<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
-----
Act of 1934
For the fiscal year ended December 31, 1997 or
------------------
_____Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from________________________to________________________
Commission file number 1-5654
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EXX INC
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 88-0325271
- ------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1350 East Flamingo Road, Suite 689
Las Vegas, Nevada 89119-5263
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(Address of Principal Executive Offices) (Zip Code)
702-598-3223
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of each class on Which Registered
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Common Stock Par Value $.01 Class A American Stock Exchange
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Common Stock Par Value $.01 Class B American Stock Exchange
- ----------------------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant: (1) has filed all reports
required 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 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference on Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Number of shares of Common Stock, Par Value $.01 per share, outstanding as of
March 20, 1998: 2,027,942 Class A shares and 667,314 Class B shares(exclusive of
--------- -------
759,376 Class A shares and 261,792 Class B shares held in registrant's
- ------- -------
treasury). Of the shares outstanding, 1,084,208 Class A shares and 352,736
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Class B shares are held by non-affiliates. The market value of the shares held
by non-affiliates is $4,155,628 based on $3.00 and $2.56 per share, respectively
of the closing price of the registrant's Class A and Class B common stock on the
American Stock Exchange on March 20, 1998.
Documents incorporated by reference are: Registrant's Proxy Statement dated
April, 1998 for the Annual Meeting of Stockholders to be held in May, 1998, Form
8-K Report dated February 3, 1997, and Form 10-K Report for the year ended
December 31, 1996 dated March 31, 1997. Form S-4 Registration Statement dated
July 25, 1994 and Form S-4 Amendment No. 1 dated August 16, 1994.
1
<PAGE>
PART 1
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Item 1. Business.
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EXX INC ("EXX") is the holding Company resulting from the Reorganization of
SFM Corporation ("SFM") as approved by its shareholders at a special meeting on
October 18, 1994 and effective on October 21, 1994. The purpose of adopting a
holding company structure was to enhance the Company's ability to obtain new
financing by enabling potential investors to clearly focus on the strengths and
diversity of EXX's businesses and to protect each of EXX's businesses to the
extent possible from the business risks which arise out of its other businesses.
As part of the Reorganization each outstanding share of SFM Common stock
was converted into three shares of EXX Class A Common Stock and one share of EXX
Class B Common Stock. The new stock is substantially identical to the old stock
in rights and privileges except that holders of outstanding shares of Class B
Common Stock have the right to elect two-thirds or the next rounded number of
directors in excess of two-thirds if the number of Directors is not divisible by
three, and the holders of outstanding shares of the Class A Common Stock have
the right to elect the remaining directors of the Company.
Under the Reorganization SFM became a wholly-owned subsidiary of EXX and
each of SFM's wholly-owned subsidiaries became wholly-owned subsidiaries of EXX
with each subsidiary retaining its assets and liabilities and continuing its
business. In order to effect the transactions, SFM distributed as a dividend to
EXX all the outstanding stock of each of its subsidiaries as well as SFM's cash,
cash equivalents and certain promissory notes.
In February 1997, the Company (through a newly-formed subsidiary acquired
all the outstanding capital stock of Handi Pac, Inc., d/b/a Steven Manufacturing
Co. (Handi Pac). Handi Pac manufactures and sells several types of toys,
including pre-school, ride-on, classic and educational toys. (See Footnote 3 to
the Consolidated Financial Statements for a further explanation). In addition
during the third quarter 1997, a wholly-owned subsidiary acquired the assets of
Confectionery and Novelty Design International, LLC ("CANDI"), a Northbrook, IL
maker of candy-filled toy products. While this acquisition was not a material
purchase, it adds a complimentary product to the business mix.
EXX, through its subsidiaries, is engaged in the design, production and
sale of consumer goods in the form of "impulse toys", watches and kites. In
addition, it is engaged in the design, production and sale of electric motors
geared toward the (OEM) original equipment market, and the design, production
and sale of cable pressurization equipment sold to the telecommunications
industry. It formerly manufactured machine tools and machine tool replacement
parts. It continues to receive royalty income from machine tools and
replacement parts as part payment for its sale of a subsidiary's assets.
Continuing operations are conducted through six wholly-owned subsidiaries.
1
<PAGE>
Henry Gordy International, Inc. ("Gordy") was formed during the third
-------------------------------
quarter of 1987 to conduct the business associated with certain assets purchased
from Henry Gordy, Inc. and Gordy International, Inc.
Gordy markets a line of "impulse" toys through a national network of
commissioned sales representatives, together with its own sales staff. Its
products are distributed directly or through wholesalers to a wide range of
retail outlets including, but not limited to, toy stores, department stores,
discount chains, drug stores and supermarkets.
Gordy's sales are derived from both proprietary and licensed products. In
prior years, some of the products covered by the Power Ranger license caused
sales to materially increase due to strong consumer demand. During the past
year, there were no licenses that individually had a material effect on sales.
Trademarks and related molds are developed in line with specific licenses.
There are currently no significant licenses that are material to the Toy line.
The majority of the merchandise is manufactured in the Far East to Gordy's
specifications and shipped as required. No difficulties have been encountered
in obtaining sources for the products, nor are any expected for the current
year.
Inventories are maintained for anticipated orders. Gordy believes that its
practices relating to all working capital items, including its inventory
practices, do not materially differ from those used by other companies in
similar endeavors and comparable in size to Gordy.
Gordy operates in a highly competitive market. It competes with many other
companies, some of which have substantially greater resources and assets than
Gordy.
In February, 1994, Hi-Flier Inc., a newly formed subsidiary of SFM,
purchased the assets of Hi-Flier Manufacturing Co., a leader in the kite
business for more than seventy years. This acquisition strengthened the
Company's toy segment by providing product lines that compliment those of the
Henry Gordy International Inc. subsidiary.
The Howell Electric Motors Division ("Howell") is engaged in the
-----------------------------------
manufacture and sale of alternating current, fractional and small integral
motors ranging from 1/4 to 10 horsepower. Howell's product line consists of
such specialty items as blower motors designed for use in air conditioning
systems, flat-type motors used in floor scrubbing and polishing machines, and
motor pump assemblies used in food machinery products and a variety of other
applications. In recent years, a substantial portion of Howell's sales have
been to the floor care service industry and the food machinery industry, and
have been effected through Howell's own marketing personnel and several
independent sales representatives working on a commission basis.
2
<PAGE>
The principal raw materials used by Howell are steel, copper, aluminum and
grey-iron or aluminum casting, all of which are purchased from various suppliers
on a competitive basis. During the period covered by this report, Howell
experienced no significant difficulty in obtaining these raw materials, and,
barring some presently unforeseen event, Howell does not expect to encounter any
difficulties in obtaining such supplies during the current year.
Raw material inventories for Howell are maintained largely for known
requirements, i.e., they are held for firm orders, or, in the case of certain
items with a variety of applications to Howell's products, are held for
anticipated orders. Inventories of finished goods consist predominately of
products ready for shipment. Howell believes that its practices relating to all
working capital items, including its inventory practices, do not materially
differ from those used by other companies in similar endeavors and comparable in
size to Howell.
Howell is in a highly competitive business, and believes that it is not a
very significant factor in the industry. It competes with many other companies
which have significantly greater assets and resources.
In April, 1994, TX Systems Inc., a newly formed subsidiary of EXX, acquired
the operating assets and businesses of TX Technologies, Inc. and TX Software,
Inc. These companies were engaged in the Cable Pressurization and Monitoring
Systems business. The TX Systems Inc. acquisition together with the activities
of another newly formed subsidiary - TX Technology Corp. - broadened our
activities in the capital goods segment, allowing us entry to the dynamic and
rapidly growing telecommunications industry. The TX Companies operate the cable
pressurization and monitoring system business.
The business provides means to prevent telecommunications signal reductions
through use of cable pressurization equipment and equipment to monitor cable
pressure, as well as equipment to report the results of the monitoring over
telephone lines.
Material Customers.
------------------
The registrant's business is not dependent to a material extent on any
single customer or group of customers.
Employees.
---------
The registrant employs approximately 180 full-time employees, of whom
approximately 63 are employed by Howell, 15 by TX Technology Corp., 65 by Gordy,
35 by Handi Pac, and 2 for all other activities of the registrant combined.
3
<PAGE>
Item 2. Properties.
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SFM Corp., the registrant's wholly-owned subsidiary, owns a brick and
masonry building in Plainfield, New Jersey containing approximately 120,000
square feet of manufacturing area and 10,000 square feet of office space, where
the operations of Howell and Gordy are located.
The registrant, through a subsidiary, currently leases 11,000 square
feet of warehousing and office space in Randolph, New Jersey for its
telecommunication operations. Also, the registrant through its Handi Pac
subsidiary leases a 90,000 square foot facility under a capital lease
arrangement with an option to purchase. In addition, the registrant's
subsidiaries lease office and/or showroom space in New York City, Dallas, Texas
and Las Vegas, Nevada.
The registrant considers its facilities and the equipment contained
therein adequate and suitable to meet its current and foreseeable requirements.
Item 3. Legal Proceedings.
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None other than in the normal course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
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Not applicable.
4
<PAGE>
Part II
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Item 5. Market for the Registrant's Common Stock and Related Security Holder
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Matters.
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<TABLE>
<CAPTION>
Principal Market: American Stock Exchange
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Quarterly Price Information
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1997 1996
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Class A Class B Class A Class B
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High Low High Low High Low High Low
---- ----- ------- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter 4-7/8 2-3/4 4-3/8 2-13/16 9 4-5/8 8-1/4 4-1/8
Second Quarter 4-3/4 2 4-5/8 2-1/8 6-7/8 4-1/4 6-1/2 4-1/4
Third Quarter 6-1/8 2-1/2 5-3/4 2-3/8 4-5/8 2-1/2 4-1/4 2-3/8
Fourth Quarter 5-1/2 2-7/8 5 2-3/4 8-7/8 1-3/4 8-3/8 1-7/8
</TABLE>
Stockholders: As of March 20, 1998, it is estimated that there were
------------
approximately 1,100 stockholders of record of Class A shares and 500
stockholders of record of Class B shares.
Dividend Information: No dividends were paid in 1997 or 1996.
--------------------
There is no present restriction on the registrant's ability to pay
dividends. The registrant deems the use of corporate funds for day to day needs
to be in the best interest of the registrant. There is no present intention to
make any dividend payments.
5
<PAGE>
Item 6. Selected Financial Data.
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<TABLE>
<CAPTION>
Sales and Income 1997 1996 1995 1994 1993
- ---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $22,324,000 $19,746,000 $30,522,000 $45,490,000 $18,037,000
Net Income (loss) (233,000) (1,624,000) 2,330,000 2,682,000 611,000
Per Share Data (A)
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Basic and diluted
income (loss) $ (.08) $ (.60) $ .86 $ .99 $ .23
Cash dividends declared -- -- -- -- --
Book value 3.31 3.38 3.99 3.13 2.14
Financial Position
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Current assets $12,961,000 $12,066,000 $13,591,000 $16,191,000 $6,518,000
Total Assets 15,851,000 13,419,000 15,418,000 17,640,000 7,972,000
Current liabilities 4,822,000 4,018,000 4,372,000 8,857,000 1,869,000
Current ratio 2.7 to 1 3.0 to 1 3.1 to 1 1.8 to 1 3.5 to 1
Working capital 8,139,000 8,048,000 9,219,000 7,334,000 4,649,000
Property and
equipment, net 2,586,000 830,000 998,000 710,000 622,000
Long-term debt 1,793,000 - 0 - - 0 - - 0 - - 0 -
Stockholders' equity 8,918,000 9,141,000 10,793,000 8,463,000 5,781,000
</TABLE>
(A) As adjusted for a four-for-one stock split effective October 21, 1994, Class
A and Class B shares retroactively shown.
6
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
- --------------
The following management's discussion and analysis of results of operations
and financial condition contains certain forward-looking statements with respect
to the Company's future financial performance. These forward-looking statements
are subject to various risks and uncertainties which could cause actual results
to differ materially from historical results and those currently anticipated.
Results for 1997 include the Handi Pac operations acquired February 3, 1997.
1997 Compared to 1996
- ---------------------
Net sales in 1997 were $22,324,000 compared to $19,746,000 which was an
increase of $2,578,000. This year's sales represent a 13% increase from the
prior year sales. The Toy Segment's sales were $12,162,000 compared to
$9,505,000 in 1996, an increase of $2,657,000. The current year's sales
represent a 28% increase from the prior year sales. The Mechanical Equipment
Group had total sales of $10,162,000 in 1997 compared to $10,242,000 in 1996, a
decrease of $79,000. The current year sales represent 99% of the prior year
sales.
Gross profit was $5,767,000 compared to last year's $4,135,000, an increase
of $1,632,000. The Toy Segment accounted for a $1,540,000 increase in gross
profit while the Mechanical Equipment Group accounted for the remaining
difference. Gross profit as a percentage of sales increased from 26% compared
to last year's 21% because of the higher gross profit percentage earned by the
Toy Segment.
Selling and G&A expenses were $6,531,000, a decrease of $360,000 from
$6,891,000 in 1996. The decrease in expenses directly relates to the
implementation of tighter management controls.
The operating loss of $763,000 represented a reduction of $1,993,000 from
the prior year's operating loss of $2,756,000. The Toy Segment's operating loss
of $1,152,000 represented a reduction of $1,129,000 from a loss of $2,281,000 in
1996 while the Mechanical Equipment Group generated operating income of
$819,000, an increase of $530,000 from 1996. Corporate and other operating
expenses decreased to $431,000 from $764,000 last year.
Interest expense increased to $145,000 from $25,000 in the prior year, which
mostly related to interest-bearing debt of the Handi Pac acquisition during
1997.
The Company generated a net loss of $223,000 or $.08 per A & B share
compared to a net loss of $1,624,000 or $.60 per Share A & B share in 1996.
The Company reported a net deferred tax asset of $226,000 at December 31,
1997. Management believes this asset will be realized by taxable earnings in the
future.
7
<PAGE>
As noted previously, in 1997, Handi Pac operations have been included with
the Toy Segment and on a combined basis have resulted in a sales increase. The
general climate in the toy industry has been flat for the past few years, making
it difficult for the Toy Group management to improve its results. During the
third quarter of 1997, a wholly-owned subsidiary acquired the assets of
Confectionery & Novelty Design International, LLC ("CANDI") a Northbrook, IL
maker of candy-filled toy products. While not a material acquisition, it
represents a step toward expanding the Company's product line. During the year,
certain management changes have been initiated in the Toy Segment. Management
itself continues to review opportunities to enhance its market share in light of
the challenges enumerated and the lack of significant new licenses.
The Mechanical Equipment Group operations continue to reflect a softening of
the Telecommunication equipment market. Management has been working to broaden
existing markets and pursue new markets through enhanced and new products. The
Motor operations continue to incur heavy competition in a limited market, but
with some success in market share. Management anticipates the group on an
overall basis will be profitable in the coming year.
Please refer to Footnote 3 for a further explanation of the Handi Pac
acquisition which occurred February 3, 1997.
8
<PAGE>
1996 Compared to 1995
- ---------------------
Net sales in 1996 were $19,746,000 compared to $30,522,000 which was a
decrease of $10,776,000. This year's sales represents 65% of the prior year
sales. The Toy Segment's sales were $9,505,000 compared to $21,373,000 in 1995,
a decrease of $11,868,000. The current year's sales represent 44% of the prior
year sales. The Mechanical Equipment Group had total sales of $10,241,000 in
1996 compared to $9,149,000 in 1995, an increase of $1,092,000. The current
year sales represent 112% of the prior year sales.
Gross profits were $4,135,000 compared to last year's $11,471,000, a
decrease of $7,336,000. The Toy Segment accounted for a $7,219,000 decrease in
gross profit while the Mechanical Equipment Group accounted for the remaining
difference.
Selling and G&A expenses were $6,891,000, a decrease of $1,390,000 from
$8,281,000 in 1995. The decrease in expenses directly relates mostly to the
substantial decreased sales volume in the Toy Segment.
Operating losses of $(2,756,000) represented a reduction of $5,946,000 from
the prior year's operating profits of $3,190,000. The Toy Segment's operating
losses of $(2,281,000) represented a reduction of $5,112,000 from $2,831,000 in
1995 while the Mechanical Equipment Group sustained an operating profit of
$289,000, a decrease of $654,000 from 1995. Corporate and other operating
expenses increased to $764,000 from $584,000 last year.
Interest expense decreased to $25,000 from $84,000 in the prior year. The
amount of company borrowing was minimal during the year.
The Company generated a net loss of $(1,624,000) or $(.60) per A & B share
compared to net income of $2,330,000 or $.86 per Share A & B share in 1995.
The Company reported a net deferred tax asset totaling $275,000 at December
31, 1996. Management believes this asset will be realized by taxable earnings
in the future.
1996 was truly a year of retrenchment for the Toy Division. The reduction
in sales continued mainly due to the lackluster results from the Mighty Morphin
Power Rangers license. The lack of successful new licenses during the year is
reflective of the industry and consumer market. Management continues to review
and add to its licensing structure based on new items in the market. Management
can make no prediction regarding the availability of new licenses or their
acceptance in the marketplace.
The Mechanical Equipment group sales increase relates to the Howell segment,
solidifying its market share. The decrease in operating profit in the Group
reflects a soft market in the Telecommunications industry. Management
anticipates that the Mechanical Equipment Group will remain profitable in the
coming year.
9
<PAGE>
Liquidity and Sources of Capital
- --------------------------------
During 1997, the Company generated $1,688,000 of cash flows from operating
activities compared to $450,000 in 1996 which was due to a decrease in the net
loss of $1,401,000, a reduction of inventories of $1,121,000, and an offsetting
decrease in accounts payable and other current liabilities of $1,002,000.
In 1997 and 1996, the Company's investing activities used cash of $456,000
and $1,015,000, respectively. The primary use of cash in 1997 was for the
purchases of $132,000 for property and equipment and the acquisition of a
business for a net investment of $324,000. In 1996, the Company purchased
$1,800,000 of short-term investments which was offset by $989,000 of proceeds
from maturities of these short-term investments and the purchases of $272,000 of
property and equipment.
During 1997 and 1996, the Company's financing activities used cash of
$670,000 and $1,071,000, respectively. In 1997, the Company acquired a business
and made payments on those notes payable of $670,000. In 1996, the Company
repaid a note payable due to an officer for $1,043,000 and purchased treasury
stock for $28,000.
At the end of 1997, the Company had working capital of approximately
$8,139,000 and a current ratio of 2.7 to 1. During the year 1997, there was no
open credit facility. Subsequent to year end, the Registrant opened a limited
credit facility with a bank for two subsidiaries which includes a $300,000 sub-
limit for direct borrowings and a $150,000 sub-limit for documentary letters of
credit all secured by certain of the Registrant's money market funds. The
Company considers this line and its cash and short term investments of
$5,454,000 to be adequate for its current operating needs.
The Company has no present plans that will require material capital
expenditures for any of the Company's businesses. Capital expenditures are
expected to be in the ordinary course of business and financed by cash generated
from operations.
The Company believes the effects of inflation will not have a material
effect on its future operations.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income." This Statement establishes standards
for the reporting and display of comprehensive income and its components in the
Company's financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of a Business and Related information." This Statement establishes revised
standards for the reporting of financial information about a Company's operating
segments for both interim and annual reporting.
These statements, which will be adopted by the Company in 1998, affect
financial statement presentation and disclosure but will not have an impact on
the Company's consolidated financial position or results of operations.
10
<PAGE>
Item 8. Financial Statements
- ------------------------------
The financial statements required by this item may be found beginning with
the index page on page F-1 immediately following the signature page.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure.
---------------------
None
11
<PAGE>
Part III
- --------
In accordance with General Instruction G to Form 10-K, Items 10 through 13,
identified below, have been omitted form this report. The information required
in those sections, to the extent applicable, has been included in the
registrant's Proxy Statement for the current year, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997. The
Proxy Statement is herein incorporated by reference.
Item 10. Directors and Executive Officers of the Registrant.
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Item 11. Executive Compensation.
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Item 12. Security Ownership of Certain Beneficial Owners and Management.
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Item 13. Certain Relationships and Related Transactions.
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Part IV
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Item 14. Exhibits, Schedules to Financial Statements and Reports
- -----------------------------------------------------------------
on Form 8-K.
-----------
(a) 1. Financial Statements
--------------------
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
2. Schedules to Financial Statements
---------------------------------
II - Valuation and Qualifying Accounts and Reserves
3. Exhibits
--------
Exhibit No. Description
----------- -----------
2.1 Agreement of Merger and Plan of Reorganization,
EXX INC (1)
2.2 Amendment to Agreement of Merger and Plan of
Reorganization, EXX INC (2)
3.1 Articles of Incorporation, EXX INC (1)
10.1 Amendment dated March 27, 1998 to Employment
Agreement with Davd A. Segal
(1) Incorporated by reference to Form S-4 Registration
Statement dated July 25, 1994.
(2) Incorporated by reference to Form S-4 Amendment No. 1 dated
August 16, 1994.
12
<PAGE>
(b) Reports on Form 8-K
-------------------
Not applicable.
(c) See Item (a)3. above
(d) Not applicable
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.
EXX INC
By: /s/ DAVID A. SEGAL
-------------------------------------
David A. Segal, Chairman of the Board
Date: March 31, 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.
By: /s/ JERRY FISHMAN
-------------------------------------
Jerry Fishman, Director
Date: March 31, 1998
------------------------------------
By: /s/ NORMAN H. PERLMUTTER
-------------------------------------
Norman H. Perlmutter, Director
Date: March 31, 1998
------------------------------------
By: /s/ FREDERIC REMINGTON
-------------------------------------
Frederic Remington, Director
Date: March 31, 1998
------------------------------------
By: /s/ DAVID A. SEGAL
---------------------------------------
David A. Segal, Chief Executive Officer
Chief Financial Officer
Chairman of the Board
Date: March 31, 1998
------------------------------------
13
<PAGE>
EXX INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES (ITEMS 8 AND 14(A))
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PAGE NO.
(1) FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets
December 31, 1997 and 1996 F-3
Statements of Operations
Years Ended December 31, 1997, 1996 and 1995 F-4
Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995 F-6 - 7
Notes to Consolidated Financial Statements F-8 - 22
(2) FINANCIAL STATEMENT SCHEDULE
II - Valuation and Qualifying Accounts and Reserves S-1
OTHER SCHEDULES ARE OMITTED BECAUSE OF THE ABSENCE OF CONDITIONS UNDER WHICH
THEY ARE REQUIRED OR BECAUSE THE REQUIRED INFORMATION IS GIVEN IN THE
CONSOLIDATED FINANCIAL STATEMENTS OR NOTES THERETO.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EXX INC
We have audited the accompanying consolidated balance sheets of EXX INC and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity, cash flows and
financial statement schedule for each of the three years in the period ended
December 31, 1997. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of EXX INC
and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 6, 1998
F-2
<PAGE>
EXX INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31, 1997 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,654,000 $ 3,092,000
Short-term investments 1,800,000 1,800,000
Accounts receivable, less allowances of
$481,000 in 1997 and $872,000 in 1996 2,620,000 2,284,000
Inventories, net 3,272,000 3,051,000
Other current assets 741,000 705,000
Refundable income taxes 330,000 599,000
Deferred income taxes 544,000 535,000
-----------------------------------
Total current assets 12,961,000 12,066,000
PROPERTY AND EQUIPMENT, net 2,586,000 830,000
OTHER ASSETS 304,000 523,000
-----------------------------------
$ 15,851,000 $ 13,419,000
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, current portion $ 93,000 $ -
Accounts payable and other current
liabilities 4,729,000 4,018,000
-----------------------------------
Total current liabilities 4,822,000 4,018,000
-----------------------------------
LONG-TERM LIABILITIES
Notes payable, less current portion 1,793,000
Deferred income taxes 318,000 260,000
-----------------------------------
2,111,000 260,000
-----------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
authorized 5,000,000 shares, none issued
Common stock, Class A, $.01 par value,
authorized 25,000,000 shares,
issued 2,787,318 shares 28,000 28,000
Common stock, Class B, $.01 par value,
authorized 1,000,000 shares
issued 929,106 shares 9,000 9,000
Capital in excess of par value 3,993,000 3,993,000
Retained earnings 5,813,000 6,036,000
Less treasury stock, 759,376 shares
of Class A common stock and 261,792
shares of Class B common stock, at cost (925,000) (925,000)
-----------------------------------
Total stockholders' equity 8,918,000 9,141,000
-----------------------------------
$ 15,851,000 $ 13,419,000
===================================
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $22,324,000 $ 19,746,000 $ 30,522,000
COST OF SALES 16,557,000 15,611,000 19,051,000
-------------------------------------------------
GROSS PROFIT 5,767,000 4,135,000 11,471,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,531,000 6,891,000 8,281,000
--------------------------------------------------
OPERATING INCOME (LOSS) (764,000) (2,756,000) 3,190,000
INTEREST EXPENSE (145,000) (25,000) (84,000)
INTEREST INCOME 347,000 283,000 336,000
OTHER INCOME 209,000 67,000 88,000
--------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
(BENEFIT) (353,000) (2,431,000) 3,530,000
INCOME TAXES (BENEFIT) (130,000) (807,000) 1,200,000
--------------------------------------------------
NET INCOME (LOSS) $ (223,000) (1,624,000) $ 2,330,000
==================================================
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE $ (.08) $ (.60) $ .86
==================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 2,695,000 2,706,000 2,708,000
==================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL IN
COMMON STOCK EXCESS OF RETAINED TREASURY
CLASS A CLASS B PAR VALUE EARNINGS STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
January 1, 1995 $ 28,000 $ 9,000 $ 3,993,000 $ 5,330,000 $ (897,000) $ 8,463,000
NET INCOME 2,330,000 2,330,000
------------------------------------------------------------------------------------------------
BALANCES,
December 31, 1995 28,000 9,000 3,993,000 7,660,000 (897,000) 10,793,000
PURCHASE OF TREASURY STOCK (28,000) (28,000)
NET LOSS (1,624,000) (1,624,000)
------------------------------------------------------------------------------------------------
BALANCES,
December 31, 1996 28,000 9,000 3,993,000 6,036,000 (925,000) 9,141,000
NET LOSS (223,000) (223,000)
------------------------------------------------------------------------------------------------
BALANCES,
December 31, 1997 $ 28,000 $ 9,000 $ 3,993,000 $ 5,813,000 $ (925,000) $ 8,918,000
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (223,000) $ (1,624,000) $ 2,330,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 956,000 736,000 539,000
Deferred income taxes 200,000 296,000 703,000
Write-down of notes receivable 300,000
Other (74,000)
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Accounts receivable 43,000 (52,000) (672,000)
Inventories 1,121,000 850,000 (115,000)
Other current assets 54,000 144,000 (383,000)
Refundable income taxes 269,000 (599,000)
Other assets 270,000 (290,000) (446,000)
Accounts payable and other current liabilities (1,002,000) 689,000 (1,660,000)
Income taxes payable (2,942,000)
--------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,688,000 450,000 (2,720,000)
--------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business net of cash acquired (324,000)
Purchases of property and equipment (132,000) (272,000) (579,000)
Proceeds from maturities of short-term investments 989,000 2,267,000
Purchase of short-term investments (1,800,000)
Proceeds from notes receivable 68,000 120,000
--------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (456,000) (1,015,000) 1,808,000
--------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable (670,000)
Payment of note due officer (1,043,000)
Purchase of treasury stock (28,000)
--------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (670,000) (1,071,000)
--------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 562,000 (1,636,000) (917,000)
CASH AND CASH EQUIVALENTS, beginning of year 3,092,000 4,728,000 5,640,000
--------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 3,654,000 $ 3,092,000 $ 4,723,000
==================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION, cash paid during the years
for:
Interest $ 148,000 $ 120,000 $ 7,000
=================================================
Income taxes $ - $ - $ 3,193,000
=================================================
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Accrued officer's salary reclassified
to note payable, officer $ - $ - $ 692,000
=================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. NATURE OF OPERATIONS EXX INC and Subsidiaries (collectively the Company)
operate primarily in the toy and electro mechanical
industries. Operations in the toy industry involve
the design, production and distribution of consumer
goods in the form of toys, watches and kites, which
are primarily imported from the Far East.
Operations in the electro mechanical equipment
industry primarily involve the design, production
and sale of capital goods, such as electric motors
and cable pressurization equipment, for the
telecommunications industry. The Company's electro
mechanical products are incorporated into
customers' products or are used to maintain
customers' equipment.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Principles of Consolidation
The consolidated financial statements include the
accounts of EXX INC and its wholly owned
subsidiaries. All material intercompany accounts
and transactions have been eliminated in
consolidation.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid debt
instruments purchased with a maturity of three
months or less to be cash equivalents. As of
December 31, 1997, and at various times during the
year, balances of cash at financial institutions
exceeded the federally insured limit. The Company
has not experienced any losses in such accounts and
believes it is not subject to any significant
credit risk on cash and cash equivalents. The
Company's short-term investments are comprised of
readily marketable debt securities with remaining
maturities of more than 90 days at the time of
purchase. The cost of such investments approximates
their fair market value. Where the remaining
maturity is more than one year, the securities are
still classified as short-term investments as the
Company's intention is to convert them into cash
within one year.
Fair Value of Financial Instruments
The fair value of the Company's assets and
liabilities which qualify as financial instruments
under Statement of Financial Accounting Standards
No. 107 approximate the carrying amounts presented
in the accompanying consolidated balance sheets.
F-8
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED) Inventories
Certain inventories are valued at the lower of
cost, on the last-in, first-out ("LIFO")
method, or market. The remainder of the
inventories are valued at the lower of cost,
on the first-in, first out ("FIFO") method, or
market.
Impairment of Long-Lived Assets
The Company periodically assesses the
recoverability of the carrying amounts of
long-lived assets, including intangible
assets. A loss is recognized when expected
undiscounted future cash flows are less than
the carrying amount of the asset. The
impairment loss is the difference by which the
carrying amount of the asset exceeds its fair
value.
Property and Equipment
Property and equipment are stated at cost and
are depreciated or amortized on the straight-
line method over the estimated useful lives of
the assets as follows:
Buildings and
improvements 10 - 25 years
Machinery and
equipment 3 - 20 years
Maintenance and repairs are charged to
operations, while betterments and improvements
are capitalized.
Other Assets
Other assets include packaging design costs
which are being amortized over their estimated
useful lives of two years on the straight-line
method.
Advertising
Advertising costs are charged to operations as
incurred and were $245,000, $229,000, and
$215,000 for 1997, 1996 and 1995,
respectively.
F-9
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED) Research and Development Costs
Expenditures for research and development are
charged to operations as incurred and were
$244,000, $29,000 and $2,000 for 1997, 1996
and 1995, respectively.
Stock Option Plan
The Company adopted the disclosure
requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for
Stock- Based Compensation", effective for the
Company's December 31, 1996 financial
statements. The Company applies Accounting
Principles Board Opinion No. 25 and related
interpretations in accounting for its plans.
Income Taxes
The Company complies with Statement of
Financial Accounting Standards No. 109,
"Accounting for Income Taxes", which requires
an asset and liability approach to financial
reporting for income taxes. Deferred income
tax assets and liabilities are computed for
differences between the financial statement
and tax bases of assets and liabilities that
will result in future taxable or deductible
amounts, and based on enacted tax laws and
rates applicable to the periods in which the
differences are expected to affect taxable
income. Valuation allowances are established,
when necessary, to reduce deferred income tax
assets to the amount expected to be realized.
Income (Loss) Per Common Share
Effective December 31, 1997, the Company
adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS
No. 128). SFAS No. 128 requires dual
presentation of basic and diluted income per
share for all periods presented. Basic income
per share excludes dilution and is computed by
dividing income available to common
stockholders by the weighted-average number of
common shares outstanding during the period.
Diluted income per share reflects the
potential dilution that could occur if
securities or other contracts to issue common
stock were exercised or converted into common
stock or resulted in the issuance of common
stock that then shared in the income of the
Company. Prior period income (loss) per share
information has been restated as required by
SFAS No. 128.
F-10
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED) Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
3. ACQUISITION In February 1997, the Company (through a
newly-formed subsidiary) acquired all of the
outstanding capital stock of Handi Pac, Inc.,
d/b/a Steven Manufacturing Co. (Handi Pac).
Handi Pac manufactures and sells several types
of toys, including pre-school, ride-on,
classic and educational toys. The purchase
price was $400,000 including the purchase of
all outstanding loans due to the former
stockholder having an outstanding balance, as
adjusted, of $350,000. In addition, the
Company granted a five-year option to the
seller to purchase 50,000 shares of the
Company's Common Stock Class A at an exercise
price of $5 per share. In connection with the
acquisition, the seller may not compete with
the Company in the business of manufacturing
or selling toys in the United States, Mexico
or Canada for a period of five years. The
acquisition was accounted for as a purchase
and the purchase price was allocated on the
basis of relative fair market value of the
assets acquired and the liabilities to which
these assets were subject, as follows:
Cash $ 76,000
Accounts receivable 379,000
Inventories 1,343,000
Prepaid expenses 90,000
Property and equipment 2,579,000
Other assets 51,000
Deferred tax asset 152,000
Accounts payable and other
current liabilities (1,714,000)
Notes payable (2,556,000)
-----------
$ 400,000
===========
F-11
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
3. ACQUISITION (CONTINUED) The following unaudited pro forma combined
statements of operations for 1997 and 1996
give effect to the acquisition of Handi Pac,
as if it occurred on January 1, 1996.
1997 1996
Net sales $22,517,000 $25,691,000
==========================
Net loss $ (295,000) $(2,464,000)
==========================
Basic and
diluted loss
per common share $ (.11) $ (.91)
==========================
4. INVENTORIES Inventories consist of the following at
December 31, 1997 and 1996:
1997 1996
Raw materials $ 883,000 $ 563,000
Work-in-process 179,000 176,000
Finished goods 2,210,000 2,312,000
--------------------------
$3,272,000 $3,051,000
==========================
Inventories stated on the LIFO method amounted
to $371,000 and $365,000 at December 31, 1997
and 1996, respectively, which amounts are
below replacement cost by approximately
$366,000 and $381,000, respectively.
During 1997, 1996, and 1995, net income (loss)
was not materially affected as a result of
using the LIFO method.
F-12
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT Property and equipment consists of the
following at December 31, 1997 and 1996:
1997 1996
Land $ 47,000 $ 35,000
Buildings and
improvements,
including
$1,617,000
under a capital
lease in 1997 3,009,000 1,179,000
Machinery and
equipment 6,716,000 6,087,000
-------------------------
9,772,000 7,301,000
Less accumulated
depreciation
and amortization,
including $66,000
under a capital
lease in 1997 7,186,000 6,471,000
-------------------------
$2,586,000 $ 830,000
=========================
6. OTHER ASSETS Other assets consist of the following at
December 31, 1997 and 1996:
1997 1996
Notes receivable,
less current
portion $ 136,000 $ 98,000
Packaging design
costs - 253,000
Prepaid pension 168,000 172,000
-------------------------
$ 304,000 $ 523,000
=========================
During 1996, the Company recorded a $300,000
write-down on the notes receivable to their
estimated realizable value.
F-13
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
7. NOTES PAYABLE Notes payable at December 31, 1997 are comprised
of the following:
Note payable, with monthly
payments of approximately
$4,000, including interest at
4%, through September 2015,
collateralized by substantially
all assets of a subsidiary $ 551,000
Note payable, with monthly
payments of approximately
$2,000, including interest at
4%, through December 2023,
collateralized by substantially
all of the assets of a subsidiary 422,000
Note payable, with monthly
installments of approximately
$5,900, including interest at
9%, through August 1998,
collateralized by machinery
and equipment 47,000
Capital lease obligation 866,000
------------
1,886,000
Less current portion 93,000
------------
$ 1,793,000
============
Future aggregate required principal
payments by year are as follows:
YEAR ENDING DECEMBER 31
1998 $ 93,000
1999 52,000
2000 64,000
2001 67,000
2002 70,000
Thereafter 1,540,000
------------
$ 1,886,000
============
F-14
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
7. NOTES PAYABLE (CONTINUED) Aggregate minimum lease payments for the
obligation under the capital lease in the
years subsequent to December 31, 1997 are as
follows:
YEAR ENDING DECEMBER 31
1998 $ 68,000
1999 69,000
2000 78,000
2001 78,000
2002 78,000
Thereafter 1,185,000
------------
Total minimum lease payments 1,556,000
Less amount representing
interest 690,000
------------
Present value of future
minimum lease payments $ 866,000
============
8. ACCOUNTS PAYABLE AND OTHER
CURRENT LIABILITIES Accounts payable and other current liabilities
consist of the following at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Trade accounts payable $ 1,800,000 $ 1,631,000
Payroll and related costs 329,000 410,000
Royalties payable 601,000 464,000
Commissions payable 438,000 311,000
Professional fees 199,000 311,000
Product liability claim 350,000 350,000
Other 1,012,000 541,000
----------------------------------
$ 4,729,000 $ 4,018,000
==================================
</TABLE>
F-15
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
9. INCOME TAXES The provision (benefit) for income taxes
consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C>
CURRENT
Federal $ (330,000) $ (974,000) $ 497,000
State (129,000)
-----------------------------------------------------
(330,000) (1,103,000) 497,000
DEFERRED
Federal 200,000 168,000 703,000
State 128,000
-----------------------------------------------------
$ (130,000) $ (807,000) $ 1,200,000
=====================================================
</TABLE>
Substantially all of the Company's taxable
income was generated in states with no state
or local income taxes.
The net deferred tax assets and liabilities as
of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for doubtful
accounts and returns
and notes receivable $ 322,000 $ 415,000
Asset basis difference,
property and equipment 80,000
Asset basis difference,
inventories 132,000 25,000
Other 90,000 15,000
----------------------------------
544,000 535,000
----------------------------------
DEFERRED TAX LIABILITIES
Accumulated DISC earnings (224,000) (202,000)
Asset basis difference,
property and equipment (36,000)
Prepaid pension costs (58,000) (58,000)
----------------------------------
(318,000) (260,000)
----------------------------------
DEFERRED TAX ASSET, net $ 226,000 $ 275,000
==================================
</TABLE>
F-16
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
10. PENSION PLANS The Company participates in two pension plans.
One plan covers hourly employees under union
contracts and provides for defined
contributions based on annual hours worked.
Pension expense for these plans was $58,000
in 1997, $47,000 in 1996, and $72,000 in 1995.
The Company-sponsored plan is a
noncontributory defined benefit pension plan.
Benefits are based on years of service and the
employees' highest five year average earnings.
The Company's funding policy is to contribute
annually at least the minimum amount required
by the Employee Retirement Income Security Act
of 1974. Effective January 1, 1988, the plan
was curtailed through an amendment to freeze
benefits and future participation.
Net pension expense for the Company-sponsored
plan is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest cost on projected
benefit obligation $ 72,000 $ 72,000 $ 74,000
Actual return on plan
assets (53,000) (50,000) (50,000)
Net amortization and
deferral (2,000) (1,000) (2,000)
------------------------------------------
Net pension expense $ 17,000 $ 21,000 $ 22,000
==========================================
</TABLE>
The following table sets forth the funded
status of the Company-sponsored plan and the
amounts recognized by the Company in the
consolidated balance sheets as of December 31,
1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Actuarial present value of
accumulated benefit obligation
including vested benefits $ 949,000 $ 963,000
=============================
Actuarial present value of projected
benefit obligation for services
rendered to date $ (949,000) $ (963,000)
Plan assets at fair value,
primarily unallocated group
annuity contracts 778,000 789,000
-----------------------------
Projected benefit obligation in
excess of plan assets (171,000) (174,000)
Unrecognized loss 339,000 346,000
-----------------------------
Prepaid pension cost $ 168,000 $ 172,000
=============================
</TABLE>
F-17
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
10. PENSION PLANS (CONTINUED) The discount rate and rate of increase in
future compensation assumed in determining the
actuarial present value of the projected
benefit obligation is 8%. The expected long-
term rate of return on assets is 10%.
11. STOCK OPTION PLAN During 1994, the Company's Board of Directors
adopted, and the stockholders approved, the
1994 stock option plan (the Plan) pursuant to
which 1,000,000 shares of Class A common stock
were reserved for issuance upon the exercise
of options granted to officers, directors,
employees and consultants of the Company.
Options under the Plan may be incentive stock
options, nonqualified stock options, or any
combination thereof, and the Board of
Directors (Committee) may grant options at an
exercise price which is not less than the fair
market value on the date such options are
granted. The Plan further provides that the
maximum period in which stock options may be
exercised will be determined by the Committee,
except that they may not be exercisable after
ten years from the date of grant. Unless
previously terminated, the Plan shall
terminate in October 2004. Options to purchase
20,000 shares of common stock were granted
during 1997, which are exercisable at $4.00
per share and expire on December 31, 1998.
These are the only options outstanding at
December 1997. At December 31, 1997, options
to purchase 980,000 shares of common stock
were available for grant.
The Company has adopted the disclosure - only
provisions of SFAS No. 123 "Accounting for
Stock Based Compensation". Accordingly, no
compensation cost has been recognized for the
Company's stock option plan. Had compensation
cost for the Company's stock option plan been
determined based on the fair value at the
grant date of awards in 1997, consistent with
the provisions of SFAS 123, the Company's net
loss and loss per common share would have been
increased to the pro forma amounts indicated
below.
Net loss-as reported $ (223,000)
Net loss-pro forma (250,000)
Basic and diluted loss per
share, as reported (.08)
Basic and diluted loss
per share, pro forma (.09)
F-18
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
11. OPTION PLAN
(CONTINUED) The fair value of issued stock options is
estimated on the date of grant using the
Black-Scholes option pricing model including
the following assumptions: expected volatility
50%, expected dividend yield rate 0%, and 6%
risk-free interest rate.
12. COMMITMENTS AND
CONTINGENCIES Leases
The Company leases showroom and office
facilities under noncancellable operating
leases. The following are the aggregate future
minimum rental payments, as of December 31,
1997, under these noncancelable operating
leases:
YEAR ENDING DECEMBER 31
1998 $ 114,000
1999 114,000
2000 77,000
2001 10,000
-------------
$ 315,000
=============
Rent expense for 1997, 1996 and 1995 amounted
to $177,000, $144,000 and $122,000,
respectively.
Royalty Agreements
The Company has licensing agreements relating
to the sale of certain products, which expire
through December 31, 1998. Under the terms of
the agreements, the Company is required to pay
royalties of 6% to 12% on the net sales of the
related products. In addition, certain
agreements require advance payments or
payments over the lives of the agreements.
Employment and Stock Repurchase Agreement
The Company has an employment agreement with
an officer, who is a principal stockholder,
requiring the payment of a minimum annual
salary of approximately $300,000, adjusted
annually for increases in the consumer price
index, plus a bonus based on the Company's
earnings. The agreement expires in 2004 and is
renewable for an additional five years unless
written notice of non-renewal is given by
either party within 90 days prior to its
expiration. The agreement provided an option
whereby the principal stockholder could
require the Company to purchase all of his
common stock in the Company
F-19
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
12. COMMITMENTS AND
CONTINGENCIES (CONTINUED) on the date his employment terminated, at
the greater of fair market value or $10
per share. In 1997, in order to avoid the
classification of the shares owned by the
principal stockholder of the Company as
"mezzanine" capital and the reduction to
future earnings per share (or increase to
future loss per share) which would result
from such classification, the principal
stockholder agreed to relinquish his
contractual right to require the Company
to purchase his shares, in exchange for
options, to be granted in 1998, to
purchase 300,000 Class A shares and
100,000 Class B shares at prices equal to,
or greater than, the market value at the
date of the grant.
Litigation
The Company is a party to various legal
matters, the outcome of which, in the
opinion of management, will not have a
material adverse effect on the financial
position, results of operations, or cash
flows of the Company.
13. DEPENDENCE UPON KEY
RELATIONSHIPS Approximately 27% of the Company's
revenues for the year ended December 31,
1995 were attributable to an agreement
with a certain licensor. The agreements
with this licensor expire through December
31, 1998.
Selected segment and related information
is presented in the table below. Operating
income is total revenues less operating
expenses. In computing operating income,
general corporate expenses, interest
expense, certain other income and income
taxes have been excluded. The LIFO method
of valuing inventories of certain electro
mechanical equipment increased (decreased)
operating income for that segment by
$15,000, ($45,000), and ($36,000) in 1997,
1996 and 1995, respectively. Identifiable
assets by industry are those assets that
are used in the Company's operations in
each industry.
F-20
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. DESCRIPTION OF BUSINESS
AND INDUSTRY SEGMENTS Export revenues for the years ended
December 31, 1997, 1996, and 1995 were
approximately $1,374,000, $1,499,000 and
$1,549,000, respectively.
Industry segment information for 1997,
1996, and 1995 is summarized as follows:
MECHANICAL
TOY EQUIPMENT CONSOLIDATED
1997
Sales $ 12,162,000 $ 10,162,000 $ 22,324,000
==============================================
Operating income (loss) $ (1,152,000) $ 819,000 $ (333,000)
=============================
General corporate
expenses (431,000)
Interest expense (145,000)
Interest income 347,000
Other income 209,000
-------------
Loss before income
taxes (benefit) $ (353,000)
=============
Identifiable assets (A) $ 7,401,000 $ 2,809,000 $ 10,210,000
==============================================
Depreciation and
amortization $ 871,000 $ 85,000 $ 956,000
==============================================
Capital expenditures $ 4,000 $ 128,000 $ 132,000
==============================================
MECHANICAL
TOY EQUIPMENT CONSOLIDATED
1996
Sales $ 9,505,000 $ 10,241,000 $ 19,746,000
==============================================
Operating income (loss) $ (2,281,000) $ 289,000 $ (1,992,000)
==============================
General corporate
expenses (764,000)
Interest expense (25,000)
Interest income 283,000
Other income 67,000
--------------
Loss before income
taxes (benefit) $ (2,431,000)
==============
Identifiable assets (A) $ 5,339,000 $ 2,621,000 $ 7,960,000
==============================================
Depreciation and
amortization $ 623,000 $ 113,000 $ 736,000
==============================================
Capital expenditures $ 112,000 $ 160,000 $ 272,000
==============================================
F-21
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DESCRIPTION OF BUSINESS
AND INDUSTRY SEGMENTS
(CONTINUED)
MECHANICAL
TOY EQUIPMENT CONSOLIDATED
1995
Sales $ 21,373,000 $ 9,149,000 $ 30,522,000
==============================================
Operating income $ 2,831,000 $ 943,000 $ 3,774,000
==============================
General corporate
expenses (584,000)
Interest expense (84,000)
Interest income 336,000
Other income 88,000
--------------
Income before income
taxes $ 3,530,000
==============
Identifiable assets (A) $ 6,372,000 $ 2,707,000 $ 9,079,000
==============================================
Depreciation and
amortization $ 436,000 $ 98,000 $ 534,000
==============================================
Capital expenditures $ 557,000 $ 22,000 $ 579,000
==============================================
[A] Excludes corporate assets of $5,641,000, $5,459,000, and $6,339,000, at
December 31, 1997, 1996, and 1995, respectively.
15. QUARTERLY INFORMATION
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
1997
Net sales $ 6,131,000 $ 5,852,000 $ 5,001,000 $ 5,340,000
Gross profit 1,524,000 2,035,000 1,030,000 1,178,000
Net income (loss) (190,000) (73,000) (25,000) 65,000
Basic and diluted
income (loss)
per common share (.07) (.03) (.01) .02
1996
Net sales $ 4,735,000 $ 4,844,000 $ 5,088,000 $ 5,079,000
Gross profit 1,047,000 1,016,000 1,694,000 378,000
Net (loss) (585,000) (337,000) (193,000) (509,000)
Basic and diluted
loss per common
share (.22) (.12) (.07) (.19)
F-22
<PAGE>
EXX INC AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT ADDITIONS - DEDUCTIONS BALANCE
BEGINNING CHARGED FROM AT END
DESCRIPTION OF PERIOD TO INCOME RESERVES OF PERIOD
<S> <C> <C> <C> <C>
1997
Reserve for bad debts and allowances $ 373,000 $ 51,000 $ 273,000 $ 151,000
==========================================================================
Reserve for sales returns and other
allowances $ 499,000 $ 44,000 $ 213,000 $ 330,000
==========================================================================
Reserve for disposition of inventories $ 211,000 $ 386,000 $ $ 597,000
==========================================================================
1996
Reserve for bad debts and allowances $ 411,000 $ $ 38,000 $ 373,000
==========================================================================
Reserve for sales returns and other
allowances $ 583,000 $ $ 84,000 $ 499,000
==========================================================================
Reserve for disposition of inventories $ 211,000 $ $ $ 211,000
==========================================================================
1995
Reserve for bad debts and allowances $ 454,000 $ 13,000 $ 56,000 $ 411,000
==========================================================================
Reserve for sales returns and other
allowances $ 2,575,000 $ $ 1,992,000 $ 583,000
==========================================================================
Reserve for disposition of inventories $ 554,000 $ $ 343,000 $ 211,000
==========================================================================
</TABLE>
S-1
<PAGE>
EXHIBIT 10.1 - Amendment dated March 27, 1998 to Employment Agreement With
David A. Segal
DAVID A. SEGAL
SUITE 507
3527 Oak Lawn Avenue
Dallas, Texas 75219
March 27, 1998
EXX INC
Suite 689
1350 East Flamingo Road
Las Vegas, Nevada 89119
Gentlemen:
I refer to the Employment Agreement, effective October 24, 1994 (the
"Agreement"), by and between EXX INC, a Nevada corporation (the "Company"), and
David A. Segal ("Segal"). This will confirm that I have waived, effective as of
December 31, 1997, my rights under the Agreement to require the Company to
repurchase my shares of the Company's common stock upon termination of the
Agreement, in exchange for the Company's granting to me the following options
during 1998 under the Company's 1994 Stock Option Plan (the "Plan): (i) an
option to purchase 300,000 shares of Class A Common Stock, and (ii) an option to
purchase 100,000 shares of Class B Common Stock. The exercise prices of such
options shall be equal to or greater than the market price at the date of grant.
Capitalized terms used but not otherwise defined herein shall have the meanings
ascribed thereto in the Plan.
Very truly yours,
/s/ DAVID A. SEGAL
------------------
DAVID A. SEGAL
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,654,000
<SECURITIES> 1,800,000
<RECEIVABLES> 2,620,000
<ALLOWANCES> 0
<INVENTORY> 3,272,000
<CURRENT-ASSETS> 12,961,000
<PP&E> 9,772,000
<DEPRECIATION> 7,186,000
<TOTAL-ASSETS> 15,851,000
<CURRENT-LIABILITIES> 4,822,000
<BONDS> 0
0
0
<COMMON> 37,000
<OTHER-SE> 8,881,000
<TOTAL-LIABILITY-AND-EQUITY> 15,851,000
<SALES> 22,324,000
<TOTAL-REVENUES> 0
<CGS> 16,557,000
<TOTAL-COSTS> 6,531,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145,000
<INCOME-PRETAX> (353,000)
<INCOME-TAX> (130,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (223,000)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
