EXX Inc.

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EXX Inc.

1350 E. Flamingo Road, Suite 689
Las Vegas, Nevada 89119-5263
U.S.A.
Telephone: (702) 598-3223
Web site: http://www.newcor.com

Public Company
Incorporated: 1899 as Fitchburg Machine Works
Employees: 1,000
Sales: $135.5 million (2003)
Stock Exchanges: American
Ticker Symbol: EXXA
NAIC: 336299 All Other Motor Vehicle Parts Manufacturing; 339932 Game, Toy, and Children's Vehicle Manufacturing

EXX Inc. is a Las Vegas-based holding company with independent subsidiaries grouped into two business segments: Mechanical Equipment and Plastics and Rubber. The Mechanical Equipment segment is composed of seven companies. Deco Engineering, Inc. manufactures heavy-duty truck engines and powertrain components and assemblies. Blackhawk Engineering, Inc. produces large gray iron, nodular iron, and steel foundry castings used by companies serving the agricultural market. Rochester Gear, Inc. and Machine Tool and Gear, Inc. manufacture automobile shafts, axles, transmission parts, differential pins and gears, rear axle shafts, and other machined components. The Bay City division of subsidiary Newcor, Inc. designs and makes machines and systems used by automotive, appliance, and consumer goods customers in their welding, assembly, forming, heat treating, and testing processes. The Howell Electric Motors Division of SFM Corp. produces specialty motors used in such applications as blowers for air conditioning systems, floor scrubbing and polishing motors, and motor pump assemblies used in food machinery products. The final unit in the Mechanical Equipment Segment is TX Technology, which provides the telecommunications industry with cable pressurization and monitoring systems to prevent signal reduction while keeping tabs via telephone lines. EXX's Plastics and Rubber Segment consists of five subsidiaries. Boramco, Inc. and Plastronics Plus, Inc. manufacture a variety of automotive parts, including transmission shift boots, steering column and gearshift lever seals, air conditioning ducts, body and dash panel grommets, fuel filler seals, hose and wire brackets, speaker seals, and vacuum control systems. Henry Gordy International, Inc. produces a line of impulse toys, generally sold at the point of purchase at toy stores, department stores, drugstores, and supermarkets. Handi-Pac, Inc. makes a variety of pre-school toys. Finally, Hi-Flier, Inc. is a major manufacturer of kites. Chairman and CEO David A. Segal owns a controlling interest in the publicly traded company.

Company Roots Dating to the 1800s

The corporate lineage of EXX traces back to the Civil War when Sylvester C. Wright started the Fitchburg Machine Works in Massachusetts, which was incorporated in 1899. The company acquired the plant and assets of Seneca Falls Manufacturing Company, Inc., based in Seneca Falls, New York, in 1924 and adopted the name Seneca Falls Machine Co. The company operated in Seneca Falls for the next four decades, producing automatic lathes and special machinery, such as a machine to automatically manufacture automobile camshafts. In 1968 the company moved to New Jersey, where it was reorganized and renamed SFM Corporation. In 1970 SFM acquired one of the subsidiaries that would become part of EXX, paying $2.5 million for Howell Electric Motors of Plainfield, New Jersey, where SFM maintained its headquarters.

In 1984 EXX's chairman and CEO, David A. Segal, was a director of SFM, owning 10 percent of the company's stock, when he decided to seek control of the business. With the board's blessing he took control and became SFM's chief executive. At this stage the company manufactured machine tools and electric motors, but in 1987 Segal took SFM far afield in acquiring Henry Gordy Inc., a Yonkers, New York-based manufacturer, importer, and marketer of toys. These assets were then transferred to a newly formed subsidiary, Henry Gordy International, Inc. The modification of SFM's business mix continued over the next few years. In 1991 the Seneca Falls machine tool operation was sold for $2 million and in 1993, Waterbury Headers, Inc., which had been acquired a dozen years earlier, also was divested. A year later SFM moved into the telecommunications business, forming two subsidiaries, TX Systems Inc. and TX Technology Corp., which then bought the operating assets of TX Technologies Inc. and TX Software Inc. at a bankruptcy sale. The new units made air drying systems, sensors, and monitoring systems for a number of major telephone companies. Also in 1994 SFM supplemented its toy business by acquiring Colorado-based Hi-Flier Manufacturing Co., one of the leading makers of kites and model airplanes in the United States. These assets were folded into a new subsidiary named Hi-Flier Inc.

Sudden Celebrity in 1994

SFM was a little known company in the early 1990s, generating about $18 million in annual revenues, with sales having dropped for four consecutive years. Nevertheless it was profitable, paying a dividend of 75 cents per share in 1992 and 90 cents in 1993. But the company was thinly traded on the American Stock Exchange, with a float of only 363,000 shares because Segal owned nearly half of the company's stock. On most days that the American Stock Exchange was opened, in fact, not a single SFM share changed hands. Then, in August 1994 SFM experienced sudden celebrity and became one of the hottest stocks in the country. On August 10 the company announced its second quarter numbers, which showed that sales had increased to $11.6 million from $4.7 million, and per share profits rose from 19 cents to 60 cents during the same period the year before. Most of this improvement was due to Henry Gordy adding watches to the mix and the licensing of cartoon characters, such as a line of Mighty Morphin Power Ranger toys, but also of importance was the Hi-Flier acquisition. Because kites were a seasonal item, sales were strong in one quarter and virtually nonexistent in another. SFM booked sales when they shipped to wholesalers and stores, which fell in the second quarter, and not when the kites were actually sold to consumers. Whatever the reasons for the strong numbers, SFM caught the wave of investor enthusiasm over the sudden jump in sales, and combined with the limited number of shares available the price of SFM shares skyrocketed. In one day the price jumped from $5.5 to $14.875, with more than 50,000 shares trading hands, a number that was eight times the volume for the previous month. Over the next 11 sessions another 550,000 shares traded and the price topped $34. In fact, in a single week more shares were traded than in any previous year. Segal, although pleased, was somewhat puzzled by the run-up. He told the Sunday Gazette-Mail that he received calls from brokers who had just bought several thousand shares of SFM stock for their clients and wanted to know what business the company was in. The price approached $42 before receding to $26.25 early in September, only to go on another run that would bring the price of SFM stock to a new high of $46.25 before the hysteria finally began to subside.

In late July SFM had already taken steps to increase the float through the issuance of two new classes of shares and a four-for-one stock split. For each unit of current SFM stock, shareholders received three shares of Class A stock and one share of Class B stock. The class A stock elected one-third of the SFM board, while the Class B stock elected two-thirds. As explained by Barron's, "Because of the different voting rights, Segal can easily maintain near-majority control of the company by keeping his B shares, while greatly diluting current holders by selling his A shares."

The stock split took place in October 1994. As part of the issuance of two classes of stock, the company also decided to reorganize as a holding company with each of its businesses operating as separate units. Thus, in October 1994, shareholders approved the merger of SFM Corp. with a new holding company named EXX Inc. The new name was adopted in November 1994. Subsequently the company's headquarters was moved from Plainfield, New Jersey, to Las Vegas. For 1994 the company recorded sales of nearly $45.5 million, a significant increase over the $18 million generated a year earlier. Net income improved from $611,000 or 23 cents per share to $2.7 million, or 99 cents per share. Almost all of the improvement came in the toy segment, which experienced an increase in sales from $10.7 million to $37.2 million.

Business fell off in 1995, due primarily to decreasing popularity of the Mighty Morphin Power Rangers. Sales declined to $30.5 million, but net income remained strong, totaling $2.3 million or 86 cents per share. Sales of the Mighty Morphin Power Rangers continued to slide in 1996 and the company failed to sign any successful new licenses to fill the gap. As a result toy sales dropped from $21.4 million to $9.5 million, and although the Mechanical Equipment Group showed some improvement, EXX as a whole posted sales of $19.8 million, leading to a net loss on the year of $1.6 million.

EXX looked to bolster its toy business in 1997 through acquisitions. In February of that year, through a newly formed subsidiary, Steven Toy Inc., it paid $400,000 for Handi Pac, Inc., manufacturer of preschool, ride-on, classic, educational, and other toys. Later in 1997, EXX acquired the assets of Northbrook, Illinois-based Novelty Design International, LLC, which made candy-filled toy products. These additions to the company's toy lines helped the toy segment to increase sales by $2.7 million over the previous year, but a softening in the telecommunications equipment market resulted in declining sales from the Mechanical Equipment Group. As a consequence EXX lost $223,000 in 1997 on sales of $22.3 million.

Company Perspectives:

The company's focus is found in three guiding principles: 1) Promote a customer focused mentality; 2) Have respect for each employee; 3) Develop a Lean Manufacturing Philosophy.

Buying Newcor Shares in 2000

Over the next two years the Mechanical Equipment Group posted modest gains, the result of an improvement in the telecommunications area, but the toy segment continued to deteriorate, a condition all too common in the toy industry at the time. EXX was unable to secure any new licenses, and suffered from increased product costs and stagnant consumer demand. Revenues in the toy segment fell to $9.6 million in 1998 and $7.3 million in 1999. Although overall sales fell to $20.9 million in 1998, EXX returned to profitability, earning $761,000 or 6 cents per share. In 1999 revenues improved to $21.2 million and net income grew to $2.5 million, or 19 cents per share. While the Mechanical Equipment Group was able to benefit to some extent from the Y2K phenomenon in 1999, sales for the year decreased, and the toy segment continued to flounder.

It was clear by now that EXX needed to make an adjustment to its business mix to sustain any kind of significant growth. In 2000 EXX attempted to acquire Detroit-based Newcor, Inc., which Segal believed would fit well with the company's Mechanical Equipment Group. Newcor made precision machined products, rubber and plastic parts, and special machines for the automotive, medium and heavy-duty truck, agricultural vehicle, and appliance industries.

Newcor was founded in 1933 as National Electric Welding Machines Company, and adopted the Newcor name in February 1969. The company expanded rapidly in the 1980s and 1990s, completing a number of acquisitions, including several of the subsidiaries that would be key components of EXX. Rochester Gear was added in 1985, Blackhawk Engineering in 1994, Boramco in 1996, Plastronics Plus in 1997, and Machine Tool & Gear in 1997. The company made other acquisitions during the late 1990s, but overall it grew too quickly and had difficulty turning a profit. As a result, its stock price slipped, and in the final months of 1999 Segal began acquiring Newcor stock for both EXX and himself. By early 2000 EXX had a 13.24 percent stake in the company and Segal made it clear that he might make a hostile takeover attempt. The Newcor board adopted a shareholder's rights plan to check his attempt. In April, when Newcor stock was trading from $1.80 to $2.75, Segal's offer of $4 a share to buy the company was rejected. Segal bided his time and continued to buy Newcor stock on the open market while the company's business continued to slip. In 2001 he controlled a large enough stake to gain a seat on the Newcor board and by the summer EXX-backed executives began to take over. In February 2002 Newcor filed for Chapter 11 bankruptcy and would not emerge for another year, at which time EXX bought the business for $5.9 million. Later in 2003 EXX also acquired a Newcor subsidiary, Midwest Rubber and Plastic Inc.

The addition of Newcor, a much larger company, transformed EXX, as it shifted away from the toy industry. In 2003 the company posted sales of $135.5 million, compared with $16.2 million the year before. Net income grew from $836,000 to $6.2 million. EXX was beginning a new chapter in its history. How it would fare as a company heavily dependent on the automotive industry remained to be determined.