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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
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Act of 1934
For the fiscal year ended December 31, 2002 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
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(Exact Name of Registrant as Specified in its Charter)
Nevada 88-0325271
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1350 East Flamingo Road, Suite 689
Las Vegas, Nevada 89119-5263
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(Address of Principal Executive Offices) (Zip Code)
702-598-3223
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of each class on Which Registered
------------------- -------------------
Common Stock Par Value $.01 Class A American Stock Exchange
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Common Stock Par Value $.01 Class B American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___ Indicate by check mark
---
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference on Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Number of shares of Common Stock, Par Value $.01 per share, outstanding as of
December 31, 2002: 10,412,307 Class A shares and 608,093 Class B shares
(exclusive of 1,649,300 Class A shares and 16,600 Class B shares held in
registrant's treasury). Of the shares outstanding, 4,435,325 Class A shares and
293,515 Class B shares are held by non-affiliates. The market value of the
shares held by non-affiliates is $4,728,514 based on $.99 and $1.15 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 14, 2003.
Documents incorporated by reference are: Registrant's Proxy Statement dated
April, 2003 for the Annual Meeting of Stockholders to be held in May, 2003, Form
8-K Report dated February 17, 1997, Form 8-K Report dated October 29, 1999, Form
8-K Report dated February 15, 2001, Form 8-K Report dated August 6, 2001, form
8-K Report dated October 16, 2002, Form 8-K Report dated February 4, 2003, and
Form 10-K Report for the year ended December 31, 1997 dated March 31, 1998, Form
10-K Report for the year ended December 31, 2000 dated March 29, 2001, Form 10-K
Report for the year ended December 31, 2001 dated March 28, 2002, Form S-4
Registration Statement dated July 25, 1994 and Form S-4 Amendment No. 1 dated
August 16, 1994.
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 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. SFM manufactured machine tools and machine tool
replacement parts. EXX 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 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.
2
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
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 products manufactured to its
specifications. 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 several years, there were no licenses that individually had a
material effect on sales. 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. A substantial portion of toy sales are dependent on a contractual
basis which are subject to re-negotiation at various times. The non-renewal of
contractual sales would have a material adverse effect on the toy segment of the
business.
3
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 44% and 33% for the years
ended December 31, 2002 and 2001, respectively.
Employees.
The registrant employs approximately 120 full-time employees, of whom
approximately 93 are employed by the Mechanical Equipment group, 21 by the Toy
Segment and 1 for all other activities of the registrant combined.
4
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. Legal Proceedings.
None other than in the normal course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters.
Principal Market: American Stock Exchange
Quarterly Price Information
2002 2001
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Class A Class B Class A Class B
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High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
First Quarter .80 .45 1.90 1.35 1.00 .56 2.23 .88
Second Quarter .55 .45 1.60 1.00 .70 .56 1.76 1.40
Third Quarter .48 .36 1.00 .80 .65 .48 1.46 1.30
Fourth Quarter .75 .45 .98 .73 .67 .44 1.60 1.05
Stockholders: As of March 15, 2003, it is estimated that
there were approximately 1100 stockholders of record of Class A shares and 350
stockholders of record of Class B shares.
5
Dividend Information: No cash dividends were paid in 2002 or 2001.
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. Selected Financial Data.
Sales and Income 2002 2001 (A) 2000 (A) 1999 1998
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Net sales $16,186,000 $18,382,000 $19,163,000 $21,158,000 $20,935,000
Net Income 836,000 81,000 1,074,000 2,445,000 761,000
Per Share Data (B)
- --------------
Net income - Basic $ .07 $ .01 $ .09 $ .12 $ .06
Net income - Diluted .07 .01 .08 .12 .06
Book value 1.06 .97 .93 .80 .72
Financial Position
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Current assets $16,365,000 $15,606,000 $15,269,000 $13,886,000 $13,776,000
Total Assets 18,405,000 17,889,000 17,688,000 16,786,000 16,440,000
Current liabilities 4,248,000 4,306,000 3,720,000 4,047,000 4,667,000
Current ratio 3.9 to 1 3.6 to 1 4.1 to 1 3.4 to 1 3.0 to 1
Working capital $12,117,000 $11,300,000 $11,549,000 $ 9,839,000 $ 9,109,000
Property and
equipment, net 1,620,000 1,801,000 2,025,000 2,325,000 2,386,000
Long-term debt 1,481,000 1,555,000 1,690,000 1,747,000 1,794,000
Stockholders' equity 11,721,000 11,050,000 11,427,000 10,207,000 9,281,000
(A) Restated to reflect change in reporting entity. (See Note 4 to the
Consolidated Financial Statements)
(B) As adjusted for a 400% stock dividend effective March 8, 2000, Class A and
Class B shares retroactively shown.
6
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.
Due to the factors noted above and elsewhere in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, our
future earnings and stock price may be subject to significant volatility,
particularly on a quarterly basis. This could result in an immediate and adverse
effect on the trading price of our common stock. Past financial performance
should not be considered a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.
During 2001, the Company increased its investment in Newcor, Inc. to
approximately 31%, thereby requiring the Company to use the equity method of
accounting. The following management's discussion gives retroactive effect to
the adoption of the equity method which is considered a change in reporting
entity for the calendar years 2000 and 1999. Please see Note 3 to the
Consolidated Financial Statements which further discusses this change.
In January 2003, under the Newcor, Inc. Plan of Reorganization, the Company
purchased 11,877 shares or 98.975% of the outstanding common stock of the
reorganized Newcor for approximately $5,939,000. See Footnote 15 for a further
discussion of this subsequent event.
2002 Compared to 2001
Net sales in 2002 were $16,186,000 compared to $18,382,000 which was a
decrease of $2,196,000. This year's sales represent a 12% decrease from the
prior year sales. The Mechanical Equipment Group had total sales of $8,299,000
in 2002 compared to $10,910,000 in 2001, a decrease of $2,611,000. The current
year sales represent a 24% decrease from the prior year sales. The Toy Segment's
sales were $7,887,000 compared to $7,472,000 in 2001, an increase of $415,000.
The current year's sales represent a 6% increase from the prior year sales.
Gross profit was $5,253,000 compared to last year's $6,818,000, a decrease
of $1,565,000. The Mechanical Equipment Group accounted for a $1,870,000
decrease in gross profit while the Toy Segment accounted for the difference.
Gross profit as a percentage of sales decreased to 32% compared to last year's
37% primarily due to the reduction in sales and the related gross profit
percentage reduction by the Mechanical Equipment Group.
Selling and G&A expenses were $4,098,000, a decrease of $341,000 from
$4,439,000 in 2001. The decrease relates mostly to the reduction in expenses
associated with the overall reduction in revenue.
The operating income of $1,155,000 represented a decrease in income of
$1,224,000 from the prior year's operating income of $2,379,000.
The Mechanical
7
Equipment Group generated operating income of $463,000, a decrease of $1,522,000
from an operating income of $1,985,000 in 2001 while the Toy Segment's operating
income of $1,234,000 represented an increase of $223,000 from an operating
income of $1,011,000 in 2001 Corporate and other operating expenses decreased to
$542,000 from $617,000 last year.
Interest expense was $144,000 in 2002 compared to $140,000 in 2001.
The Company generated net income of $836,000 or $.07 per A & B share
compared to a net income of $81,000 or $.01 per A & B share in 2001. There was
no equity in losses of Newcor, Inc. in 2002 as the investment was written off
completely in 2001. The equity in losses of Newcor, Inc. in 2001 was $1,679,000.
The Company reported a deferred tax asset of $564,000 at December 31, 2002.
Management believes this asset will be realized by taxable earnings in the
future.
The Mechanical Equipment Group operations in 2002 continued to decline due
to the economic downturn, especially in the Telecommunications area. This was
the second year of reporting a reduction of sales in spite of a strong sales
effort and management's work to introduce new products acceptance. The industry
remains highly competitive. Management continues to be committed to retain
market share and continue its positive direction in spite of the existing
current economic climate.
The Toy segment operations in 2002 were little changed from the prior 2001
year. The industry's attempts to introduce major new products into the
marketplace have not materialized. The US dollar weakness during the year along
with the West Coast dock strike and continuing increases in labor and other
marketing costs, provided added pressure to maintain profit margins. The small
improvement in the toy segment operations is not reflective of any industry
trend, but the continuation of customers balancing their inventory levels.
Management remains committed to search for, review and test new items that fall
within its pricing structure in its quest to improve sales and margin in this
highly competitive environment.
2001 Compared to 2000
Net sales in 2001 were $18,382,000 compared to $19,163,000 which was a
decrease of $781,000. Last year's sales represented a 4% decrease from the prior
year sales. The Mechanical Equipment Group had total sales of $10,910,000 in
2001 compared to $11,915,000 in 2000, a decrease of $1,005,000. Last year's
sales represented an 8% decrease from the prior year sales. The Toy Segment's
sales were $7,472,000 compared to $7,248,000 in 2000, an increase of $224,000.
Last year's sales represented a 3% increase from the prior year sales.
Gross profit was $6,818,000 compared to last year's $7,339,000, a decrease
of $521,000. The Mechanical Equipment Group accounted for a $401,000 decrease in
gross profit while the Toy Segment accounted for the difference. Gross profit as
a percentage of sales decreased to 37% compared to last year's 38% 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 $4,439,000, a decrease of $773,000 from
$5,212,000 in 2000.
8
The operating income of $2,379,000 represented an increase in income of
$252,000 from the prior year's operating income of $2,127,000. The Mechanical
Equipment Group generated operating income of $1,985,000, a decrease of $212,000
from an operating income of $2,197,000 in 2000 while the Toy Segment's operating
income of $1,011,000 represented an increase of $279,000 from an operating
income of $732,000 in 2000 Corporate and other operating expenses decreased to
$617,000 from $802,000 last year.
Interest expense was $140,000 in 2001 compared to $112,000 in 2000.
The Company generated net income of $81,000 or $.01 per A & B share
compared to a net income of $1,074,000 or $.09 per A & B share in 2000. The
equity in losses of Newcor, Inc. in 2001 was $1,679,000 compared to $598,000 in
2000.
The Company reported a deferred tax asset of $520,000 at December 31, 2001.
Management believes this asset will be realized by taxable earnings in the
future.
The Mechanical Equipment Group operations in 2001 reflected the downturn of
the economy. Competition remained intense for the reduced amount of available
sales. Management's goals have remained consistent during the year in attempting
to maintain a highly competitive market share and new product acceptance in
spite of the adverse economic conditions.
The Toy segment remained in a lackluster market. Industry attempts to
introduce what are perceived to be hot new items had on an overall basis been
unsuccessful. New meaningful licenses had not surfaced. The same challenges
indicated in the past affect the industry namely product, labor and marketing
costs. The strength of the US dollar in purchasing product overseas, had little
effect in reducing costs. While the Toy segment operations this past year showed
a small improvement, management believed the results were not of a trend but of
customers balancing their inventory levels. Management continued to seek, review
and test new items that fall within its pricing structure in a highly
competitive marketing area.
9
Liquidity and Sources of Capital
During 2002, the Company generated $566,000 of cash flows from operating
activities compared to $3,517,000 in 2001.
In 2002, the Company's investing activities used cash of $29,000 compared
to using cash of $1,103,000 in 2001. In 2002, cash was used to purchase property
and equipment, while cash was used primarily to purchase long-term investments
in 2001.
During 2002 and 2001, the Company's financing activities used cash of
$270,000 and $564,000, respectively. In 2002, the Company purchased $203,000 of
treasury stock and made payments on notes totaling $67,000. In 2001, the Company
purchased $495,000 of treasury stock and made payments on notes totaling
$69,000.
At the end of 2002, the Company had working capital of approximately
$12,117,000 and a current ratio of 3.9 to 1. At the end of 2001, the Company had
working capital of $11,300,000 and a current ration of 3.6 to 1. In addition,
the Registrant's Handi-Pac subsidiary has $698,000 of long-term debt existing
with the SBA.
In January 2003, under the Newcor, Inc. Plan of Reorganization, the Company
purchased 11,877 shares or 98.975% of the outstanding common stock of the
reorganized Newcor for approximately $5,939,000. See Footnote 15 for a further
discussion of this subsequent event.
The Company considers its cash and cash equivalents of $3,950,000 (net of
the $5,939,000 purchase above) 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.
Critical Accounting Policies
We have prepared our financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America. This has required us to make estimates, judgments and assumptions that
affected the amounts we reported. Note 1 of Notes to Consolidated Financial
Statements contains the significant accounting principles that we used to
prepare our consolidated financial statements.
We have identified a few critical accounting policies that required us to
make assumptions about matters that were uncertain at the time of our estimates.
Had we used different estimates and assumptions, the amounts we recorded could
have been significantly different. Additionally, actual results that would have
a material effect on our accounting policies that were affected by the
estimates, assumptions, and judgments used in the preparation of our financial
statements are listed below.
Inventories. Certain of our inventories are valued at the lower of cost, on
the last-in, first-out ("LIFO") method, or market. The remainder of our
inventories are valued at the lower of cost, on the first-in, first-out ("FIFO")
method, or market. We periodically assess this inventory for obsolescence and
potential excess by reducing the difference between our cost and the estimated
market value of the inventory based on assumptions about future demand
historical sales patterns. If market conditions or future demand are less
favorable than our current expectations, additional inventory write downs or
reserves may be required, which could have an adverse effect on our reported
results in the period the adjustments are made.
10
Income Taxes. We comply with SFAS No. 109, "Accounting for Income
Taxes," which requires that deferred tax assets and liabilities be recognized
using enacted tax rates for the effect of temporary differences between the book
and tax bases of recorded assets and liabilities. SFAS 109 also requires a
valuation allowance if it is more likely than not that a portion of the deferred
tax asset will not be realized. We have determined that it is more likely than
not that our future taxable income will be sufficient to realize our deferred
tax assets.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risks
Our cash and cash equivalent investments are exclusively in short
term money market investments and U.S. Treasury Money Market investments with
maturities generally less than 90 days. They are subject to limited interest
rate risks. A 10% change in interest rates would not have a material effect on
our financial statements.
Item 8. Financial Statements
The financial statements required by this item may be found
beginning with the index page on page F-1 immediately following the signature
page.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
11
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, 2002. 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.
Item 14. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluations of a date within 90 days of the filing
date of this report, the Chief Executive Officer and the Chief
Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act") are effective to
ensure that information required to be disclosed by us in reports that
we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities Exchange Commission rules and forms.
(b) Changes in Internal Controls
There have been no significant changes in our internal controls
or in other factors that could significantly affect the disclosure
controls subsequent to the Chief Executive Officer's and Chief
Financial Officer's most recent evaluation, and there have been no
corrective actions with regard to significant deficiencies and
material weaknesses in such controls.
12
PART IV
Item 15. 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 David 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
On October 16, 2002, the Company filed with the Commission a copy
of a press release which announced that Newcor, Inc. filed a proposed
Joint Chapter 11 Plan Of Reorganization for itself and its
wholly-owned subsidiaries as debtors and debtors-in-possession. The
document summarized that among other provisions the Plan provided for
a rights offering of $6 million which would be subscribed to by EXX
INC on a standby basis. Also, pursuant to the rights offering, Newcor
would cease to be a stand-alone public reporting company and would
become a subsidiary of EXX INC. The document also indicated the
confirmation of the Plan was subject to the requisite vote of
creditors and the approval of the Bankruptcy Court. There were no
financial statements attached to this filing.
(c) See Item (a)3. above
(d) Not applicable
13
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 28, 2003
---------------------------------------------
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 28, 2003
By: /s/ NORMAN H. PERLMUTTER
---------------------------------------------
Norman H. Perlmutter, Director
Date: March 28, 2003
---------------------------------------------
By: /s/ FREDERIC REMINGTON
---------------------------------------------
Frederic Remington, Director
Date: March 28, 2003
---------------------------------------------
By: /s/ DAVID A. SEGAL
------------------------------------------
David A. Segal, Chief Executive Officer
Chief Financial Officer
Chairman of the Board
Date: March 28, 2003
---------------------------------------------
14
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, 2002 and 2001 F-3
Statements of Operations
Years Ended December 31, 2002, 2001 and 2000 F-4
Statements of Changes in Stockholders' Equity
Years Ended December 31, 2002, 2001 and 2000 F-5
Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000 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
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, 2002 and 2001, 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, 2002. 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 financial position of EXX INC and
Subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, 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
January 31, 2003
F-2
EXX INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 2001
- ----------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,889,000 $ 9,622,000
Accounts receivable, less allowances of
$119,000 and $91,000 in 2002 and 2001, respectively 2,897,000 2,577,000
Inventories 2,711,000 2,620,000
Other current assets 304,000 246,000
Refundable income taxes 21,000
Deferred tax asset 564,000 520,000
---------------------------
Total current assets 16,365,000 15,606,000
Property and equipment, net 1,620,000 1,801,000
Other assets 420,000 482,000
---------------------------
$ 18,405,000 $ 17,889,000
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term debt, current portion $ 73,000 $ 66,000
Accounts payable and other current liabilities 3,859,000 4,240,000
Income taxes payable 316,000
---------------------------
Total current liabilities 4,248,000 4,306,000
---------------------------
LONG-TERM LIABILITIES
Long-term debt, less current portion 1,481,000 1,555,000
Pension liability 359,000 416,000
Deferred tax liability 596,000 562,000
---------------------------
2,436,000 2,533,000
---------------------------
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, 12,061,607 shares issued 121,000 121,000
Common stock, Class B, $.01 par value
authorized 1,000,000 shares, 624,693 shares issued and outstanding 6,000 6,000
Capital in excess of par value 2,670,000 2,670,000
Accumulated other comprehensive loss (237,000) (275,000)
Retained earnings 10,147,000 9,311,000
Less treasury stock, 1,649,300 and 1,229,600 shares of Class A
common stock and 16,600 and 7,100 shares of Class B
common stock, at cost, in 2002 and 2001, respectively (986,000) (783,000)
---------------------------
Total stockholders' equity 11,721,000 11,050,000
---------------------------
$ 18,405,000 $ 17,889,000
===========================
See notes to consolidated financial statements. F - 3
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------------
Net sales $ 16,186,000 $ 18,382,000 $ 19,163,000
Cost of sales 10,933,000 11,564,000 11,824,000
--------------------------------------------
Gross profit 5,253,000 6,818,000 7,339,000
Selling, general and
administrative expenses 4,098,000 4,439,000 5,212,000
--------------------------------------------
Operating income 1,155,000 2,379,000 2,127,000
Interest expense (144,000) (140,000) (112,000)
Interest income 139,000 366,000 469,000
Other income 79,000 68,000 43,000
Equity in losses of Newcor, Inc. (1,679,000) (598,000)
--------------------------------------------
Income before income taxes 1,229,000 994,000 1,929,000
Income taxes 393,000 913,000 855,000
--------------------------------------------
Net income $ 836,000 $ 81,000 $ 1,074,000
============================================
NET INCOME PER COMMON SHARE
Basic $ 0.07 $ 0.01 $ 0.09
============================================
Diluted $ 0.07 $ 0.01 $ 0.08
============================================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 11,230,000 11,939,000 12,616,000
============================================
Diluted 11,276,000 11,994,000 13,052,000
============================================
See notes to consolidated financial statements. F - 4
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
CAPITAL IN COMPREHENSIVE COMPREHENSIVE
COMMON STOCK EXCESS OF INCOME INCOME RETAINED
CLASS A CLASS B PAR VALUE (LOSS) (LOSS) EARNINGS
Balances,
January 1, 2000 $ 177,000 $ 9,000 $ 3,844,000 $ (746,000) $ 8,156,000
Purchase of treasury stock
Retirement Of treasury stock (56,000) (3,000) (1,174,000)
Net income $ 1,074,000 1,074,000
OTHER COMPREHENSIVE INCOME,
NET OF TAX EFFECT
Minimum pension liability
adjustment 68,000(a) 68,000
Net unrealized loss on
marketable securities 366,000(b) 366,000
-------------
Total comprehensive income $ 1,508,000
--------------------------------------------- ============= -----------------------------
Balances,
December 31, 2000 121,000 6,000 2,670,000 (312,000) 9,230,000
Purchase of treasury stock
Retirement of treasury stock
Net income $ 81,000 81,000
OTHER COMPREHENSIVE INCOME,
NET OF TAX EFFECT
Minimum pension liability
adjustment 37,000(a) 37,000
-------------
Total comprehensive income $ 118,000
--------------------------------------------- ============= -----------------------------
Balances,
December 31, 2001 121,000 6,000 2,670,000 (275,000) 9,311,000
Purchase of treasury stock
Net income $ 836,000 836,000
OTHER COMPREHENSIVE INCOME,
NET OF TAX EFFECT
Minimum pension liability
adjustment 38,000(a) 38,000
-------------
Total comprehensive income $ 874,000
--------------------------------------------- ============= -----------------------------
Balances,
December 31, 2002 $ 121,000 $ 6,000 $ 2,670,000 $ (237,000) $ 10,147,000
============================================= =============================
TREASURY
STOCK TOTAL
Balances,
January 1, 2000 $ (1,233,000) $ 10,207,000
Purchase of treasury stock (288,000) (288,000)
Retirement of treasury stock 1,233,000
Net income 1,074,000
OTHER COMPREHENSIVE INCOME,
NET OF TAX EFFECT
Minimum pension liability
adjustment 68,000
Net unrealized loss on
marketable securities 366,000
Total comprehensive income
-----------------------------
Balances,
December 31, 2000 (288,000) 11,427,000
Purchase of treasury stock (495,000) (495,000)
Retirement of treasury stock
Net income 81,000
OTHER COMPREHENSIVE INCOME,
NET OF TAX EFFECT
Minimum pension liability
adjustment 37,000
Total comprehensive income
-----------------------------
Balances,
December 31, 2001 (783,000) 11,050,000
Purchase of treasury stock (203,000) (203,000)
Net income 836,000
OTHER COMPREHENSIVE INCOME,
NET OF TAX EFFECT
Minimum pension liability
adjustment 38,000
Total comprehensive income
-----------------------------
Balances,
December 31, 2002 $ (986,000) $ 11,721,000
=============================
(a) Minimum pension liability adjustment has been recorded net of tax effects of
$19,000, $19,000, and $35,000, respectively, in 2002, 2001 and 2000.
(b) Net unrealized gain (loss) on marketable securities has been recorded net of
tax effects of $189,000 and in 2000.
See notes to consolidated financial statements. F - 5
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 836,000 $ 81,000 $ 1,074,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 210,000 248,000 260,000
Deferred income taxes (29,000) 112,000 201,000
Equity in losses of Newcor, Inc. 1,679,000 598,000
Loss on sale of property and equipment 11,000
Increase (decrease) in cash and cash equivalents
attributable to changes in operating assets and liabilities:
Accounts receivable (320,000) 711,000 494,000
Inventories (91,000) 375,000 (4,000)
Other current assets (58,000) 110,000 (7,000)
Refundable income taxes 21,000 131,000 (41,000)
Other assets 62,000 (88,000) (19,000)
Accounts payable and other current liabilities (381,000) 158,000 (331,000)
Income taxes payable 316,000
-----------------------------------------
Net cash provided by (used in) operating activities 566,000 3,517,000 2,236,000
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (29,000) (24,000) (77,000)
Proceeds from sale of property and equipment 106,000
Proceeds from maturities of short-term investments 600,000 3,934,000
Purchase of investments in Newcor, Inc. (1,679,000) (397,000)
-----------------------------------------
Net cash provided by (used in) investing activities (29,000) (1,103,000) 3,566,000
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (67,000) (69,000) (57,000)
Purchase of treasury stock (203,000) (495,000) (288,000)
-----------------------------------------
Net cash provided by (used in) financing activities (270,000) (564,000) (345,000)
-----------------------------------------
Net increase (decrease) in cash and
cash equivalents 267,000 1,850,000 5,457,000
Cash and cash equivalents, beginning of year 9,622,000 7,772,000 2,315,000
-----------------------------------------
Cash and cash equivalents, end of year $ 9,889,000 $ 9,622,000 $ 7,772,000
=========================================
See notes to consolidated financial statements. F - 6
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
YEARS ENDED DECEMBER 31, 2002 2001 2000
- -----------------------------------------------------------------------------------
Supplemental disclosures of cash flow
information, cash paid during the year for:
Interest $ 143,000 $ 85,000 $ 95,000
====================================
Income taxes $ 85,000 $ 670,000 $ 951,000
====================================
See notes to consolidated financial statements. F - 7
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
EXX INC and Subsidiaries (collectively the "Company") operate primarily in the
mechanical equipment and toy industries. Operations in the mechanical equipment
industry primarily involve the design, assembly and sale of capital goods, such
as electric motors and cable pressurization equipment. The Company's mechanical
equipment products are incorporated into customers' products or are used to
maintain customers' equipment. Operations in the toy industry involve the
design, assembly and distribution of consumer goods in the form of toys and
kites, which are primarily imported from the Far East.
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,
2002, 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.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions.
Accounts are written off as uncollectible if payments are not expected to be
received.
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 ("SFAS")
No. 107, "Disclosures About Fair Value of Financial Instruments," approximate
the carrying amounts presented in the accompanying consolidated balance sheets.
F-8
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Certain inventories are valued at the lower of cost, on the last-in, first-out
("LIFO") method, or market. The remainder of the inventories are valued at the
lower of cost, on the first-in, first-out ("FIFO") method, or market.
Impairment of Long-Lived Assets
The Company periodically assesses the recoverability of the carrying amounts of
long-lived assets. 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 $29,000,
$59,000 and $67,000, for 2002, 2001 and 2000, respectively.
Research and Development Costs
Expenditures for research and development are charged to operations as incurred
and were $280,000 $193,000 and $46,000 for 2002, 2001 and 2000, respectively.
Income Taxes
The Company complies with SFAS 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.
F-9
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Per Common Share
SFAS 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.
Unexercised stock options to purchase 2,150,000 shares, 2,150,000 shares, and
250,000 shares of the Company's Class A Common Stock as of December 31, 2002,
2001 and 2000, respectively, were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than the
average market price of the Company's Class A Common Stock.
Impact of Recently Issued Accounting Standards
In 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146,
"Accounting for the Impairment or Disposal of Long-Lives Assets" and SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS
No. 146, which is not effective until the year ending December 31, 2003,
addresses financial accounting and reporting for costs associated with exit or
disposal activities. The Company does not believe that SFAS No. 146 will have a
significant impact on its consolidated financial position, results of operations
and cash flows. SFAS No. 148 addresses stock-based compensation, which the
Company does not have.
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 2001 and 2000 amounts have been reclassified to conform to the 2002
presentation.
3. INVESTMENT IN NEWCOR, INC.
In July 2001, the Company purchased an additional 679,994 shares of Newcor Inc.
("Newcor") common stock and $500,000 principal amount of Newcor's 9.875% Senior
Subordinated Notes due 2008, from five of the former directors of Newcor and
24,000 shares from David A. Segal (the Company's Chairman). In connection with
such purchases, the Company paid an aggregate of $1,679,000 in cash. Prior to
the Company's acquisition of these additional shares, the Company accounted for
its investment in Newcor as an available for sale marketable security. The
changes in the market value of the Newcor shares were recorded as comprehensive
income in each applicable period. The additional acquisition increased the
Company's ownership percentage in Newcor to approximately 31%, thereby requiring
the Company to use the equity method of accounting for this investment in
F-10
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT IN NEWCOR, INC. (continued)
accordance with Accounting Principles Board Opinion No. 18, "The Equity Method
of Accounting for Investments in Common Stock." The change to the equity method
is considered a change in reporting entity, requiring the Company to give
retroactive effect to this change in all prior periods that Newcor stock was
held. The consolidated financial statements for all periods prior to December
31, 2001 have been restated to give effect to this change. As of December 31,
2002, the Company owns approximately 1,546,000 shares of the outstanding common
stock of Newcor and based on its equity in the losses of Newcor, the Company has
reduced its investment (including subordinated notes) in Newcor to zero. In
February 2002, Newcor filed for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Act. As a result of the reorganization plan approved by the
creditors, these shares were of no value at December 31, 2002 and were
effectively cancelled via the reorganization. See Note 15 for additional
investment made by the Company in Newcor.
The summarized financial information of Newcor is as follows:
DECEMBER 31, 2002 2001
(UNAUDITED)
Current assets $ 57,088,000 $ 37,865,000
Other assets 40,769,000 91,879,000
-------------------------------
$ 97,857,000 $ 129,744,000
===============================
Current liabilities $ 180,953,000 $ 163,215,000
Other liabilities 25,821,000 16,971,000
Stockholders' equity (108,917,000) (50,442,000)
-------------------------------
$ 97,857,000 $ 129,744,000
===============================
YEARS ENDED DECEMBER 31, 2002 2001 2000
(UNAUDITED)
Net sales $ 170,347,000 $ 177,342,000 $ 238,115,000
Gross profit 24,813,000 14,872,000 32,858,000
Net loss (48,756,000) (57,250,000) (6,582,000)
F-11
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consist of the following at December 31, 2002 and 2001:
2002 2001
Raw materials $ 737,000 $ 838,000
Work-in-progress 152,000 164,000
Finished goods 1,822,000 1,618,000
---------------------------
$ 2,711,000 $ 2,620,000
===========================
Inventories stated on the LIFO method amounted to $316,000 and $323,000 at
December 31, 2002 and 2001, respectively, which amounts are below replacement
cost by approximately $391,000 and $396,000, respectively.
During 2002, 2001, and 2000, net income 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, 2002 and 2001:
2002 2001
Land $ 41,000 $ 41,000
Buildings and improvements, including
$1,617,000 under a capital lease 2,993,000 2,993,000
Machinery and equipment 6,491,000 6,462,000
---------------------------
9,525,000 9,496,000
Less accumulated depreciation and
amortization, including $614,000 and
$526,000 under a capital lease in
2002 and 2001, respectively 7,905,000 7,695,000
---------------------------
$ 1,620,000 $ 1,801,000
===========================
F-12
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. OTHER ASSETS
Other assets consist of the following at December 31, 2002 and 2001:
2002 2001
Notes receivable, less current portion - $ 83,000
Prepaid pension 420,000 399,000
-----------------------
$ 420,000 $ 482,000
=======================
7. LONG-TERM DEBT
Long-term debt at December 31, 2002 and 2001 is comprised of the following:
2002 2001
Note payable with monthly
payments of approximately
$4,000, including interest
at 4% per annum, through
September 2015, collateralized
by substantially all of the assets
of a subsidiary $ 400,000 $ 433,000
Note payable with monthly
payments of approximately
$2,000, including interest
at 4% per annum, through
December 2023, collateralized
by substantially all of the
assets of a subsidiary 371,000 382,000
Capital lease obligation 783,000 806,000
---------------------------
1,554,000 1,621,000
Less current portion 73,000 66,000
---------------------------
$ 1,481,000 $ 1,555,000
===========================
Future aggregate required principal payments for each of the next five years are
as follows:
YEAR ENDING DECEMBER 31,
2003 $ 73,000
2004 81,000
2005 105,000
2006 110,000
2007 117,000
F-13
EXX INC AND SUBSIDIARIES
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, 2002 are as follows:
YEAR ENDING DECEMBER 31,
2003 $ 78,000
2004 82,000
2005 101,000
2006 101,000
2007 101,000
Thereafter 721,000
----------
Total minimum lease payments 1,184,000
Less amount representing interest 401,000
----------
Present value of future minimum
lease payments $ 783,000
==========
8. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consist of the following at
December 31, 2002 and 2001:
2002 2001
Trade accounts payable $ 578,000 $ 852,000
Warranty 444,000 581,000
Payroll and related costs 987,000 1,054,000
Royalties payable 300,000 300,000
Commissions payable 298,000 318,000
Product liability claim 350,000 350,000
Refundable purchase discounts 535,000 425,000
Other 367,000 360,000
---------------------------
$ 3,859,000 $ 4,240,000
===========================
F-14
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
The provision for income taxes consists of the following:
2002 2001 2000
CURRENT
Federal $ 401,000 $ 800,000 $ 654,000
State 21,000
----------------------------------------
422,000 800,000 654,000
DEFERRED
Federal (29,000) 113,000 201,000
----------------------------------------
$ 393,000 $ 913,000 $ 855,000
========================================
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:
2002 2001 2000
% % %
Federal statutory rate 34.0 34.0 34.0
State, net of federal tax 1.0
Change in valuation allowance 57.4 10.5
Other (3.1) 0.5 (0.2)
---------------------------
Effective income tax rate 31.9 91.9 44.3
===========================
The net deferred tax assets and liabilities as of December 31, 2002 and 2001 are
as follows:
2002 2001
DEFERRED TAX ASSETS
Allowance for doubtful accounts,
warranty and notes receivable $ 438,000 $ 396,000
Equity in loss of Newcor 1,068,000 1,068,000
Asset basis difference for inventories 78,000 80,000
Pension obligations 7,000
Other 48,000 42,000
------------------------------
1,632,000 1,593,000
Valuation allowance (1,068,000) (1,068,000)
------------------------------
$ 564,000 $ 525,000
==============================
F-15
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (continued)
2002 2001
DEFERRED TAX LIABILITIES
Accumulated DISC earnings $ (509,000) $ (494,000)
Asset basis difference for property
and equipment (5,000)
Pension obligations (19,000)
Other (68,000) (68,000)
--------------------------
(596,000) (567,000)
--------------------------
Deferred tax asset (liability), net $ (32,000) $ (42,000)
==========================
The amounts are recorded in the consolidated balance sheets as follows:
2002 2001
Deferred tax asset, current $ 564,000 $ 520,000
Deferred tax liability (596,000) (562,000)
--------------------------
$ (32,000) $ (42,000)
==========================
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 $50,000, $31,000 and $58,000 for
2002, 2001, and 2000, 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 for the Company-sponsored plan is as follows:
2002 2001 2000
Interest cost on projected benefit
obligation $ 69,000 $ 71,000 $ 71,000
Expected return on plan assets (81,000) (69,000) (62,000)
Amortization of net gain on
transition assets 21,000 29,000 33,000
--------------------------------------
Net periodic pension cost $ 9,000 $ 31,000 $ 42,000
======================================
F-16
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. PENSION PLANS (continued)
The following table presents significant assumptions used:
2002 2001 2000
Discount rate 7% 7% 7%
Expected long-term rate
of return on plan assets 8% 8% 8%
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, 2002 and 2001 for the Company-sponsored defined benefit
pension plan:
2002 2001
Benefit obligation - beginning
of year $ 1,069,000 $ 1,056,000
Interest cost 69,000 71,000
Actuarial loss (32,000) 28,000
Total benefits paid (82,000) (86,000)
--------------------------
Benefit obligation - end of year $ 1,024,000 $ 1,069,000
==========================
The following table sets forth the change in plan assets for the years ended
December 31, 2002 and 2001 for the Company-sponsored defined benefit pension
plan:
2002 2001
Fair value of plan assets -
beginning of year $ 1,052,000 $ 894,000
Actual return on plan assets 85,000 124,000
Company contributions 30,000 120,000
Benefits paid (82,000) (86,000)
----------------------------
Fair value of plan assets -
end of year $ 1,085,000 $ 1,052,000
============================
F-17
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. PENSION PLANS (continued)
The funded status for the years ended December 31, 2002 and 2001 is as follows:
2002 2001
Plan assets less projected
benefit obligation $ 61,000 $ (17,000)
Unrecognized actuarial net loss 359,000 416,000
Adjustment required to
recognize minimum pension
liability (359,000) (416,000)
--------------------------
Net amount recognized $ 61,000 $ (17,000)
==========================
Amounts recognized in the consolidated balance sheets consist of the following:
2002 2001
Prepaid benefit cost $ 420,000 $ 399,000
Accrued benefit liability (359,000) (416,000)
--------------------------
Net amount recognized $ 61,000 $ (17,000)
==========================
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, 2002 and 2001, options to purchase
5,000,000 shares of Class A common stock were available for grant under the
Plan.
F-18
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS (continued)
The status of the Company's stock options are summarized below:
WEIGHTED
PER SHARE AVERAGE
OTHER EXERCISE EXERCISE
OPTIONS PRICE PRICE
Outstanding and exercisable
at December 31, 2002, 2001
and 2000 2,250,000(a) $0.65 - $1.00 $ 0.74
=========
(a) Includes options to purchase 2,150,000 shares of Class A common stock and
100,000 shares of Class B common stock.
12. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office and plant facilities under operating leases on a
month-to-month basis.
Rent expense for 2002, 2001 and 2000 amounted to $78,000, $77,000 and $94,000,
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, for 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.
F-19
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES (continued)
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
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 2002, 2001, and 2000 is summarized as follows:
MECHANICAL
EQUIPMENT TOY CORPORATE CONSOLIDATED
2002
Net sales $ 8,299,000 $ 7,887,000 $ - $ 16,186,000
============================================================
Operating income (loss) $ 463,000 $ 1,234,000 $ (542,000) $ 1,155,000
Interest expense (88,000) (56,000) (144,000)
Interest income 14,000 9,000 116,000 139,000
Other income 39,000 40,000 79,000
------------------------------------------------------------
Income (loss) before
income taxes (benefit) $ 516,000 $ 1,195,000 $ (482,000) $ 1,229,000
============================================================
Assets $ 3,183,000 $ 6,169,000 $ 9,053,000(a) $ 18,405,000
============================================================
Depreciation and
amortization $ 80,000 $ 130,000 $ - $ 210,000
============================================================
Capital expenditures $ 27,000 $ 2,000 $ - $ 29,000
============================================================
F-20
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION (continued)
MECHANICAL
EQUIPMENT TOY CORPORATE CONSOLIDATED
2001
Net sales $ 10,910,000 $ 7,472,000 $ - $ 18,382,000
============================================================
Operating income (loss) $ 1,985,000 $ 1,011,000 $ (617,000) $ 2,379,000
Interest expense (124,000) (16,000) (140,000)
Interest income 34,000 63,000 269,000 366,000
Other income 64,000 4,000 68,000
Equity in losses of Newcor (1,679,000) (1,679,000)
------------------------------------------------------------
Income (loss) before
income taxes (benefit) $ 2,083,000 $ 954,000 $ (2,043,000) $ 994,000
============================================================
Assets $ 3,924,000 $ 5,353,000 $ 8,612,000(a) $ 17,889,000
============================================================
Depreciation and
amortization $ 100,000 $ 148,000 $ - $ 248,000
============================================================
Capital expenditures $ 24,000 $ - $ - $ 24,000
============================================================
MECHANICAL
EQUIPMENT TOY CORPORATE CONSOLIDATED
2000
Net sales $ 11,915,000 $ 7,248,000 $ - $ 19,163,000
============================================================
Operating income (loss) $ 2,197,000 $ 732,000 $ (802,000) $ 2,127,000
Interest expense (94,000) (18,000) (112,000)
Interest income 53,000 28,000 388,000 469,000
Other income 38,000 5,000 43,000
Equity in losses of Newcor (598,000) (598,000)
------------------------------------------------------------
Income (loss) before
income taxes (benefit) $ 2,288,000 $ 671,000 $ (1,030,000) $ 1,929,000
============================================================
Assets $ 3,930,000 $ 5,708,000 $ 8,050,000(a) $ 17,688,000
============================================================
Depreciation and
amortization $ 94,000 $ 166,000 $ - $ 260,000
============================================================
Capital expenditures $ 77,000 $ - $ - $ 77,000
============================================================
(a) Corporate assets consist primarily of cash, short-term investments and
long-term investments, as described in Note 2.
F-21
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION (continued)
Net sales to countries outside of the United States for the years ended December
31, 2002, 2001 and 2000 were approximately $933,000, $1,534,000 and $2,073,000,
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 44%, 33% and 25% for the years
ended December 31, 2002, 2001 and 2000, respectively.
14. SELECTED QUARTERLY RESULTS (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
2002
Net sales $ 3,789,000 $ 4,206,000 $ 4,208,000 $ 3,983,000
=================================================================
Gross profit $ 1,182,000 $ 1,418,000 $ 1,412,000 $ 1,241,000
=================================================================
Net income $ 81,000 $ 217,000 $ 207,000 $ 331,000
=================================================================
Income per common
share and common
share equivalent:
Basic $ 0.01 $ 0.02 $ 0.02 $ 0.02
=================================================================
Dilutive $ 0.01 $ 0.02 $ 0.02 $ 0.02
=================================================================
2001
Net sales $ 4,978,000 $ 4,927,000 $ 4,900,000 $ 3,577,000
=================================================================
Gross profit $ 1,514,000 $ 1,856,000 $ 1,694,000 $ 1,754,000
=================================================================
Net income (loss) $ 391,000 $ 485,000 $ (1,167,000) $ 372,000
=================================================================
Income (loss) per
common share and
common share
equivalent:
Basic $ 0.03 $ 0.04 $ (0.10) $ 0.04
=================================================================
Dilutive $ 0.03 $ 0.04 $ (0.10) $ 0.04
=================================================================
F-22
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENT
On January 31, 2003, a Plan of Reorganization of Newcor became effective. Under
a rights offering to shareholders included as part of Newcor's Plan of
Reorganization, the Company purchased 11,877 shares of common stock of Newcor
for a total purchase price of $5,938,500. The shares purchased by the Company
constitute 98.975% of the outstanding common stock of the reorganized Newcor
entity and, as a result, Newcor ceased to be a stand-alone public reporting
company and became a subsidiary of the Company. The purchase price was
established in the Plan of Reorganization, as approved by the creditors, the
United States Trustee for the District of Delaware and the United States
Bankruptcy Court in the District of Delaware. The source of funds for the
Company's purchase was cash on hand. In addition to the purchase made by the
Company, certain other shareholders purchased shares of common stock of Newcor
under the rights offering made in connection with the Plan of Reorganization.
The other shareholders purchased an aggregate of 123 shares totaling $62,500,
which represented 1.025%, of the aggregate purchase price. The primary purpose
of the acquisition of Newcor was to expand the Company's operations. Newcor
designs and manufactures precision machine components and assemblies and custom
rubber and plastic products primarily for the automotive and agricultural
vehicle markets. Newcor is also a supplier of standard and specialty machines
and equipment systems mainly for the automotive and appliance industries.
The following condensed balance sheet reflects the assets and liabilities of
Newcor at their fair market values at January 31, 2003 based on preliminary
estimates by management.
(UNAUDITED)
-------------
Current assets $ 36,134,000
Property and equipment 33,380,000
Intangibles and other assets 8,680,000
-------------
Total assets $ 78,194,000
=============
Current liabilities $ 17,588,000
Long term debt 41,248,000
Pension, post retirement
and other liabilities 13,358,000
-------------
Total liabilities $ 72,194,000
=============
Newcor's operations will be included in the consolidated financial statements of
the Company commencing January 31, 2003. Newcor had sales of approximately
$170,000,000 for the year ended December 31, 2002. The intangible and other
assets include approximately $3,900,000 allocated to customer lists and patents
which will be amortized over periods ranging from 2 to 10 years. These amounts
will not be deductible for income tax purposes. The balance of the intangible
assets of approximately $4,500,000 has been allocated to goodwill which will not
be deductible for income tax purposes. The above allocations are based on
management's estimate at this time and are subject to final determination.
F-23
EXX INC AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
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
2002
Reserve for bad debts and allowances $ 91,000 $ 35,000 $ 7,000 $ 119,000
====================================================
Warranty $ 581,000 $ - $ 137,000 $ 444,000
====================================================
Reserve for dispositions of inventories $ 494,000 $ - $ - $ 494,000
====================================================
2001
Reserve for bad debts and allowances $ 88,000 $ 3,000 $ - $ 91,000
====================================================
Warranty $ 580,000 $ 1,000 $ - $ 581,000
====================================================
Reserve for dispositions of inventories $ 496,000 $ - $ 2,000 $ 494,000
====================================================
2000
Reserve for bad debts and allowances $ 84,000 $ 4,000 $ - $ 88,000
====================================================
Warranty $ 587,000 $ - $ 7,000 $ 580,000
====================================================
Reserve for dispositions of inventories $ 592,000 $ - $ 96,000 $ 496,000
====================================================
S-1