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 March 2000, the Company paid a 400% stock dividend which provided for a dividend of four shares of Class A stock for each share of Class A and/or Class B common stock held. All transactions and disclosures in the consolidated financial statements relating to the Company's Class A and Class B common stock have been restated to reflect this dividend.
EXX, through its subsidiaries, 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 has a continuing right to royalty income from machine tools and replacement parts as part payment for its sale of a subsidiary's assets. Continuing operations are conducted through wholly-owned subsidiaries. In addition, it is engaged in the design, production and sale of consumer goods in the form of impulse and other toys, watches and kites.
The Howell Electric Motors Division ("Howell") of SFM 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.
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.
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.
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. 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.
Material Customers. ------------------
Net sales to one customer were approximately 25% and 20% for the years ended December 31, 2000 and 1999, respectively.
Employees. ---------
The registrant employs approximately 120 full-time employees, of whom approximately 93 are employed by the Mechanical Equipment group, 26 by the Toy Segment and 1 for all other activities of the registrant combined.
Item 2.
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 a capital lease arrangement with an option to purchase. In addition, the registrant leases office space in 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.
Item 3. Legal Proceedings. - --------------------------
None other than in the normal course of business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------
(a) The Annual Meeting of Shareholders was held on October 16, 2000.
(b) (1) The proposal to re-elect the one Class A director was passed by a vote of 11,130,324 shares in favor and 28,736 abstaining. (2) The proposal to re-elect the three Class B directors was passed by a vote of 542,418 shares in favor and 769 shares abstaining. (3) There were no other proposals brought up at this meeting.
PART II -------
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Security Holder - ----------------------------------------------------------------------------- Matters. - -------
Principal Market: American Stock Exchange ------------------------------------------
Quarterly Price Information ----------------------------
2000 1999 ---------------------------- -------------------------
Class A Class B Class A Class B ----------- ----------- ----------- ----------- High Low High Low High Low High Low ---- --- ---- --- ---- --- ---- ---
First Quarter 2.25 .95 2.94 .95 .58 .33 .50 .33 Second Quarter 1.19 .63 1.88 1.25 .73 .39 .70 .38 Third Quarter 1.06 .63 1.94 1.38 1.23 .53 1.16 .54 Fourth Quarter .81 .56 1.50 .88 1.70 .63 1.53 .66
Stockholders: As of March 16, 2001, it is estimated that there were ------------ approximately 1200 stockholders of record of Class A shares and 350 stockholders of record of Class B shares.
Dividend Information: No cash dividends were paid in 2000 or 1999. --------------------
There is no present restriction on the registrant's ability to pay cash 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 cash dividend payments.
Item 6.
Item 6. Selected Financial Data. - --------------------------------
(A) As adjusted for a 400% stock dividend effective March 8, 2000, Class A and Class B shares retroactively shown.
Item 7.
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 which are covered under the safe harbor provisions of the Private Securities Legislation Reform Act of 1995 with respect to the Company's future financial performance. Although EXX INC believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be realized. Forward-looking statements involve known and unknown risks which may cause EXX INC's actual results and corporate developments to differ materially from those expected. Factors that could cause results and developments to differ materially from EXX INC's expectations include, without limitation, changes in manufacturing and shipment schedules, delays in completing plant construction and acquisitions, new product and technology developments, competition within each business segment, cyclicality of the markets for the products of a major segment, litigation, significant cost variances, the effects of acquisitions and divestitures, and other risks.
2000 Compared to 1999 - ---------------------
Net sales in 2000 were $19,163,000 compared to $21,158,000 which was a decrease of $1,995,000. This year's sales represent a 9% decrease from the prior year sales. The Mechanical Equipment Group had total sales of $11,915,000 in 2000 compared to $13,866,000 in 1999, a decrease of $1,951,000. The current year sales represent a 14% decrease from the prior year sales. The Toy Segment's sales were $7,248,000 compared to $7,292,000 in 1999, a decrease of $44,000. The current year's sales represent a 1% decrease from the prior year sales.
Gross profit was $7,339,000 compared to last year's $8,455,000, a decrease of $1,116,000. The Mechanical Equipment Group accounted for a $1,533,000 decrease in gross profit while the Toy Segment accounted for the counterbalancing difference. Gross profit as a percentage of sales decreased to 39% compared to last year's 40% primarily due to the reduction in sales and the related gross profit percentage earned by the Mechanical Equipment Group.
Selling and G&A expenses were $5,212,000, an increase of $165,000 from $5,047,000 in 1999.
The operating income of $2,127,000 represented a decrease in income of $1,281,000 from the prior year's operating income of $3,408,000. The Mechanical Equipment Group generated operating income of $2,197,000, a decrease of $1,265,000 from an operating income of $3,462,000 in 1999 while the Toy Segment's operating income of $732,000 represented an increase of $145,000 from an operating income of $587,000 in 1999 Corporate and other operating expenses increased to $802,000 from $641,000 last year.
Interest expense remained the same in 2000 and 1999 at $112,000.
The Company generated net income of $1,672,000 or $.13 per A & B share compared to a net income of $2,455,000 or $.19 per A & B share in 1999.
The Company reported a net deferred tax asset of $409,000 at December 31, 2000. Management believes this asset will be realized by taxable earnings in the future.
The Mechanical Equipment Group operations in 2000 reflect more normal results in the Telecommunications area. In 1999, this segment was the beneficiary of the Y2K phenomenon which resulted in increased sales and profits. Management's goals continue to be to maintain a highly competitive market share, and new product acceptance in a continuing limited market areas.
The Toy segment finished the year 2000 in much the same condition as the prior year. The industry has not produced new meaningful licenses nor provided the toy companies with new products to capture additional portions of the market. The large companies are faced with the same challenges as the smaller companies. These challenges as indicated in prior comments relate to competition and increasing product, labor and marketing costs. Management continues to be watchful over all aspects of the business, with its continuing goal of reviewing and adjusting to customer demands and product mix. In addition, it is constantly striving to seek and test new items that fall within the competitive range of its market area.
1999 Compared to 1998 - ---------------------
Net sales in 1999 were $21,158,000 compared to $20,935,000, which was an increase of $223,000. The year's sales represented a 1% increase from the prior year sales. The Toy Segment's sales were $7,292,000 compared to $9,639,000 in 1998, a decrease of $2,347,000. 1999's sales represented a 24% decrease from the prior year sales. The Mechanical Equipment Group had total sales of $13,866,000 in 1999 compared to $11,296,000 in 1998, an increase of $2,570,000. 1999's sales represented a 23% increase from the prior year sales.
Gross profit was $8,455,000 compared to 1998's $6,851,000, an increase of $1,604,000. The Toy Segment accounted for a $1,292,000 decrease in gross profit while the Mechanical Equipment Group accounted for the remainder. Gross profit as a percentage of sales increased to 40% compared to 1998's 33% primarily due to the higher gross profit percentage earned by the Mechanical Equipment Group.
Selling and G&A expenses were $5,047,000, a decrease of $1,029,000 from $6,076,000 in 1998. The decrease in expenses directly relates to continuing the implementation of tighter management controls.
The operating income of $3,408,000 represented an increase in income of $2,633,000 from the prior year's operating income of $775,000. The Toy Segment's operating profit of $587,000 represented an increase of $366,000 from an operating profit of $221,000 in 1998 while the Mechanical Equipment Group generated operating income of $3,462,000, which was an increase of $2,138,000 from 1998. Corporate and other operating expenses decreased to $641,000 from $770,000 last year.
Interest expense decreased to $112,000 from $127,000 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 $2,455,000 or $.19 per A & B share compared to a net income of $761,000 or $.06 per A & B share in 1998.
The Company reported a net deferred tax asset of $307,000 at December 31, 1999. Management believes this asset will be realized by taxable earnings in the future.
The Toy Segment continued to be confronted with its basic problems, namely flat demand, no new licenses, constant challenges from competition to maintain market share, and increasing product and related costs. The industry continues to search for a solution with the large players in the same predicament. Management has continued its policies of making personnel changes, reviewing customer demands and product mix in its quest to increase sales and reduce and control costs while seeking new items within the parameters of remaining competitive within the business environment.
The Mechanical Equipment Group operations reflected enhanced results in the Telecommunications area due to noticeably increased sales as well as continuing to maintain market share in the Motor area. Management's goal of maintaining market share and new product acceptance remains primary in its attempt to meet the continuing heavy competition in a somewhat limited market area.
Liquidity and Sources of Capital - --------------------------------
During 2000, the Company generated $2,236,000 of cash flows from operating activities compared to $1,510,000 in 1999.
In 2000, the Company's investing activities provided cash of $3,566,000 compared to the use of cash totaling $2,415,000 in 1999. Cash was provided primarily from the proceeds from maturities of short term investments in 2000, while the primary uses of cash in 1999 were the purchase of $1,125,000 of short term investments and $1,063,000 of long term investments.
During 2000 and 1999, the Company's financing activities used cash of $345,000 and $163,000, respectively. In 2000, the Company purchased $288,000 of Treasury Stock and made payments on notes totaling $57,000. In 1999, the Company purchased $116,000 of Treasury Stock and made payments on notes totaling $47,000.
At the end of 2000, the Company had working capital of approximately $11,611,000 and a current ratio of 4.1 to 1. During the year 2000, 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 $8,371,000 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.
Item 8. Financial Statements - ------------------------------
The financial statements required by this item may be found beginning with the index page on page immediately following the signature page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------- Financial Disclosure. --------------------
None
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, 2000. The Proxy Statement is herein incorporated by reference.
Item 10.
Item 10. Directors and Executive Officers of the Registrant. - ------------------------------------------------------------
Item 11.
Item 11. Executive Compensation. - --------------------------------
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------
Item 13.
Item 13. Certain Relationships and Related Transactions. - --------------------------------------------------------
PART IV -------
Item 14.
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.
(b) Reports on Form 8-K -------------------
None
(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 29, 2001 ------------------------------------------
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 29, 2001 ------------------------------------------
By: /s/ NORMAN H. PERLMUTTER ------------------------------------------ Norman H. Perlmutter, Director
Date: March 29, 2001 ------------------------------------------
By: /s/ FREDERIC REMINGTON ------------------------------------------ Frederic Remington, Director
Date: March 29, 2001 ------------------------------------------
By: /s/ DAVID A. SEGAL ------------------------------------------ David A. Segal, Chief Executive Officer Chief Financial Officer Chairman of the Board
Date: March 29, 2001 ------------------------------------------
EXX INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE (ITEMS 8 AND 14 (a))
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.
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, 2000 and 1999, 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, 2000. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the consolidated 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.
/s/ ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey February 6, 2001
EXX INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(a) Minimum pension liability adjustment has been recorded net of tax effects of $35,000, $52,000 and $144,000, respectively, in 2000, 1999 and 1998. (b) Net unrealized loss on marketable securities has been recorded net of tax effects of $318,000, $38,000 and $37,000, respectively, in 2000, 1999 and 1998.
See notes to consolidated financial statements.
F - 5
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
F - 6
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
See notes to consolidated financial statements.
F - 7
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 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 maturities of three months or less to be cash equivalents. As of December 31, 2000, 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 principally of readily marketable government debt securities with remaining maturities of more than 90 days at the time of purchase. These investments are classified as available for sale and are reported at their fair market value as provided for under Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities"
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.
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.
Long-term investment
The Company's long-term investment is comprised of shares of the outstanding common stock of a publicly traded company. This investment is classified as available for sale and is reported at the fair market value as provided for under SFAS No. 115.
Advertising
Advertising costs are charged to operations as incurred and were $67,000, $86,000, and $181,000 for 2000, 1999 and 1998, respectively.
Research and Development Costs
Expenditures for research and development are charged to operations as incurred and were $46,000, $251,000 and $147,000 for 2000, 1999 and 1998, respectively.
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 Per Common Share
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" 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.
The outstanding options had a dilutive effect of 436,000 shares and 472,000 shares in 2000 and 1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Reclassification
Certain 1999 and 1998 amounts have been reclassified to conform to the 2000 presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. Investments
The Company's short-term investments consist of the following at December 31, 2000 and 1999:
The Company's long-term investments consist of the following at December 31, 2000 and 1999:
(1) Represents approximately 17% of outstanding shares at December 31, 2000.
4. Inventories
Inventories consist of the following at December 31, 2000 and 1999:
Inventories stated on the LIFO method amounted to $517,000 and $342,000 at December 31, 2000 and 1999, respectively, which amounts are below replacement cost by approximately $371,000 and $381,000, respectively.
During 2000, 1999, and 1998, net income was not materially affected as a result of using the LIFO method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. Property and equipment
Property and equipment consists of the following at December 31, 2000 and 1999:
6. Other assets
Other assets consist of the following at December 31, 2000 and 1999:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. Long-term debt
Long-term debt at December 31, 2000 and 1999 are comprised of the following:
Future aggregate required principal payments for each of the next five years are as follows:
Year ending December 31 2001 $63,000 2002 66,000 2003 69,000 2004 76,000 2005 99,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. Long-term debt (continued)
Aggregate minimum lease payments for the obligation under the capital lease in the years subsequent to December 31, 2000 are as follows:
Year ending December 31 2001 $ 78,000 2002 78,000 2003 78,000 2004 82,000 2005 101,000 Thereafter 923,000 -------------------- Total minimum lease payments 1,340,000 Less amount representing interest 507,000 -------------------- Present value of future minimum lease payments $ 833,000 ====================
8. Accounts payable and other current liabilities
Accounts payable and other current liabilities consist of the following at December 31, 2000 and 1999:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. Income taxes
The provision for income taxes (benefit) consists of the following:
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:
The net deferred tax assets and liabilities as of December 31, 2000 and 1999 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. Income taxes (continued)
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 $58,000, $52,000 and $81,000 for 2000, 1999, and 1998, respectively.
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 periodic pension cost (benefit) for the Company-sponsored plan is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. Pension plans (continued)
The following table presents significant assumptions used:
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, 2000 and 1999 for the Company sponsored defined benefit pension plan:
The following table sets forth the change in plan assets for the years ended December 31, 2000 and 1999 for the Company sponsored defined benefit pension plan:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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10. Pension plans (continued)
The funded status for the years ended December 31, 2000 and 1999, is as follows:
Amounts recognized in the consolidated balance sheets consist of the following:
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 5,000,000 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, 2000 and 1999, options to purchase 5,000,000 shares of Class A common stock were available for grant under the Plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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11. Stock options (continued)
The status of the Company's stock options are summarized below:
(a) Options issued in 1997 in connection with the acquisition of a subsidiary.
(b) Includes options to purchase 1,900,000 shares of Class A common stock and 100,000 shares of Class B common stock.
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 applicable to common shareholders and net income per share applicable to common shareholders would have been adjusted to the pro forma amounts indicated below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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11. Stock options (continued)
The Company did not grant options or have any options vested during 1999 and 2000. Therefore no proforma adjustments were required in these years.
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%, expected dividend yield rate of 0%, expected life of 5 years, and a risk-free interest rate of 5% in 1998.
12. Commitments and contingencies
Leases
The Company leases showroom office, and plant facilities under operating leases on a month to month basis.
Rent expense for 2000, 1999 and 1998 amounted to $94,000, $113,000 and $149,000, respectively.
Royalty Agreements
The Company has licensing agreements relating to the sale of certain products. Under the terms of the agreements, the Company is required to pay royalties of between 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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13. Segment information
The Company adopted Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 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.
Operating segment information for 2000, 1999, and 1998 is summarized as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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13. Segment information (continued)
(a) Corporate assets consist primarily of cash, short-term investments and long- term investments, as described in Note 2.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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13. Segment information (continued)
Net sales to countries outside of the United States for the years ended December 31, 2000, 1999 and 1998 were approximately $2,073,000, $1,608,000 and $1,631,000, respectively, and were attributable primarily to sales from the Company's mechanical equipment segment. There were no significant sales to any individual country or region outside of the United States.
Net sales to one customer were approximately 25%, 20% and 20% for the years ended December 31, 2000, 1999 and 1998, respectively.
14. Selected quarterly results (unaudited)
EXX INC AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
S-1