================================================================================================
For the year ended June 30, 1998
Allowance for uncollectible accounts
------------------------------------------------------------------------
Notes receivable $23,147 $23,147
------------------------------------------------------------------------
Interest receivable $12,477 (2,431) $14,908
------------------------------------------------------------------------
For the year ended June 30, 1997
Allowance for uncollectible accounts
------------------------------------------------------------------------
Notes receivable $23,147 $23,147
------------------------------------------------------------------------
Interest receivable $10,044 (2,433) $12,477
------------------------------------------------------------------------
For the year ended June 30, 1996
Allowance for uncollectible accounts
------------------------------------------------------------------------
Notes receivable $74,795 51,648 $23,147
------------------------------------------------------------------------
Interest receivable $31,642 4,520 26,118 $10,044
====================================------------------------------------------------------------------------
See notes to financial statements
S-2