<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, 1998 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
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
702-598-3223
- ------------------------------------------------------------------------------
(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
- ------------------- ---------------------
Common Stock Par Value $.01 Class A American Stock Exchange
- ----------------------------------- -----------------------
Common Stock Par Value $.01 Class B American Stock Exchange
- ----------------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act:
None
- --------------------------------------------------------------------------------
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
December 31, 1998: 1,950,459 Class A shares and 643,553 Class B shares
--------- -------
(exclusive of 836,859 Class A shares and 285,553 Class B shares held in
------- --------
registrant's treasury). Of the shares outstanding, 1,006,725 Class A shares and
---------
328,975 Class B shares are held by non-affiliates. The market value of the
- -------
shares held by non-affiliates is $2,796,003 based on $2.0625 and $2.1875 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 19, 1999.
Documents incorporated by reference are: Registrant's Proxy Statement dated
April, 1999 for the Annual Meeting of Stockholders to be held in May, 1999, Form
8-K Report dated February 3, 1997, and Form 10-K Report for the year ended
December 31, 1997 dated March 31, 1998, Form S-4 Registration Statement dated
July 25, 1994 and Form S-4 Amendment No. 1 dated August 16, 1994.
<PAGE>
PART 1
Item 1. Business.
- ----------------
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 Note 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 and other 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.
2
<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 EXX,
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
assembly 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.
3
<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.
------------------
Net sales to one customer were approximately 20% and 18% for the years
ended December 31, 1998 and 1997, respectively.
Employees.
---------
The registrant employs approximately 145 full-time employees, of whom
approximately 63 are employed by Howell, 20 by TX Technology Corp., 30 by Gordy,
30 by Handi Pac, and 2 for all other activities of the registrant combined.
4
<PAGE>
Item 2. Properties.
- -------------------
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 in Hermann, Missouri under
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.
- --------------------------
None other than in the normal course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
Not applicable.
PART II
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Item 5. Market for the Registrant's Common Stock and Related Security Holder
- -----------------------------------------------------------------------------
Matters.
- -------
Principal Market: American Stock Exchange
------------------------------------------
Quarterly Price Information
---------------------------
1998 1997
----------------------------- -------------------------------
Class A Class B Class A Class B
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
First Quarter 4-1/8 2-11/16 3-9/16 2-3/8 4-7/8 2-3/4 4-3/8 2-13/16
Second Quarter 3-13/16 2-1/4 3-7/16 2-3/8 4-3/4 2 4-5/8 2-1/8
Third Quarter 2-3/4 1-7/16 2-7/8 1-3/4 6-1/8 2-1/2 5-3/4 2-3/8
Fourth Quarter 4-1/2 1-1/2 3-5/8 1-1/2 5-1/2 2-7/8 5 2-3/4
Stockholders: As of March 19, 1999, it is estimated that there were
------------
approximately 900 stockholders of record of Class A shares and 350 stockholders
of record of Class B shares.
Dividend Information: No dividends were paid in 1998 or 1997.
--------------------
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 1998 1997 1996 1995 1994
- ---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $20,935,000 $22,324,000 $19,746,000 $30,522,000 $45,490,000
Net Income (loss) 761,000 (223,000) (1,624,000) 2,330,000 2,682,000
Per Share Data (A)
- ------------------
Basic and diluted
income (loss) $.29 $(.08) $ (.60) $ .86 $ .99
Cash dividends declared -- -- -- -- --
Book value 3.58 3.31 3.38 3.99 3.13
Financial Position
- ------------------
Current assets $13,776,000 $13,291,000 $12,066,000 $13,591,000 $16,191,000
Total Assets $16,440,000 16,181,000 13,419,000 15,418,000 17,640,000
Current liabilities 4,667,000 5,152,000 4,018,000 4,372,000 8,857,000
Current ratio 3.0 to 1 2.6 to 1 3.0 to 1 3.1 to 1 1.8 to 1
Working capital 9,109,000 8,139,000 8,048,000 9,219,000 7,334,000
Property and
equipment, net 2,386,000 2,586,000 830,000 998,000 710,000
Long-term debt 1,794,000 1,886,000 -- -- --
Stockholders' equity 9,281,000 8,918,000 9,141,000 10,793,000 8,463,000
</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
- -------------------------------------------------------------------------------
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.
1998 Compared to 1997
- ---------------------
Net sales in 1998 were $20,935,000 compared to $22,324,000 which was a
decrease of $1,389,000. This year's sales represent a 6% decrease from the prior
year sales. The Toy Segment's sales were $9,639,000 compared to $12,162,000 in
1997, a decrease of $2,523,000. The current year's sales represent a 21%
decrease from the prior year sales. The Mechanical Equipment Group had total
sales of $11,296,000 in 1998 compared to $10,162,000 in 1997, an increase of
$1,134,000. The current year sales represent 111% of the prior year sales.
Gross profit was $6,851,000 compared to last year's $5,767,000, an increase
of $1,084,000. The Toy Segment accounted for a $524,000 increase in gross profit
while the Mechanical Equipment Group accounted for the remaining difference.
Gross profit as a percentage of sales increased to 33% compared to last year's
26% primarily due to the higher gross profit percentage earned by the Toy
Segment.
Selling and G&A expenses were $6,076,000, a decrease of $455,000 from
$6,531,000 in 1997. The decrease in expenses directly relates to the
implementation of tighter management controls.
The operating income of $775,000 represented an increase in income of
$1,539,000 from the prior year's operating loss of $764,000. The Toy Segment's
operating profit of $221,000 represented an increase in income of $1,373,000
from a loss of $1,152,000 in 1997 while the Mechanical Equipment Group generated
operating income of $1,324,000, an increase of $505,000 from 1997. Corporate and
other operating expenses increased to $770,000 from $431,000 last year.
Interest expense decreased to $127,000 from $145,000 in the prior year, which
mostly related to a reduction in interest-bearing debt of the Handi Pac
subsidiary.
The Company generated net income of $761,000 or $.29 per A & B share compared
to a net loss of $223,000 or $.08 per A & B share in 1997.
The Company reported a net deferred tax asset of $417,000 at December 31,
1998. Management believes this asset will be realized by taxable earnings in the
future.
The Toy industry as a whole reflects little change from the past several
years, namely no new licenses, flat demand, challenges to maintain market share
and increasing product costs. Management has continued to make personnel changes
and review product mix in an attempt to reduce costs to stay competitive while
continuing to seek new items consistent with its core business. Management
remains vigilant in reviewing costs and reviewing opportunities to increase
sales.
The Mechanical Equipment Group operations reflect enhanced results in the
Telecommunications area as well as maintaining market share in the Motor area.
The challenges in both areas as to market share and new product acceptance
continue as before due to the heavy competition in somewhat limited markets.
7
<PAGE>
Y2K Compliance
- --------------
Management does not consider Y2K compliance to be a material concern.
However, since the Securities and Exchange Commission has strongly suggested the
situation be addressed, it is being discussed here.
Each of the Company's subsidiaries has used outside consultants to check its
computer systems to determine that the systems are Y2K compliant. Costs to check
compliance have not been material, and it is anticipated that all computer
systems are or will be compliant prior to the end of 1999.
Purchases of products are made from an array of vendors. No one subsidiary
is dependent on any one vendor for purchased items which would cause a problem
due to Y2K failures. The lead time for products is such that Management is
comfortable in its ordering process.
The Company's banks have already indicated that they are Y2K compliant.
The Company's payrolls are produced by outside service bureaus who have
provided assurances of Y2K compliance.
8
<PAGE>
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 to 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.
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.
9
<PAGE>
Liquidity and Sources of Capital
- --------------------------------
During 1998, the Company generated $1,625,000 of cash flows from operating
activities compared to $1,688,000 in 1997.
In 1998 and 1997, the Company's investing activities used cash of $1,612,000
and $456,000, respectively. The primary use of cash in 1998 was purchase of
$3,271,000 of short term investments which were offset by $1,800,000 of proceeds
from maturities of short term investments.
During 1998 and 1997, the Company's financing activities used cash of
$284,000 and $670,000, respectively. In 1998, the Company purchased $192,000 of
Treasury Stock and made payments on notes totaling $92,000. In 1997, the Company
acquired a business and made payments on those notes payable of $670,000.
At the end of 1998, the Company had working capital of approximately
$9,109,000 and a current ratio of 3.0 to 1. During the year 1998, the Registrant
maintained a limited credit facility with a bank for two subsidiaries which
included 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 $6,893,000 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.
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
10
<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, 1998. The
Proxy Statement is herein incorporated by reference.
Item 10. Directors and Executive Officers of the Registrant.
- ------------------------------------------------------------
Item 11. Executive Compensation.
- --------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions.
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PART IV
-------
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 Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
2. Schedules to Financial Statements
---------------------------------
II - Valuation and Qualifying Accounts
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 (3)
(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.
(3) Incorporated by reference to Form 10-K Report for the year
ended December 31, 1997 filed March 31, 1998.
11
<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 30, 1999
------------------------------------------------
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 30, 1999
------------------------------------------------
By: /s/ NORMAN H. PERLMUTTER
---------------------------------------------------
Norman H. Perlmutter, Director
Date: March 30, 1999
------------------------------------------------
By: /s/ FREDERIC REMINGTON
--------------------------------------------------
Frederic Remington, Director
Date: March 30, 1999
------------------------------------------------
By: /s/ DAVID A. SEGAL
--------------------------------------------------
David A. Segal, Chief Executive Officer
Chief Financial Officer
Chairman of the Board
Date: March 30, 1999
------------------------------------------------
12
<PAGE>
EXX INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE (ITEMS 8 AND 14 (a))
- --------------------------------------------------------------------------------
(1) Financial Statements
Independent Auditors' Report F-2
Consolidated Financial Statements
Balance Sheets
December 31, 1998 and 1997 F-3
Statements of Operations
Years Ended December 31, 1998, 1997 and 1996 F-4
Statements of Changes Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996 F-6 - 7
Notes to Consolidated Financial Statements F-8 - 23
(2) Financial Statement Schedule
II - Valuation and Qualifying Accounts 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, 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
February 19, 1999
F-2
<PAGE>
EXX INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3,383,000 $ 3,654,000
Short-term investments 3,510,000 1,800,000
Accounts receivable, less allowances of
$208,000 and $151,000 in 1998 and 1997, 2,315,000 2,950,000
respectively
Inventories 3,552,000 3,272,000
Other current assets 276,000 741,000
Refundable income taxes -- 330,000
Deferred tax asset 740,000 544,000
---------------------------------------
Total current assets 13,776,000 13,291,000
Property and equipment, net 2,386,000 2,586,000
Other assets 278,000 304,000
---------------------------------------
$ 16,440,000 $ 16,181,000
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, current portion $ 49,000 $ 93,000
Accounts payable and other current liabilities 4,333,000 5,059,000
Income taxes payable 285,000 --
---------------------------------------
Total current liabilities 4,667,000 5,152,000
---------------------------------------
Long-term liabilities
Notes payable, less current portion 1,745,000 1,793,000
Pension liability 424,000 --
Deferred tax liability 323,000 318,000
---------------------------------------
2,492,000 2,111,000
---------------------------------------
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
Accumulated other comprehensive loss (206,000) --
Retained earnings 6,574,000 5,813,000
Less treasury stock, 836,859 and 759,376 shares of Class A
common stock and 285,553 and 261,792 shares of Class B
common stock, at cost in 1998 and 1997, respectively (1,117,000) (925,000)
---------------------------------------
Total stockholders' equity 9,281,000 8,918,000
---------------------------------------
$ 16,440,000 $ 16,181,000
=======================================
</TABLE>
See accompanying notes to consolidated financial statements F-3
<PAGE>
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 20,935,000 $ 22,324,000 $ 19,746,000
Cost of sales 14,084,000 16,557,000 15,611,000
------------------------------------------------------
Gross profit 6,851,000 5,767,000 4,135,000
Selling, general and
administrative expenses 6,076,000 6,531,000 6,891,000
------------------------------------------------------
Operating income (loss) 775,000 (764,000) (2,756,000)
Interest expense (127,000) (145,000) (25,000)
Interest income 353,000 347,000 283,000
Other income 166,000 209,000 67,000
------------------------------------------------------
Income (loss) before income taxes
(benefit) 1,167,000 (353,000) (2,431,000)
Income taxes (benefit) 406,000 (130,000) (807,000)
------------------------------------------------------
Net income (loss) $ 761,000 $ (223,000) $ (1,624,000)
======================================================
Basic and diluted income (loss)
per common share .29 (.08) (.60)
======================================================
Weighted average shares outstanding
Basic and diluted 2,668,000 2,695,000 2,706,000
======================================================
</TABLE>
See accompanying notes to consolidated financial statements F-4
<PAGE>
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997, and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Capital in Comprehensive
Common Stock Excess of Comprehensive Income Retained
Class A Class B Par Value Income (Loss) Earnings
<S> <C> <C> <C> <C> <C> <C>
Balances,
January 1, 1996 $ 28,000 $ 9,000 $ 3,993,000 $ $ 7,660,000
Purchase of treasury stock
Net loss $ (1,624,000) (1,624,000)
--------- -------- ----------- ============== -------------- -------------
Balances,
December 31, 1996 28,000 9,000 3,993,000 6,036,000
Net loss $ (223,000) (223,000)
--------- -------- ----------- ============== -------------- -------------
Balances,
December 31, 1997 28,000 9,000 3,993,000 5,813,000
Purchase of treasury stock
Net income $ 761,000 761,000
Other comprehensive income,
net of tax effect
Minimum pension liability
adjustment (280,000)(a) (280,000)
Unrealized gains on debt
securities 74,000 (a) 74,000
--------------
Total comprehensive income $ 555,000
--------- -------- ----------- ============== -------------- -------------
Balances,
December 31, 1998 $ 28,000 $ 9,000 $ 3,993,000 $ (206,000) $ 6,574,000
========= ======== =========== ============== =============
<CAPTION>
Treasury
Stock Total
<S> <C> <C>
Balances,
January 1, 1996 $ (897,000) $ 10,793,000
Purchase of treasury stock (28,000) (28,000)
Net loss (1,624,000)
-------------- ---------------
Balances,
December 31, 1996 (925,000) 9,141,000
Net loss (223,000)
-------------- ---------------
Balances,
December 31, 1997 (925,000) 8,918,000
Purchase of treasury stock (192,000) (192,000)
Net income 761,000
Other comprehensive income,
net of tax effect
Minimum pension liability
adjustment (280,000)
Unrealized gains on debt
securities 74,000
Total comprehensive income
-------------- ---------------
Balances,
December 31, 1998 $(1,117,000) $ 9,281,000
============== ===============
</TABLE>
(a) Minimum pension liability adjustment and unrealized gains on debt securities
have been recorded net of tax effects of $144,000 and $37,000, respectively, in
1998
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 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 761,000 $ (223,000) $(1,624,000)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 338,000 956,000 736,000
Deferred income taxes (benefit) (84,000) 200,000 296,000
Write down of notes receivable 110,000 -- 300,000
Accrued interest income (128,000) -- --
Loss on sale of property and equipment 3,000 -- --
Increase (decrease) in cash attributable to changes in
assets and liabilities:
Accounts receivable 635,000 43,000 (52,000)
Inventories (280,000) 1,121,000 850,000
Other current assets 355,000 54,000 144,000
Refundable income taxes 330,000 269,000 (599,000)
Other assets 26,000 270,000 (290,000)
Accounts payable and other current liabilities (726,000) (1,002,000) 689,000
Income taxes payable 285,000 -- --
-------------------------------------------------------
Net cash provided by operating activities 1,625,000 1,688,000 450,000
-------------------------------------------------------
Cash flows from investing activities
Acquisition of business net of cash acquired -- (324,000) --
Purchases of property and equipment (144,000) (132,000) (272,000)
Proceeds from sale of property and equipment 3,000 -- --
Proceeds from maturities of short-term investments 1,800,000 -- 989,000
Purchase of short-term investments (3,271,000) -- (1,800,000)
Proceeds from notes receivable -- -- 68,000
-------------------------------------------------------
Net cash used in investing activities (1,612,000) (456,000) (1,015,000)
-------------------------------------------------------
Cash flows from financing activities
Payments on notes payable (92,000) (670,000) --
Payment of note due officer -- -- (1,043,000)
Purchase of treasury stock (192,000) -- (28,000)
-------------------------------------------------------
Net cash used in financing activities (284,000) (670,000) (1,071,000)
-------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (271,000) 562,000 (1,636,000)
Cash and cash equivalents, beginning of year 3,654,000 3,092,000 4,728,000
-------------------------------------------------------
Cash and cash equivalents, end of year $ 3,383,000 $ 3,654,000 $ 3,092,000
=======================================================
</TABLE>
See accompanying notes to consolidated financial statements F-6
<PAGE>
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow
information, cash paid during
the years for:
Interest $ 126,000 $ 148,000 $ 120,000
====================================
Income taxes $ 343,000 $ - $ -
====================================
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 mechanical equipment industries. Operations in the toy industry involve the
design, assembly and distribution of consumer goods in the form of toys, watches
and kites, which are primarily imported from the Far East. Operations in the
mechanical equipment industry primarily involve the design, assembly and sale of
capital goods, such as electric motors and cable pressurization equipment, for
the telecommunications industry. The Company's mechanical equipment 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.
Revenue Recognition
The Company recognizes substantially all revenues when goods are shipped and
title passes to customers. Provisions are established, as appropriate, for
uncollectible accounts, returns and allowances and warranties in connection with
sales.
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,
1998, 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. These investments are available for sale and are reported at their
fair market value as provided for under Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." At December 31, 1998, the gross unrealized gain of $111,000 has
been recorded on the short-term investments.
F-8
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (continued)
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,
"Disclosures About Fair Value of Financial Instruments," approximate the
carrying amounts presented in the accompanying consolidated balance sheets.
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.
Advertising
Advertising costs are charged to operations as incurred and were $181,000,
$245,000, and $229,000 for 1998, 1997 and 1996, respectively.
Research and Development Costs
Expenditures for research and development are charged to operations as incurred
and were $147,000, $244,000 and $29,000 for 1998, 1997 and 1996, respectively.
F-9
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (continued)
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,
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. Options were not included in the computation of earnings per share
since they were antidilutive in 1997 and had no dilutive effect in 1998, since
the exercise prices exceeded the average market prices of the Company's common
stock.
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.
F-10
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (continued)
Reclassification
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
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 assembles 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 assembling 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 the relative
fair market value of the assets acquired and the liabilities assumed, 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
=============
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)
====================================
F-11
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. Inventories
Inventories consist of the following at December 31, 1998 and 1997:
1998 1997
Raw materials $ 1,089,000 $ 883,000
Work-in-progress 219,000 179,000
Finished goods 2,244,000 2,210,000
-------------------------------
$ 3,552,000 $ 3,272,000
===============================
Inventories stated on the LIFO method amounted to $606,000 and $371,000 at
December 31, 1998 and 1997, respectively, which amounts are below replacement
cost by approximately $341,000 and $366,000, respectively.
During 1998, 1997, and 1996, net income (loss) was not materially affected as a
result of using the LIFO method.
5. Property and equipment
Property and equipment consists of the following at December 31, 1998 and 1997:
1998 1997
Land $ 41,000 $ 47,000
Buildings and improvements,
including $1,617,000 under
a capital lease 2,961,000 2,956,000
Machinery and equipment 6,358,000 6,219,000
-------------------------
9,360,000 9,222,000
Less accumulated depreciation
and amortization, including
$154,000 and $66,000 under a
capital lease in 1998 and 1997,
respectively 6,974,000 6,636,000
-------------------------
$ 2,386,000 $2,586,000
=========================
F-12
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. Other assets
Other assets consist of the following at December 31, 1998 and 1997:
1998 1997
Notes receivable, less
current portion $ 82,000 $ 136,000
Prepaid pension 196,000 168,000
-------------------------
$ 278,000 $ 304,000
=========================
During 1998, the Company recorded a $110,000 write-down on the notes receivable
to their estimated realizable value.
7. Notes payable
Notes payable at December 31, 1998 and 1997 are comprised of the following:
1998 1997
Note payable with monthly
payments of approximately
$4,000, including interest
at 4%, through September
2015, collateralized by
substantially all assets
of a subsidiary $ 523,000 $ 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 413,000 422,000
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 858,000 866,000
-----------------------------
1,794,000 1,886,000
Less current portion 49,000 93,000
-----------------------------
$ 1,745,000 $1,793,000
=============================
F-13
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. Notes payable (continued)
Future aggregate required principal payments by year are as follows:
Year ending December 31
1999 $ 49,000
2000 59,000
2001 63,000
2002 66,000
2003 69,000
Thereafter 1,488,000
-------------
$ 1,794,000
=============
Aggregate minimum lease payments for the obligation under the capital lease in
the years subsequent to December 31, 1998 are as follows:
Year ending December 31
1999 $ 70,000
2000 78,000
2001 78,000
2002 78,000
2003 78,000
Thereafter 1,104,000
---------------
Total minimum lease payments 1,486,000
Less amount representing interest 628,000
---------------
Present value of future minimum
lease payments $ 858,000
===============
F-14
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. Accounts payable and other current liabilities
Accounts payable and other current liabilities consist of the following at
December 31, 1998 and 1997:
1998 1997
Trade accounts payable $ 1,000,000 $ 1,800,000
Warranty 580,000 330,000
Payroll and related costs 344,000 329,000
Royalties payable 605,000 601,000
Commissions payable 436,000 438,000
Product liability claim 350,000 350,000
Other 1,018,000 1,211,000
-------------------------------
$ 4,333,000 $ 5,059,000
===============================
9. Income taxes
The provision for income taxes (benefit) consists of the following:
1998 1997 1996
Current
Federal $ 490,000 $ (330,000) $ (974,000)
State - - (129,000)
---------------------------------------------
490,000 (330,000) (1,103,000)
---------------------------------------------
Deferred
Federal (84,000) 200,000 168,000
State - - 128,000
---------------------------------------------
(84,000) 200,000 296,000
---------------------------------------------
$ 406,000 $ (130,000) $ (807,000)
=============================================
Substantially all of the Company's taxable income was generated in states with
no state or local income taxes.
The following reconciles the Federal statutory tax rate to the effective income
tax rate:
1998 1997 1996
% % %
Federal statutory rate 34.0 (34.0) (34.0)
Other 0.8 (2.8) 0.8
-------------------------------
Effective income tax rate 34.8 (36.8) (33.2)
===============================
F-15
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. Income taxes (continued)
The net deferred tax assets and liabilities as of December 31, 1998 and 1997 are
as follows:
1998 1997
Deferred tax assets
Allowances for doubtful
accounts, warranty
and notes receivable $ 510,000 $ 322,000
Asset basis difference,
for inventories 125,000 132,000
Other 105,000 90,000
---------------------------
740,000 544,000
---------------------------
Deferred tax liabilities
Accumulated DISC earnings (263,000) (224,000)
Asset basis difference, for
property and equipment (69,000) (36,000)
Pension obligations 77,000 (58,000)
Other (68,000) -
---------------------------
(323,000) (318,000)
---------------------------
Deferred tax asset, net $ 417,000 $ 226,000
===========================
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 this plan was $81,000 in 1998, $58,000 in
1997, and $47,000 in 1996.
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.
F-16
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. Pension plans (continued)
Net periodic pension cost (benefit) for the Company-sponsored plan is as
follows:
1998 1997 1996
Interest cost on projected
benefit obligation $ 70,000 $ 72,000 $ 72,000
Expected return on
plan assets (60,000) (53,000) (50,000)
Amortization of net
transition assets (23,000) (2,000) (1,000)
--------------------------------------
Net periodic pension
cost (benefit) $ (13,000) $ 17,000 $ 21,000
======================================
The following table presents significant assumptions used:
1998 1997 1996
Discount rate 7% 8% 8%
Expected long-term rate
of return on plan assets 8% 10% 10%
No adjustments for a rate of compensation increase have been factored into the
plan due to the effective curtailment on benefits and participation.
The following table sets forth the changes in benefit obligations for the years
ended December 31, 1998 and 1997 for the Company sponsored defined benefit
pension plan:
1998 1997
Benefit obligation -
beginning of year $ 949,000 $ 963,000
Interest cost 70,000 72,000
Actuarial (gain) or loss 112,000 (9,000)
Total benefits paid (79,000) (77,000)
-----------------------------
Benefit obligation - end of year $ 1,052,000 $ 949,000
=============================
F-17
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. Pension plans (continued)
The following table sets forth the change in plan assets for the years ended
December 31, 1998 and 1997 for the Company sponsored defined benefit pension
plan:
1998 1997
Fair value of plan assets -
beginning of year $ 778,000 $ 789,000
Actual return on plan assets 65,000 54,000
Company contributions 60,000 12,000
Benefits paid (79,000) (77,000)
--------------------------
Fair value of plan assets -
end of year $ 824,000 $ 778,000
==========================
1998 1997
Plan assets less projected
benefit obligation $ (228,000) $ (171,000)
Unrecognized actuarial net loss 424,000 339,000
Adjustment required to
recognize minimum pension
liability (424,000) -
--------------------------
Net amount recognized $ (228,000) $ 168,000
==========================
Funded Status
Amounts recognized in the Company's balance sheet consist of the
following:
1998 1997
Prepaid benefit cost $ 196,000 $ 168,000
Accrued benefit liability (424,000) -
--------------------------
Net amount recognized $ (228,000) $ 168,000
==========================
F-18
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. Stock options
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. At December 31, 1998, options to purchase 980,000
shares of common stock were available for grant under the plan.
The status of the Company's stock options are summarized below:
<TABLE>
<CAPTION>
Weighted
Per Share Average
Plan Other Exercise Exercise
Options Options Price Price
<S> <C> <C> <C> <C>
Granted in 1997 and
outstanding at
December 31, 1997 20,000 50,000 $4.00 - $5.00 $4.71
Granted - 1998 - 400,000 (a) $3.25 - $3.56 $3.48
Expired - 1998 (20,000) - $4.00 $4.00
-------------------------
Outstanding at
December 31, 1998 - 450,000 $3.25 - $5.00 $3.65
=========================
Exercisable at
December 31, 1998 - 450,000 $3.25 - $5.00 $3.65
=========================
</TABLE>
(a) Includes options to purchase 300,000 shares of Class A common stock and
100,000 shares of Class B common stock.
F-19
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. Stock options (continued)
The Company has adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 (SFAS No.123), "Accounting for Stock-Based
Compensation". The Company continues to apply the provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its Plan. Had compensation cost for
the Plan been determined based on the fair value at the grant dates, consistent
with SFAS No. 123, the Company's net income (loss) applicable to common
shareholders and net income (loss) per share applicable to common shareholders
would have been adjusted to the pro forma amounts indicated below:
1998 1997
Net income (loss)-as reported $ 761,000 $ (223,000)
Net income (loss)-pro forma 119,000 (250,000)
Basic and diluted income (loss)
per share, as reported .29 (.08)
Basic and diluted income (loss)
per share, pro forma .04 (.09)
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 for
both classes of stock: expected volatility of 82%-85%, expected 0% dividend
yield rate, expected life 5 years and 5% and 6% risk-free interest rate in 1998
and 1997, respectively.
12. Commitments and contingencies
Leases
The Company leases showroom and office facilities under noncancellable
operating leases running through February 2001. The following are the
aggregate future minimum rental payments, as of December 31, 1998,
under these noncancelable operating leases:
Year ending December 31
1999 $ 114,000
2000 77,000
2001 10,000
-----------
$ 201,000
===========
Rent expense for 1998, 1997 and 1996 amounted to $149,000, $177,000
and $144,000, respectively.
F-20
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. Commitments and contingencies
Royalty Agreements
The Company has licensing agreements relating to the sale of certain products,
which expire through December 31, 1999. 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 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.
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. Segment information
The Company adopted Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures about Segments of an Enterprise and Related Information,"
effective January 1, 1998. SFAS 131 requires disclosures of segment information
on the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments.
Segment information listed below reflects the two principal business units of
the Company (as described in Note 1). Each segment is managed according to the
products which are provided to the respective customers and information is
reported on the basis of reporting to the Company's Chief Operating Decision
Maker.
F-21
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. Segment information (continued)
Operating segment information for 1998, 1997, and 1996 is summarized as follows:
<TABLE>
<CAPTION>
Mechanical
Toy Equipment Corporate Consolidated
1998
<S> <C> <C> <C> <C>
Net sales $ 9,639,000 $ 11,296,000 $ - $ 20,935,000
========================================================================
Operating income (loss) $ 221,000 $ 1,324,000 $ (770,000) $ 775,000
Interest expense (101,000) (11,000) (15,000) (127,000)
Interest income 14,000 11,000 328,000 353,000
Other income 45,000 50,000 71,000 166,000
------------------------------------------------------------------------
Income (loss) before
income taxes (benefit) $ 179,000 $ 1,374,000 $ (386,000) $ 1,167,000
========================================================================
Assets $ 6,117,000 $ 4,742,000 $ 5,581,000 (a) $ 16,440,000
Depreciation and ========================================================================
amortization $ 243,000 $ 95,000 $ - $ 338,000
========================================================================
Capital expenditures $ 75,000 $ 69,000 $ - $ 144,000
========================================================================
<CAPTION>
Mechanical
Toy Equipment Corporate Consolidated
1997
<S> <C> <C> <C> <C>
Net sales $ 12,162,000 $ 10,162,000 $ - $ 22,324,000
=========================================================================
Operating income (loss) $ (1,152,000) $ 819,000 $ (431,000) $ (764,000)
Interest expense (124,000) - (21,000) (145,000)
Interest income 13,000 90,000 244,000 347,000
Other income 77,000 132,000 - 209,000
-------------------------------------------------------------------------
Income (loss) before
income taxes (benefit) $ (1,186,000) $ 1,041,000 $ (208,000) $ (353,000)
=========================================================================
Assets $ 7,401,000 $ 2,809,000 $ 5,971,000 (a) $ 16,181,000
Depreciation and =========================================================================
amortization $ 871,000 $ 85,000 $ - $ 956,000
=========================================================================
Capital expenditures $ 4,000 $ 128,000 $ - $ 132,000
=========================================================================
</TABLE>
F-22
<PAGE>
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. Segment information (continued)
<TABLE>
<CAPTION>
Mechanical
Toy Equipment Corporate Consolidated
1996
<S> <C> <C> <C> <C>
Net sales $ 9,505,000 $ 10,241,000 $ - $ 19,746,000
=========================================================================
Operating income (loss) $ (2,281,000) $ 289,000 $ (764,000) $ (2,756,000)
Interest expense - - (25,000) (25,000)
Interest income - 91,000 192,000 283,000
Other income 8,000 59,000 - 67,000
-------------------------------------------------------------------------
Income (loss) before
income taxes (benefit) $ (2,273,000) $ 439,000 $ (597,000) $ 2,431,000)
=========================================================================
Assets $ 5,339,000 $ 2,621,000 $ 5,450,000 (a) $ 13,410,000
=========================================================================
Depreciation and
amortization $ 623,000 $ 113,000 $ - $ 736,000
=========================================================================
Capital expenditures $ 112,000 $ 160,000 $ - $ 272,000
=========================================================================
</TABLE>
(A) Corporate assets consist primarily of cash and short-term investments, as
described in Note 2.
Net sales to countries outside of the United States, for the years ended
December 31, 1998, 1997 and 1996 were approximately $1,631,000, $1,374,000 and
$1,499,000, respectively, and were attributable primarily to sales from the
Company's mechanical equipment segment. There were no significant sales to any
one country or region, outside of the United States.
Net sales to one customer were approximately 20% and 18% for the years ended
December 31, 1998 and 1997, respectively.
F-23
<PAGE>
EXX INC AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<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>
1998
Reserve for bad debts and allowances $ 151,000 $ 57,000 $ - $ 208,000
================================================================================
Warranty $ 330,000 $ 650,000 $ 400,000 $ 580,000
================================================================================
Reserve for dispositions of inventories $ 597,000 $ - $ 4,000 $ 593,000
================================================================================
1997
Reserve for bad debts and allowances $ 373,000 $ 51,000 $ 273,000 $ 151,000
================================================================================
Warranty $ 499,000 $ 44,000 $ 213,000 $ 330,000
================================================================================
Reserve for dispositions of inventories $ 211,000 $ 386,000 $ - $ 597,000
================================================================================
1996
Reserve for bad debts and allowances $ 411,000 $ - $ 38,000 $ 373,000
================================================================================
Warranty $ 583,000 $ - $ 84,000 $ 499,000
================================================================================
Reserve for dispositions of inventories $ 211,000 $ - $ - $ 211,000
================================================================================
</TABLE>
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,383,000
<SECURITIES> 3,510,000
<RECEIVABLES> 2,315,000
<ALLOWANCES> 0
<INVENTORY> 3,552,000
<CURRENT-ASSETS> 13,776,000
<PP&E> 9,360,000
<DEPRECIATION> 6,974,000
<TOTAL-ASSETS> 16,440,000
<CURRENT-LIABILITIES> 4,667,000
<BONDS> 0
0
0
<COMMON> 37,000
<OTHER-SE> 9,244,000
<TOTAL-LIABILITY-AND-EQUITY> 16,440,000
<SALES> 20,935,000
<TOTAL-REVENUES> 0
<CGS> 14,084,000
<TOTAL-COSTS> 6,076,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 127,000
<INCOME-PRETAX> 1,167,000
<INCOME-TAX> 406,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 761,000
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
