Item 1. Business
(a) General development of business
The Futures Dimension Fund (the "Partnership") is a limited partnership organized on January 31, 1986, pursuant to a Limited Partnership Agreement (the "Limited Partnership Agreement") and under the Uniform Limited Partnership Act of the State of Illinois, and funded through an offering of Limited Partnership Assignee Units (the "Units"). On July 31, 1987, the Partnership elected to be governed under the Illinois Revised Uniform Limited Partnership Act. Each Unit represents the assignment of one unit of limited partnership interest in the Partnership. Limited Partners and holders of Limited Partnership Assignee Units are collectively referred to herein as "Unitholders." The Partnership engages in speculative trading of futures and forward contracts under the direction of multiple trading advisors.
The public offering resulted in the sale of 1,001,410 Units and trading began on June 18, 1986. The offering was registered under the Securities Act of 1933, as amended, and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Selling Agent") acted as the selling agent.
Heinold Asset Management, Inc., a Delaware corporation, is the General Partner of the Partnership (the "General Partner") and performs various administrative services for the Partnership. The General Partner was organized in 1982 to serve as the general partner and pool operator for public and private commodity pools sponsored by Heinold Commodities, Inc. The General Partner is a wholly owned subsidiary of Geldermann, Inc., an Illinois corporation ("Geldermann"). Until December 12, 1994, Geldermann was an independent operating subsidiary of ConAgra, Inc., a Delaware corporation with headquarters in Omaha, Nebraska. On that date, Geldermann was acquired by E. D. & F. Man International Inc. (formerly known as E. D. & F. Man International Futures Inc.), a New York corporation with headquarters in New York, New York.
Until June 1, 1995, Geldermann acted as the Partnership's futures commission merchant or commodity broker. On that date, E.D. & F. Man International, Inc. (the "Commodity Broker") replaced Geldermann as the Partnership's commodity broker. The General Partner and the Commodity Broker perform various services related to the Partnership's Limited Partnership Agreement and customer agreement with the Commodity Broker. References to the "Commodity Broker" refer to Geldermann, Inc. for the period prior to June 1, 1995 and to E.D. & F. Man International Inc. for the period on and after June 1, 1995.
The General Partner invested $987,000 in the Partnership at the outset of trading; after reflecting redemptions of $500,159, $271,597, $71,116, $330,991 and $83,490 on September 1, 1987, July 1, 1988, October 1, 1988, September 1, 1991 and September 30, 1994, respectively, this investment was worth $99,770 as of December 31, 1995.
Under the terms of the Customer Agreement, the Partnership will not pay brokerage commissions on the basis of the number of trades made on its behalf, but will instead pay the Commodity Broker a monthly brokerage fee of 0.8333% of the Partnership's month-end Net Assets, as defined, (a 10% annual rate).
From inception until March 1, 1994, the Partnership's trading manager was Commodities Corporation (U.S.A.) N.V. (the "Initial Trading Manager"), a corporation formed under the laws of the Netherlands Antilles in June 1983, and a wholly-owned subsidiary of Commodities Corporation, originally a Delaware corporation formed in 1969 and reincorporated under the laws of the Cayman Islands in 1980. Neither Commodities Corporation nor the Initial Trading Manager is affiliated with the General Partner, the Commodity Broker or the Selling Agent. The Initial Trading Manager provided futures and forward trading advice to the Partnership pursuant to a management contract which was terminated, upon the resignation of the Initial Trading Manager, effective March 1, 1994.
Pursuant to a trading manager agreement with the Partnership (the "Management Agreement"), the General Partner assumed the duties of the trading manager of the Partnership effective March 1, 1994 (the "Trading Manager"). Under the terms of the Management Agreement, the Trading Manager's duties include, among other things, selecting, hiring, monitoring and replacing trading advisors, allocating and reallocating assets among the trading advisors and terminating and engaging additional or replacement trading advisors.
The Partnership's assets were initially allocated among nine different Trading Advisors (the "Initial Trading Advisors"), selected by the General Partner on the recommendation of the Initial Trading Manager. One of the Initial Trading Advisors, I.C.S.C., Inc., ceased trading on behalf of the Partnership during 1987 and the Partnership added a new trading advisor, Tiverton Trading Incorporated, on November 1, 1987. Until March 1, 1994, five trading advisors traded on behalf of the Partnership: Blenheim Investments, Inc.; Knightsbridge Capital Management; Mark J. Walsh & Co.; Princeton Paris Research Corporation; and Reynwood Trading Corporation. The Initial Trading Manager terminated the Advisory Agreements with the above-referenced trading advisors effective February 28, 1994.
Heinold Asset Management, Inc., the Trading Manager, retained ARA Portfolio Management Company ("ARA"), LaSalle Portfolio Management, Inc.("LaSalle"), Sunrise Capital Management Inc. ("Sunrise") and Welton Investment Systems Corporation ("Welton"), effective March 7, 1994, March 8, 1994, March 7, 1994 and March 1, 1994, respectively, to act as the trading advisors for the Partnership. On June 6, 1994, Parthenon Futures Management, Inc. ("Parthenon") and Michael Tym, Jr. ("Tym") were retained as trading advisors for the Partnership. The Advisory Agreement with Welton was terminated on September 15, 1994 and Lawless Commodities, Inc. ("Lawless") was retained as a trading advisor effective January 24, 1995.
On February 28, 1995, the Trading Manager terminated the Advisory Agreements with ARA, LaSalle, Sunrise, Parthenon and Lawless. On March 10, 1995, the Trading Manager retained Sabre Fund Management Limited ("Sabre"), Telesis Management, Inc. ("Telesis"), Gandon Fund Management, Ltd. ("Gandon") and First October Trading Company, Inc. ("First October") to trade on behalf of the Partnership. The Advisory Agreements with Sabre and First October were terminated on July 31, 1995 and September 30, 1995, respectively. The Advisory Agreements with Telesis, Tym and Gandon were terminated on October 31, 1995.
On November 1, 1995, the Trading Manager entered into Management Contracts with Hyman, Beck & Company, Inc., Marathon Capital Growth Partners, L.L.C., RXR, Inc. and Willowbridge Associates, Inc. These four trading advisors are collectively referred to herein as the "Trading Advisors."
The Initial Trading Manager, which itself did not direct any trading on behalf of the Partnership, advised the General Partner on the selection of the Initial Trading Advisors and, among other things, monitored the performance of the trading advisors and consulted with the General Partner in reviewing certain aspects of the Trading Advisors' performance through February 28, 1994. The Initial Trading Manager was responsible for providing satisfactory replacement trading advisors throughout the term of the management contract, should a replacement be required. The Trading Advisors are each allocated a percentage of the Partnership's assets for trading. The General Partner intends at all times to retain multiple trading advisors for the Partnership that, collectively, will trade a diverse group of futures and forward contracts pursuant to a mixture of systematic and discretionary trading approaches and technical and fundamental analyses.
The Initial Trading Manager purchased 500 Units prior to the time the Partnership commenced trading, which it agreed not to redeem so long as it acted as the Initial Trading Manager. These Units, valued at $84,720, were redeemed on March 1, 1994.
Prior to March 1, 1994, the Partnership paid the Initial Trading Manager: (i) a monthly management fee of 1/2 of 1% of the month-end Net Assets (as defined in the Limited Partnership Agreement, subject to certain adjustments) of the Partnership; and (ii) a quarterly incentive fee of 20% of New Appreciation, as defined in the management contract, as of the end of each calendar quarter. The Partnership paid no fees to the trading advisors, who were compensated solely by the Initial Trading Manager.
Effective March 1, 1994, each Trading Advisor is paid a management and incentive fee by the Partnership at the rates negotiated at arm's-length on behalf of the Partnership by the Trading Manager. At December 31, 1995, each Trading Advisor receives: (i) a monthly management fee equal to 0.167 of 1% (a 2% annual rate) of the month-end Net Assets of the Partnership allocated to the management of the trading advisors; and (ii) a quarterly incentive fee equal to 20% of any new trading profit, as defined in the Advisory Agreement with each of the Trading Advisors, recognized with respect to the assets of the Partnership allocated to each of the
Trading Advisors. The Trading Manager will receive no compensation for its services to the Partnership.
Regulation
Under the Commodity Exchange Act, as amended (the "Act"), futures exchanges and futures trading are subject to regulation by the Commodity Futures Trading Commission (the "CFTC"). The National Futures Association ("NFA"), a "registered futures association" under the Act, is the only non-exchange self-regulatory organization for futures industry professionals. The CFTC has delegated to the NFA responsibility for the registration of "commodity trading advisors," "commodity pool operators," "futures commission merchants," "introducing brokers" and their respective associated persons and "floor brokers." The Act requires "commodity pool operators," such as the General Partner, "commodity trading advisors," such as the Trading Advisors, and commodity brokers or a "futures commission merchant," such as the Commodity Broker, to be registered and to comply with various reporting and record keeping requirements. The General Partner, the Trading Advisors and the Commodity Broker are all members of NFA. The CFTC may suspend a commodity pool operator's or commodity trading advisor's registration if it finds that its trading practices tend to disrupt orderly market conditions or in certain other situations. In the event that the registration of the General Partner as a commodity pool operator or any of the Trading Advisors' registration as commodity trading advisors were terminated or suspended, the General Partner and any of the Trading Advisors, respectively, would be unable to continue to manage the business of the Partnership. Should the General Partner's registration be suspended, termination of the Partnership might result.
As members of NFA, the General Partner, the Trading Advisors and the Commodity Broker are subject to NFA standards relating to fair trade practices, financial condition and customer protection. As the self-regulatory body of the futures industry, the NFA promulgates rules governing the conduct of futures industry professionals and disciplines those professionals which do not comply with such standards.
In addition to such registration requirements, the CFTC and certain futures exchanges have established limits on the maximum net long or net short position which any person may hold or control in particular commodities. The CFTC has adopted a rule requiring all domestic futures exchanges to submit for approval speculative position limits for all futures contracts traded on such exchanges. Many exchanges also limit the changes in futures contract prices that may occur during a single trading day. The Partnership may trade on foreign commodity exchanges which are not subject to regulation by any United States government agency.
(b) Financial information about industry segments
The Partnership's business constitutes only one segment, speculative trading of futures and forward contracts, for financial reporting purposes. The Partnership does not engage in sales of goods and services. The Partnership's revenue, operating results and total assets for each of the five fiscal years in the period ended December 31, 1995 are set forth under "Item 6. Selected Financial Data."
(c) Narrative description of business
(1) See Items 1(a) and (b) above.
(i) through (xii) - not applicable.
(xiii) - the Partnership has no employees.
(d) Financial information about foreign and domestic operations and export sales
The Partnership does not engage in sales of goods or services. See "Item 1(b). Business - Financial information about industry segments."
Item 2.

Item 2. Properties
The Partnership does not own any properties. Under the terms of the Limited Partnership Agreement, the General Partner performs the following services for the Partnership:
(1) Manages the business of the Partnership. Pursuant to this authority, the General Partner, as Trading Manager, has entered into a Management Agreement with the Partnership (under which the Trading Advisors have complete discretion with respect to determination of the Partnership's trading decisions pursuant to the Advisory Agreement between each Trading Advisor and the Partnership) and a Customer Agreement with the Commodity Broker (pursuant to which the Commodity Broker executes all trades on behalf of the Partnership based on the instructions of the Partnership's Trading Advisors).
(2) Maintains the Partnership's books and records, which Unitholders or their duly authorized representatives may inspect during normal business hours for any proper purpose upon reasonable written notice to the General Partner.
(3) Furnishes each Unitholder with a monthly statement describing the performance of the Partnership, which sets forth aggregate management fees, incentive fees, brokerage commissions and other expenses incurred or accrued by the Partnership during the month.
(4) Forwards annual audited financial statements (including a statement of financial condition and statement of operations) to each Unitholder.
(5) Provides to each Unitholder tax information necessary for the preparation of his annual federal income tax return and such other information as the CFTC may by regulation require.
(6) Performs secretarial and other clerical responsibilities and furnishes office space, equipment and supplies as may be necessary for supervising the affairs of the Partnership.
(7) Administers the redemption of Units.
Item 3.

Item 3. Legal Proceedings
The General Partner is not aware of any pending legal proceedings to which the Partnership is a party or to which any of its property is subject. In addition, there are no pending legal proceedings involving the General Partner or the Commodity Broker.
In the ordinary course of its business, Geldermann is involved in numerous legal actions, some of which seek substantial damages. In view of the number and diversity of the claims, the number of jurisdictions involved, and the inherent difficulty of predicting the outcome of litigation, Geldermann cannot state what the eventual outcome of these pending claims will be. As a matter of policy, Geldermann vigorously defends civil litigation, reparations or arbitration proceedings pending against it, and in all proceedings currently so pending believes it has defenses which are factually and legally sound. Geldermann is contesting the allegations of each complaint and believes that there are meritorious defenses in most of the lawsuits.
Although the CFTC's staff's interpretation that any matter filed by the CFTC against a registrant is, on its face (even though it has not been litigated), material litigation which has to be disclosed, Geldermann takes exception to this. Notwithstanding the preceding, Geldermann herewith discloses a CFTC Enforcement Action titled In the Matter of Thomas Collins, et al., CFTC Docket No. 94-13.
The Complaint in this case alleges that Geldermann, in 1986, carried and cleared accounts in joint tenancy for a Mid-America local floor trader and/or ten individuals with whom the floor trader maintained a separate joint account with each of the ten individuals. None of the afore-mentioned persons were ever employees of Geldermann. Geldermann's function was only that of clearing broker. Over a period of approximately four years, at the direction of the account holder(s), Geldermann transferred certain positions amongst and between the accounts. It is those transfers that the CFTC is alleging are non-competitive, fictitious transactions. The CFTC's complaint also alleges that Geldermann failed to properly supervise the employees who accepted the transfer instructions from the account holder(s). Geldermann takes exception to the CFTC's allegation and is vigorously defending this litigation.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
There is no trading market for the Units, and none is likely to develop. They are transferable only after written notice has been given to and approved by the General Partner. Units may be redeemed as of the first day of any month after the Partnership commences trading, upon ten days' written notice at their Net Asset Value (as defined in the Limited Partnership Agreement) as of the end of the immediately preceding month, without redemption charge or penalty, as provided in the Limited Partnership Agreement. In the event that all Units for which redemption is requested cannot be redeemed as of any redemption date, Units of limited partners will be redeemed in the order that requests for redemption have been received by the General Partner.
(b) Holders
As of January 1, 1996, there were 365 holders of Units.
(c) Dividends
No distributions or dividends have been made on the Units, and the General Partner has no present intention to make any.
Item 6.

Item 6. Selected Financial Data
The following is a summary of operations and total assets of the Partnership for each of the five fiscal years in the period ended December 31, 1995.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reference is made to "Item 6. Selected Financial Data" and "Item 8.

Item 8. Financial Statements and Supplementary Data
Financial statements are listed on page F-l of this report.
The supplementary financial information specified by Item 302 of Regulation S-K is not applicable.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant
The Partnership has no directors or executive officers. The Partnership is managed by its General Partner. There are no "significant employees" of the Partnership. Trading decisions for the Partnership are made by the Trading Advisors and monitored by the Trading Manager.
Item 11.

Item 11. Executive Compensation
The Partnership has no directors or officers. The General Partner performs the services described in "Item 2. Properties" herein. The Commodity Broker acts as the Partnership's commodity broker pursuant to the Customer Agreement described in "Item l(a). Business - General development of business."
The General Partner will participate in any appreciation in the net assets of the Partnership in proportion to its investment in it.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners
The Partnership knows of no person who owns beneficially more than 5% of the Units.
(b) Security ownership of management
Under the terms of the Limited Partnership Agreement, the Partnership's affairs are managed by the General Partner and the Trading Advisors have discretionary authority over the Partnership's futures and forward trading, which is monitored by the General Partner as Trading Manager. The General Partner owned 611 Unit-equivalents valued at $99,770 as of December 31, 1996, 1.8% of the Partnership's total equity.
(c) Changes in control
None.
Item 13.

Item 13. Certain Relationships and Related Transactions
See "Item 11. Executive Compensation" and "Item 12. Security Ownership of Certain Beneficial Owners and Management."
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
See Index to Financial Statements, infra.
(a)(2) Financial Statement Schedules
All Schedules are omitted for the reason that they are not required, are not applicable, or because equivalent information has been included in the financial statements or the notes thereto.
(a)(3) Exhibits as required by Item 601 of Regulation S-K
(3) Articles of Incorporation and By-laws
a. Limited Partnership Agreement dated as of January 31, 1986, and amended as of April 1, 1986.
b. Certificate of Limited Partnership of the Partnership as filed with the Cook County Recorder of Deeds on January 31, 1986.
The above exhibits are incorporated herein by reference from the Partnership's Registration Statement on Form S-1, file no. 33-3514.
(10) Material Contracts
a. Customer Agreement between the Partnership and Geldermann.
b. Management Contract between the Partnership, Commodities Corporation (U.S.A.) N.V. and the Trading Advisors.
c. Assignment Agreement among the Partnership, the General Partner, Heinold Asset Management Service Corporation and each Unitholder.
d. Guarantor and Net Worth undertaking of Commodities Corporation.
The above exhibits are incorporated herein by reference from the Partnership's Registration Statement on Form S-1, file no. 33-3514.
(e) Trading Manager Agreement dated March 1, 1994 between Heinold Asset Management, Inc. and the Partnership.
(f) Advisory Agreement dated March 7, 1994 between ARA Portfolio Management Company, the Trading Manager and the Partnership.
(g) Advisory Agreement dated March 8, 1994 between LaSalle Portfolio Management, Inc., the Trading Manager and the Partnership.
(h) Advisory Agreement dated March 7, 1994 between Sunrise Capital Management Inc., the Trading Manager and the Partnership.
(i) Advisory Agreement dated February 22, 1994 between Welton Investment Systems Corporation, the Trading Manager and the Partnership.
The above exhibits are incorporated herein by reference from the Partnership's report on Form 10-K filed on March 30, 1994.
(j) Advisory Agreement dated June 6, 1994 between Parthenon Futures Management, Inc., the Trading Manager and the Partnership.
(k) Advisory Agreement dated June 6, 1994 between Michael Tym, Jr., the Trading Manager and the Partnership.
(l) Advisory Agreement dated January 24, 1995 between Lawless Commodities, Inc., the Trading Manager and the Partnership.
The above exhibits are incorporated herein by reference from the Partnership's report on Form 10-K filed on March 30, 1995.
(m) Advisory Agreement dated March 10, 1995 between the Partnership and First October Trading Company, Inc.
(n) Advisory Agreement dated March 10, 1995 between the Partnership and Gandon Fund Management, Ltd.
(o) Advisory Agreement dated March 10, 1995 between the Partnership and Telesis Management, Inc.
(p) Advisory Agreement dated March 10, 1995 between the Partnership and Michael Tym, Jr.
(q) Management Contract dated November 1, 1995 between the Partnership and Hyman, Beck & Company, Inc.
(r) Management Contract dated November 1, 1995 between the Partnership and Marathon Capital Growth Partners, L.L.C.
(s) Management Contract dated November 1, 1995 between the Partnership and RXR, Inc.
(t) Management Contract dated November 1, 1995 between the Partnership and Willowbridge Associates Inc.
(27) Financial Data Schedule
The above exhibits are filed herewith.
(b) Reports on Form 8-K
The Partnership did not file a report on Form 8-K during the quarter ended December 31, 1995.
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, in the City of Chicago and State of Illinois on the 28th day of March, 1996.
THE FUTURES DIMENSION FUND
By HEINOLD ASSET MANAGEMENT, INC. General Partner
By /s/ Daniel E. Ragen -------------------------- Daniel E. Ragen President
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 General Partner of the Registrant in the capacities and on the date indicated.
(Being the principal executive officer, the principal financial and accounting officer, and a majority of the directors of Heinold Asset Management, Inc.)
By /s/ Daniel E. Ragen - ---------------------- Daniel E. Ragen President
THE FUTURES DIMENSION FUND (AN ILLINOIS LIMITED PARTNERSHIP) FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND 1994 AND FOR THE THREE YEARS ENDED DECEMBER 31, 1995 AND INDEPENDENT AUDITORS' REPORT
THE FUTURES DIMENSION FUND (AN ILLINOIS LIMITED PARTNERSHIP) PAGE
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS:
Statements of Financial Condition as of December 31, 1995 and 1994
Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993
Statements of Partners' Capital for the Years Ended December 31, 1995, 1994 and 1993
Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993
Notes to Financial Statements -
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the General Partner and Limited Partners of The Futures Dimension Fund:
We have audited the accompanying statements of financial condition of The Futures Dimension Fund (an Illinois Limited Partnership, the "Partnership") as of December 31, 1995 and 1994, and the related statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Partnership's General Partner. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of The Futures Dimension Fund as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 9, 1996
THE FUTURES DIMENSION FUND (AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1995 AND 1994
See notes to financial statements.
THE FUTURES DIMENSION FUND (aN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
See notes to financial statements.
THE FUTURES DIMENSION FUND (aN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
See notes to financial statements.
THE FUTURES DIMENSION FUND (aN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
See notes to financial statements.
THE FUTURES DIMENSION FUND (AN ILLINOIS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1. ORGANIZATION OF THE PARTNERSHIP
The Futures Dimension Fund (the "Partnership") was organized in January 1986, under the Illinois Uniform Limited Partnership Act (the "Act"), for purposes of engaging in speculative trading of primarily futures and forward contracts. Heinold Asset Management, Inc. ("HAMI"), a wholly owned subsidiary of Geldermann, Inc. ("Geldermann"), is the General Partner of the Partnership. On December 12, 1994, the parent of Geldermann, ConAgra, Inc., sold all of the common stock of Geldermann to E.D.& F. Man, International ("Man"). As a result, Geldermann and HAMI are wholly owned by Man.
The Partnership's funds held at Man, previously Geldermann, are in segregated accounts as required by the Commodity Exchange Act, as amended. These funds are used to meet minimum margin requirements for all of the Partnership's open positions, as set by the exchange upon which each futures contract is traded. These requirements are adjusted, as needed, due to daily fluctuations in the values of the underlying positions. If necessary, certain positions may be liquidated to satisfy resulting changes in margin requirements.
The Partnership has a brokerage contract with Man, previously Geldermann, which provides that the Partnership will pay a monthly brokerage fee of 0.8333% (10% annually) of the Partnership's month-end net asset value, plus NFA fees.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - Futures and forward contracts are recorded on trade date and are reflected in the accompanying statements of financial condition at market value on the last business day of the reporting period. The difference between the original contract amount and the market value of the futures and forward contracts is reflected as the change in net unrealized appreciation. Market values of futures contracts are based upon exchange settlement prices. Market values of forward contracts are based upon quoted rates provided by major financial institutions.
OPERATING EXPENSES - The Partnership bears all expenses incurred in connection with its activities. These include brokerage commissions, trading manager's management and incentive fees, and periodic legal, auditing, tax return preparation and filing fees. The General Partner bears all other operating expenses.
INCOME TAXES - No provision for federal income taxes has been made in the accompanying financial statements since the net income (loss) of the Partnership is not taxable as such but is includable in the income tax returns of the individual partners.
STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows for each of the three years ended December 31, 1995, cash includes only cash on deposit at financial institutions.
3. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades both cash and derivative financial instruments. The Company's principal source of revenues by reporting category is as follows:
The Partnership was organized to engage in speculative trading of a diversified portfolio of futures and forward contracts and commodity options. SFAS 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," defines a derivative as a future, forward, swap or option contract, or other financial instruments with similar characteristics such as caps, floors and collars. Generally, these financial instruments represent future commitments to exchange interest payment streams or currencies or to purchase or to sell other financial instruments at specific terms at specified future dates. Option contracts provide the holder with the right, but not the obligation, to purchase or sell a financial instrument at a specific price before or on an established date. These financial instruments may have market and/or credit risk in excess of amounts recorded in the Statements of Financial Condition.
MARKET RISK - Derivative financial instruments involve varying degrees of off-balance sheet market risk whereby changes in the level or volatility of interest rates, foreign currency exchange rates or market values of the underlying financial instruments or commodities may result in changes in the value of the financial instrument in excess of the amounts currently reflected in the Statements of Financial Condition. The Partnership's exposure to market risk is influenced by a number of factors, including the relationships among financial instruments with off-balance sheet risk and between financial instruments with off-balance sheet risk and the Partnership's proprietary commodities, as well as the volatility and liquidity in the markets in which the financial instruments are traded.
FAIR VALUE - The derivative instruments used in the Partnership's trading activities are marked to market daily with the resulting unrealized gains or losses recorded in the Statements of Financial Condition and the related income or loss reflected in revenues derived from these transactions. The fair value of derivative financial instruments held or issued for trading purposes as of December 31, 1995 and the average monthly fair value of the instruments for the fiscal year ended December 31, 1995 are as follows:
4. LIMITED PARTNERSHIP AGREEMENT
The Limited Partnership Agreement (the "Agreement") provides for the following:
ALLOCATION OF PROFIT AND LOSS FOR PARTNERSHIP ACCOUNTING PURPOSES - The Limited Partners and the General Partner share in the profits and losses of the Partnership in proportion to the number of units or unit equivalents held by each. However, no Limited Partners are liable for obligations of the Partnership in excess of their capital contribution and profits, if any, and such other amounts for which they may be liable pursuant to the Act.
DISTRIBUTIONS - Distributions (other than redemption of units) are made on a prorata basis at the sole discretion of the General Partner in accordance with the respective capital accounts of the partners. The General Partner has made no distributions from the Partnership to date.
REDEMPTIONS - Limited Partners (or any assignee thereof) may cause any or all of their units to be redeemed as of the first of any month following 10 days' written request for redemption, subject to certain other conditions, as described in the Agreement. Redemption is at net asset value as of month-end.
DISSOLUTION - The Partnership will be dissolved on December 31, 2006 unless preceded by a decline in the Partnership's aggregate net assets to less than $1,000,000 or upon the occurrence of certain future events, as specified in the Agreement.
5. MANAGEMENT AGREEMENT
The Partnership enters into various advisory agreements (the "Advisory Agreements"). As of December 31, 1995, the Partnership's trading advisors are Hyman Beck & Co., Inc., RXR, Inc., Willowbridge Associates, Inc., and Marathon Capital Growth Partners.
Under the terms of the Advisory Agreements, the trading advisors have sole responsibility for determining futures trades for the Partnership. As compensation for these services, each trading advisor receives a monthly management fee equal to .166% (2% annually) of the Partnership's net asset value, as defined, as of the last day of each month and quarterly incentive fees of 20% of "new trading profits," as defined, on their respective share of the Partnership's net asset value. Incentive fees are retained by the trading advisors even when "trading losses," as defined, occur in subsequent quarters; however, no further incentive fees are payable until any such trading losses (other than those attributable to redeemed units) are recouped by the trading advisors.
******
To the best of my knowledge and belief, the information in this statement is accurate and complete.
Heinold Asset Management, Inc. (Pool Operator)
/s/ Robert Ledvora - ---------------------------------------------------- Robert Ledvora Executive Vice-President and Chief Financial Officer
THE FUTURES DIMENSION FUND EXHIBIT INDEX
Exhibits Included Herein - --------------------------
10(m) Advisory Agreement dated March 10, 1995 between the Partnership and First October Trading Company, Inc.
10(n) Advisory Agreement dated March 10, 1995 between the Partnership and Gandon Fund Management, Ltd.
10(o) Advisory Agreement dated March 10, 1995 between the Partnership and Telesis Management, Inc.
10(p) Advisory Agreement dated March 10, 1995 between the Partnership and Michael Tym, Jr.
10(q) Management Contract dated November 1, 1995 between the Partnership and Hyman, Beck & Company, Inc.
10(r) Management Contract dated Nobember 1, 1995 between the Partnership and Marathon Capital Growth Partners, L.L.C.
10(s) Management Contract dated November 1, 1995 between the Partnership and RXR Inc.
10(t) Management Contract dated November 1, 1995 between the Partnership and Willowbridge Associates, Inc.
27 Financial Data Schedule
Exhibits Incorporated Reference - --------------------------------
See pages 13-14 for a list of exhibits incorporated by reference.


ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings other than routine legal proceedings undertaken in the ordinary course of business. In the opinion of management, after consultation with counsel, the aggregate amount involved in such proceedings is not material to the financial condition or results of operations of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1995, there were no matters submitted to a vote of the shareholders of Center Banks.
PART II.
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The information contained on the inside back cover of the Company's Annual Report to Shareholders for the year ended December 31, 1995 (the "Annual Report") and page 1 of the definitive Proxy Statement are incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Other required information contained in the table on page 6 of the Annual Report is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operation" in the Annual Report is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements contained in the 1995 Annual Report are incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III.
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") requires the reporting to the Securities and Exchange Commission (the "Commission") within required time frames of transactions in Company common stock by insiders. All filings required under Section 16 of the Exchange Act during 1995 were filed on a timely basis, except for a Form 4 for J. David Hammond, Executive Vice President, which was filed late due to an oversight. In making these statements, the Company has relied on written representations of its incumbent executive officers and directors.
Additional information regarding directors of the Company is incorporated by reference from pages 2 to 5 of the definitive Proxy Statement.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from pages 6 to 7 of the definitive Proxy Statement.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from pages 2 to 4 of the definitive Proxy Statement.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV.
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are incorporated herein by reference:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements
(a)(2) There are no financial statement schedules which are required to be filed as a part of this form since they are not applicable.
(a)(3) See (c) below for all exhibits filed herewith.
(b) During the three-month period ended December 31, 1995, the Registrant filed a Form 8-K announcing the election of Anne E. O' Connor to the Company's Board of Directors. No financial statements were filed with this report.
(c) Exhibits. The following exhibits are either filed as part of this annual report on Form 10-K, or are incorporated herein by reference:
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.
Center Banks Incorporated - ------------------------- Registrant


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.
EXX through its subsidiaries, is engaged in the design, production and sale of consumer goods in the form of "impulse toys", watches and kites. In addition, it is engaged in the design, production and sale of electric motors geared toward the (OEM) original equipment market, and the design, production and sale of cable pressurization equipment sold to the telecommunications industry. It formerly manufactured machine tools and machine tool replacement parts. It continues to receive royalty income from machine tools and replacement parts as part payment for its sale of a subsidiary's assets. Continuing operations are conducted through five wholly-owned subsidiaries.
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 and watches 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.
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 sourcing for the products, nor are any expected for the current year.
Inventories are maintained against anticipated orders. Gordy believes that its practices relating to all working capital items, including its inventory practices, do not materially differ from those used by other companies in similar endeavors and comparable in size to Gordy.
Gordy operates in a highly competitive market. It competes with many other companies, some of which have substantially greater resources and assets than Gordy.
In February, 1994, Hi-Flier Inc., a newly formed subsidiary of SFM, purchased the assets of Hi-Flier Manufacturing Co., a leader in the kite business for more than seventy years. It is anticipated that this acquisition will strengthen the toy segment by providing product lines that compliment those of the Henry Gordy International Inc. subsidiary.
The Howell Electric Motors Division ("Howell") is engaged in the ----------------------------------- manufacture and sale of alternating current, fractional and small integral motors ranging from 1/4 to 10 horsepower. Howell's product line consists of such specialty items as blower motors designed for use in air conditioning systems, flat-type motors used in floor scrubbing and polishing machines, and motor pump assemblies used in food machinery products and a variety of other applications. In recent years, a substantial portion of Howell's sales have been to the floor care service industry and the food machinery industry, and have been effected through Howell's own marketing personnel and several independent sales representatives working on a commission basis.
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 against known requirements, i.e., they are held against firm orders, or, in the case of certain items with a variety of applications to Howell's products, are held against 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. It competes with many other companies which have significantly greater assets and resources.
In April, 1994, TX Systems Inc., a newly formed subsidiary of SFM, 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 operations 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.
Effective May 1, 1993 the Company's wholly owned subsidiary Waterbury Headers Inc. ("WH") sold substantially all of its operating assets to Waterbury Headers Corp. ("WHC"), a corporation formed by a prior officer of the Company, in exchange for a promissory note of $275,000 with interest at 10% plus a right to receive a royalty on future sales. In addition SFM Corporation in exchange for an agreement not to compete with WHC obtained a promissory note of $250,000 with interest at 10%. Interest on both notes accrues as of May 1, 1993, with payments of accrued interest and principal commencing in April, 1998. Further information with respect to the transactions may be obtained by examining the Company's Form 8-K dated May 18, 1993 filed with the Securities and Exchange Commission, herein incorporated by reference.
Material Customers. ------------------
The registrant's business is not dependent to a material extent on any single customer or group of customers.
Employees. ---------
The registrant employs approximately 145 full-time employees, of whom approximately 63 are employed by Howell, 15 by TX Technology Corp., 65 by Gordy, and 2 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. This facility is held by the registrant subject to a mortgage securing the registrant's line of credit. (See Note 8 to the Consolidated Financial Statements page).
The registrant through subsidiaries currently leases 11,000 square feet of warehousing and office space in Randolph, New Jersey for its telecommunication operations. In addition the registrant leases office and/or showroom space in New York City, Dallas, Texas and Las Vegas, Nevada.
On May 1, 1993 SFM sold substantially all the assets of its Waterbury Subsidiary. Waterbury leased a cement and cinderblock building located in Waterbury, Connecticut, which contained approximately 15,000 square feet of office and warehouse space.
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 5. Market for the Registrant's Common Stock and Related Security Holder - ----------------------------------------------------------------------------- Matters. - -------
Principal Market: American Stock Exchange ------------------------------------------
Quarterly Price Information ---------------------------
Stockholders: As of March 15, 1996, there were approximately 1,100 ------------ ----- stockholders of record of Class A shares and 500 stockholders of record of Class --- B shares.
Dividend Information: No dividends were paid in 1995 or 1994. --------------------
The registrant's current ability to pay dividends is governed by provisions in a loan agreement with its principal bank. No cash dividend may be paid unless the registrant has had net income aggregating at least $400,000 during the four calendar quarters immediately preceding the date of payment, and the aggregate dividends paid over any four calendar quarters may not exceed 40% of the net income for that period. In addition, no dividend may be paid which would have the effect of reducing the Company's net worth below $4,000,000. While the restrictions do not currently prohibit the payment of a dividend, there is no present intention to make any dividend payments.
Item 6.

Item 6. Selected Financial Data. - --------------------------------
(A) 1991 does not reflect the results of the Seneca Falls Subsidiary sold in February, 1991 as of January 1, 1991.
(B) As adjusted for a four for one stock split effective October 21, 1994, Class A and Class B shares retroactively shown.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations. - --------------
1995 Compared to 1994 - ---------------------
Net sales in 1995 were $30,522,000 compared to $45,490,000 which was a decrease of $14,968,000. This year's sales represents 67% of the prior year sales. The Toy Segment's sales were $21,373,000 compared to $37,188,000 in 1994, a decrease of $15,815,000. The current year's sales represent 57% of the prior year sales. The Mechanical Equipment Group had total sales of $9,149,000 in 1995, compared to $8,302,000 in 1994, an increase of $847,000. The current year sales represent 110% of the prior year sales.
Gross profits were $11,471,000 compared to last year's $16,982,000. The Toy Segment accounted for a $ 6,756,000 decrease in gross profit while the Mechanical Equipment Group accounted for the counterbalancing increase. Improved operating results in the Mechanical Equipment Group accounted for this difference.
Selling and G&A expenses were $ 8,281,000, a decrease of $4,437,000 from $12,718,000 in 1994. The decrease in expenses directly relates to the substantial decreased sales volume in the Toy Segment.
Operating profits of $3,190,000 were $1,074,000 less than the prior year's $4,264,000. The Toy Segment's operating profits decreased to $2,831,000 from $5,280,000 while the Mechanical Equipment Group sustained an operating profit of $943,000, an increase of $ 1,027,000 from 1994. Corporate and other operating expenses decreased to $584,000 from $932,000 last year.
Interest expense increased slightly to $84,000 from $18,000 in the prior year. The amount of company borrowing was minimal during the year.
The Company generated net income of $2,330,000 or $.86 per A & B share compared to net income of $2,682,000 or $.99 per share A & B share in 1994 as adjusted for a four for one split.
The Company reported a deferred tax asset totaling $824,000 at December 31, 1995. Management believes this asset will be realized by taxable earnings in the future.
Accrued expenses decreased substantially over the prior year. Royalties payable were $728,000 at year end compared to $1,490,000 at December 31, 1994 and commissions payable were $245,000 at year end compared to $468,000 at the end of the prior year. The large decrease in both of the categories relates to the large decrease in sales in the Toy Segment and the payments of the prior amounts payable during the year. The decrease in the accrual in payroll and related costs to $301,000 at December 31, 1995 from $955,000 in the prior year is due to salaries and bonuses disbursed or reclassified during the year.
The Toy Segment's reduction in sales was attributable to reduced sales of licensed goods most particularly the Mighty Morphin Power Ranger line of products which during the year had reached a level of market maturity. The prior year's sales reflected an increase specifically due to a positive market condition, the continuation of which was not predictable. Management continues to review and add to its licensing structure based on new items in the market. The new management people added during the year have demonstrated an ability to positively impact on future operations. Management can make no prediction regarding the availabilty on new licenses or their acceptance in the market place.
As described last year, for various reasons, namely the nature of the product sold, the economic climate and industry practices, management conservatively provided for returns or allowances relating to the products sold and delivered. During the year a portion of the provision was utilized. Management continues to reevaluate this situation in adequately reserving for possible occurrences of this nature.
The Mechanical Equipment Group's results reflect the first full year of operations of the TX Technology business. Increases in sales volume and operating profit occurred in both the Howell and TX segments of the business. Management anticipates that the TX business will continue its growth in 1996 and Howell will sustain operations in 1996.
1994 Compared to 1993 - ---------------------
Net sales in 1994 were $45,490,000 compared to $18,037,000 which was an increase of $27,453,000. Last year's sales represented 252% of the prior year sales. The Toy Segment's sales were $37,188,000 compared to $10,762,000 in 1993, an increase of $26,426,000. Last year's sales represent 346% of the prior year sales. The Mechanical Equipment Group had total sales of $8,302,000 in 1994, compared to $7,275,000 in 1993, an increase of $1,027,000. The last year's sales represented 114% of the prior year sales.
Gross profits were $16,982,000 compared to the prior year's $5,114,000. The Toy Segment accounted for a $12,322,000 increase in gross profit while the Mechanical Equipment Group accounted for the counterbalancing decrease. Start up costs for the new acquisition accounted for this difference.
Selling and G&A expenses were $12,718,000, an increase of $8,513,000 from $4,205,000 in 1993. The increase in expenses directly related to the substantial increased sales volume in the Toy Segment.
Operating profits of $4,264,000 were $3,355,000 greater than the prior year's $909,000. The Toy Segment's operating profits increased to $5,280,000 from $528,000 while the Mechanical Equipment Group sustained an operating loss of $84,000, a decrease of $1,079,000 from 1993. Corporate and other operating expenses increased to $932,000 from $614,000 last year.
Interest expense increased slightly to $18,000 from $17,000 in the prior year. The amount of company borrowing was minimal during the year.
The Company generated net income of $2,682,000 or $.99 per A & B share compared to net income of $611,000 or $.23 per share in 1993 adjusted for a four for one split.
The Company reported a deferred tax asset totaling $1,477,000 at December 31, 1994. Management believes this asset will be realized by taxable earnings in the future.
Accrued expenses increased substantially over the prior year. Royalties payable were $1,490,000 at year end compared to $34,000 at December 31, 1993 and commissions payable were $468,000 at year end compared to $38,000 at the end of the prior year. The large increase in both of the categories relates to the large increase in sales in the Toy Segment and the related royalties and commissions payable on the sales. The increase in the accrual in payroll and related costs to $955,000 at December 31, 1994 from $300,000 in the prior year is due to salaries and bonuses not disbursed at year end.
The Toy Segment's substantial sales increase was caused by various factors which included licenses well received by consumers. The addition of watches and bendable figures to its impulse line benefited operations. Also, the addition of new management people enhanced the overall operation. The Kite acquisition in February, 1994 has provided an additional customer base for all Toy Segment business as well as the existing kite business. Management is continually reviewing its license structure with the view to update and adjust same in light of continuing competition and the availability of new license properties. Management can make no prediction regarding the availability of future licenses or their acceptance by the consumer.
In light of the substantial growth referred to in the Toy Segment, the nature of the products sold, the economic climate, and industry practices, Management has conservatively provided for returns or allowances relating to the products sold and delivered. As indicated, it is Management's intention to adequately reserve for possible occurrences of this nature.
The Mechanical Equipment Group's results reflect the addition of the TX Technology business as of the end of April, 1994 with its related start up costs. While the Howell Electric Motors Division sales volume reduced slightly, the TX subsidiary more than compensated for the decline. Management anticipates that the TX business will surpass the 1994 levels and that Howell will sustain operations in 1995.
Liquidity and Sources of Capital. --------------------------------
During 1995 the Company utilized $2,720,000 of cash flows from operating activities compared to generating $7,773,000 in 1994 due in part to decreased income, payment of income taxes, accounts payable and a reduction of accounts receivable and other related assets.
At the end of 1995 the Company had working capital of approximately $9,219,000 and a current ratio of 3.1:1. In addition, as described in the Notes to Consolidated Financial Statements, at year-end the Company had a Credit Agreement (the "Agreement") with a bank, pursuant to which the bank will provide a line of credit and letters of credit aggregating $5,000,000. The Company gave the bank a security interest in substantially all of its accounts receivable, inventories, machinery and equipment, land and building (See Note 8 to the Consolidated Financial Statements Page). In February 1996, the bank extended the loan agreement until August, 1996. Management currently intends to negotiate a new credit agreement prior to August 31, 1996. The current rate of interest charged by the bank is 3/4 of 1% over the prime rate. While at year end there was no borrowing on the credit facility there may be borrowings from time to time. In the event that there was a borrowing balance and the Company's bank demanded repayment in full of its revolving credit loan due August 31, 1996, which is considered unlikely, the Company would have options to seek to borrow elsewhere against its receivables or other assets, arrange to collect its receivables early or reach a loan work-out agreement with the Bank. At year- end, unused credit under this line amounted to the facility line of $5,000,000. The Company considers this line to be more than adequate to handle its current operating capital 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 or borrowing under the credit line.
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, 1995. The Proxy Statement is herein incorporated by reference.
Item 10.

Item 14. Exhibits, Schedules to Financial Statements and Reports - ----------------------------------------------------------------- on Form 8-K. -----------
(a) Schedules to Financial Statements ---------------------------------
See Schedules to Financial Statements immediately following conclusion of the Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K -------------------
Not applicable.
SIGNATURES ----------
/s/ JERRY FISHMAN EXX INC - ------------------------------- Jerry Fishman, Director
/s/ NORMAN H. PERLMUTTER /s/ DAVID A SEGAL - ------------------------------- --------------------- Norman H. Perlmutter, Director David A. Segal Chairman of the Board Chief Executive Officer /s/ FREDERIC REMINGTON - ------------------------------- Frederic Remington, Director
/s/ DAVID A. SEGAL - ------------------------------- David A. Segal, Director
Dated: March 28, 1996
EXX INC AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEMS 8 AND 14(a))
================================================================================
Page No.
(1) Financial Statements
Independent Auditors' Report - 3
Consolidated Financial Statements Balance Sheets December 31, 1995 and 1994
Statements of Income Years Ended December 31, 1995, 1994 and 1993
Statements of Changes in Stockholders' Equity Years Ended December 31, 1995, 1994 and 1993
Statements of Cash Flows Years Ended December 31, 1995, 1994 and 1993 - 8
Notes to Consolidated Financial Statements - 23
(2) Financial Statement Schedules VIII - Valuation and Qualifying Accounts and Reserves S-1
OTHER SCHEDULES ARE OMITTED BECAUSE OF THE ABSENCE OF CONDITIONS UNDER WHICH THEY ARE REQUIRED OR BECAUSE THE REQUIRED INFORMATION IS GIVEN IN THE CONSOLIDATED FINANCIAL STATEMENTS OR NOTES THERETO.
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, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years then ended, and the supporting schedules listed in the index at Item 14(a)(1) and (2). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EXX INC and Subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended, and the supporting schedules present fairly the information required to be set forth therein, in conformity with generally accepted accounting principles.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey February 28, 1996
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of EXX Inc (Formerly SFM Corporation)
We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of SFM Corporation and subsidiaries for the year ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of SFM Corporation and subsidiaries for the year ended December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109.
WEBER, LIPSHIE & CO.
Roseland, New Jersey February 22, 1994
EXX INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to cosolidated financial statements. - ----------------------------------------------------------
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements. - -----------------------------------------------------------
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================ Years Ended December 31, 1995, 1994, and 1993 - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. - -----------------------------------------------------------
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements. - -----------------------------------------------------------
EXX INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
See accompanying notes to consolidated financial statements. - -----------------------------------------------------------
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. Business and organization Line of Business ---------------- EXX Inc and Subsidiaries (collectively the Company) operate primarily in the toy and electro mechanical industries. Operations in the toy industry involve the design, production and distribution of consumer goods in the form of impulse toys, watches and kites, which are primarily imported from the Far East. Operations in the electro mechanical equipment industry primarily involve the design, production and sale of capital goods, such as electric motors and cable pressurization equipment, for the telecommunications industry. The Company's electro mechanical products are incorporated into customers' products or are used to maintain customers' equipment.
2. Summary of significant accounting policies Reorganization -------------- In October 1994, the stockholders of SFM Corporation (SFM) approved a plan of reorganization, whereby SFM was merged, on a tax- free basis, into a subsidiary of EXX Inc. Simultaneous with this merger, each share of common stock of SFM was converted into three shares of EXX Inc Class A common stock and one share of EXX Inc Class B common stock. The EXX Inc stock was substantially identical to the former SFM stock in rights and privileges, except that holders of Class B common stock have the right to elect two-thirds or the next higher rounded number of directors and the holders of the Class A common stock have the right to elect the remaining directors of the Company. This merger has been accounted for in a manner similar to a pooling of interests.
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.
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. Summary of significant accounting policies (continued) Cash and Cash Equivalents ------------------------- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. As of December 31, 1995, balances of cash at financial institutions exceeded the federally insured limit of $100,000. These balances fluctuate greatly and often exceed $100,000 during the year. Management regularly monitors the financial condition of the financial institution, along with their balances in cash and cash equivalents, and attempts to keep this potential risk to a minimum.
Short-Term Investments ---------------------- Short-term investments have maturities of less than one year. These investments are readily convertible into cash and are stated at cost plus accrued interest, which approximates market value.
Fair Value of Financial Instruments ----------------------------------- The fair value of the Company's assets and liabilities which qualify as financial instruments under Statement of Financial Accounting Standards No. 107 approximate the carrying amounts presented in the balance sheets.
Inventories ----------- Certain inventories are valued at the lower of cost, on the last-in, first-out ("LIFO") method, or market. The remainder of the inventories are valued at the lower of cost, on the first-in, first out ("FIFO") method, or market.
Impairment of Long-Lived Assets ------------------------------- The Company periodically assesses the recoverability of the carrying amounts of long- lived assets, including intangible assets. A loss is recognized when expected undiscounted future cash flows are less than the carrying amount of the asset. The impairment loss is the difference by which the carrying amount of the asset exceeds its fair value.
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. Summary of significant accounting policies (continued) Property and Equipment ----------------------
Property and equipment are stated at cost and are depreciated on the straight-line method over the estimated useful lives of the assets as follows:
Building and improvements 10 - 50 years Machinery and equipment 3 - 20 years
Maintenance and repairs are charged to operations, while betterments and improvements are capitalized. The cost of property sold or otherwise disposed of, and the accumulated depreciation thereon, are eliminated from the property and the related accumulated depreciation accounts and any resulting gain or loss is credited or charged to income.
Income Taxes ------------
The Company complies with Statement of Financial Accounting Standards No. 109 (SFAS 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 annually for differences between financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, and based on enacted tax laws and rates applicable to the periods in which the differences are expected to effect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. The cumulative effect of adopting this change in accounting principle is reflected in the 1993 statement of income.
Other Assets ------------
Other assets include intangible assets which are being amortized over their estimated useful lives of seven years on the straight-line method.
Income Per Common Share -----------------------
Income per common share is based on the weighted average number of common shares outstanding during each year, after giving effect to the reorganization.
EXX INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. Summary of significant accounting policies (continued) Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for allowance for doubtful accounts, allowance for sales returns, inventory obsolescence, depreciation and amortization, taxes and contingencies.
Reclassifications -----------------
Certain reclassifications have been made to prior years financial statements in order to conform to current year presentation.
3. Acquisitions In February 1994, the Company purchased certain assets of, and began operating, the kite manufacturing and distribution business of Hi- Flier Manufacturing Co.
In April 1994, the Company purchased the business and certain assets of TX Technologies, Inc., a manufacturer and distributor of cable pressurizers and monitors, for $900,000.
These acquisitions were accounted for as purchases and the purchase price of the assets acquired was allocated on the basis of the relative fair market value of the net assets acquired.
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NOTES TO FINANCIAL STATEMENTS
================================================================================ 3. Acquisitions (continued) The following unaudited pro forma combined statement of income for 1994 gives effect to the acquisition of TX Technologies, Inc. (the Hi-Flier transaction was not deemed to be material) as if it had occurred on January 1, 1994:
4. Inventories Inventories consist of the following at December 31, 1995 and 1994:
Inventories stated on the LIFO method amounted to $339,000, $396,000, and $464,000 at December 31, 1995, 1994 and 1993, respectively, which amounts are below replacement cost by approximately $336,000, $300,000 and $292,000, respectively.
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NOTES TO FINANCIAL STATEMENTS
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4. Inventories (continued) During 1995, 1994 and 1993, net income was not materially effected as a result of using the LIFO method.
5. Property and equipment Property and equipment consists of the following at December 31, 1995 and 1994:
6. Other assets Other assets consist of the following at December 31, 1995 and 1994:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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7. Accounts payable and other current liabilities Accounts payable and other current liabilities consist of the following at December 31, 1995 and 1994:
8. Line of credit Under the terms of a revolving credit agreement, as amended, a bank provides the Company with a line of credit and a letter of credit facility aggregating $5,000,000. Loans under the agreement bear interest at 3/4% per annum in excess of the bank's base lending rate. The agreement matures in August 1996 and is collateralized by substantially all of the Company's trade accounts receivable, inventories, and property and equipment. At December 31, 1995 and 1994, there were no balances due.
The loan agreement imposes various financial covenants on the Company, including the maintenance of minimum net worth of $4,000,000, and limitations on capital expenditures, loans and advances, future borrowings, and the purchase of common stock for the treasury. In addition, no cash dividends may be paid unless the Company has had net income aggregating at least $400,000 during the four calendar quarters immediately preceding the date of payment, and the aggregate dividends paid over any four calendar quarters may not exceed 40% of the net income for that period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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9. Income taxes The provision for income taxes includes the following:
Subsequent to the corporate reorganization in 1994, substantially all of the Company's taxable income is generated in states with no state and local income taxes.
The difference between the applicable federal statutory income tax rate and the effective income tax rate is reconciled as follows:
The tax effect of principal temporary differences at December 31, 1995 and 1994 are shown in the following table:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================ 9. Income taxes (continued) Amounts for deferred income tax assets and liabilities at December 31, 1995 and 1994 are as follows:
10. Pension plans The Company participates in two pension plans. One plan covers hourly employees under union contracts and provides for defined contributions based on annual hours worked. Pension expense for these plans was $72,000 in 1995, $57,000 in 1994 and $29,000 in 1993.
The Company-sponsored plan is a noncontributory defined benefit pension plan. Benefits are based on years of service and the employees' highest five year average earnings. The Company's funding policy is to contribute annually at least the minimum amount required by the Employee Retirement Income Security Act of 1974. Effective January 1, 1988, the plan was curtailed through an amendment to freeze benefits and future participation.
Net pension expense for the Company-sponsored plan is as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================ 10. Pension plans (continued) The following table sets forth the funded status of the Company-sponsored plan and the amounts recognized by the Company in the consolidated balance sheets as of December 31, 1995 and 1994.
The discount rate and rate of increase in future compensation assumed in determining the actuarial present value of the projected benefit obligation is 8%. The expected long-term rate of return on assets is 10%.
11. Stock option plan During 1994, the Company's Board of Directors adopted, and the stockholders approved, the 1994 stock option plan (the Plan) pursuant to which 1,000,000 shares of Class A common stock were reserved for issuance upon the exercise of options granted to officers, directors, employees and consultants of the Company. Options under the Plan may be incentive stock options, unqualified 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, 1995, 1,000 options have been granted under the Plan, which are exercisable at $14.50 per share. These options expire in January 1998.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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12. Commitments and contingencies Leases ------
The Company leases showroom and office facilities under noncancellable operating leases. The following is the aggregate future minimum rental payments, as of December 31, 1995, under these noncancelable operating leases:
Rent expense for 1995, 1994 and 1993 amounted to $122,000, $129,000 and $106,000, respectively. Rent expense, attributable to a lease with a related party, on a month to month basis, amounted to $15,000 in 1993.
Royalty Agreements ------------------
The Company has licensing agreements relating to the sale of certain products, which expire through December 31, 1998. Under the terms of the agreements, the Company is required to pay royalties of 6% to 20% on the net sales of the related products. In addition, certain agreements require minimum guaranteed advance payments or payments over the life of the agreement. At December 31, 1995, minimum guaranteed royalty payments aggregate approximately $730,000 and prepaid royalties at December 31, 1995, which expire through December 31, 1998, aggregate $433,000.
Employment and Stock Repurchase Agreement -----------------------------------------
The Company has an employment agreement with an officer, who is a principal stockholder, requiring the payment of a minimum annual salary of approximately $300,000, adjusted annually for increases in the consumer price index, plus a bonus based on earnings. Amounts earned under this contract from September 1993 through December 31, 1995 have been deferred in the form of a note payable to the officer. The note bears interest at 9% per annum and is due on February 22, 1996. The agreement expires in the year 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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12. Commitments and contingencies (continued) In addition, the agreement provides that the principal stockholder can require the Company to purchase all of his common stock in the Company on the date his employment terminates, at the greater of fair market value or $10 per share (see Note 8 as to limitations on the repurchase of common stock). At December 31, 1995, the stockholder beneficially owned 1,256,712 shares having an approximate fair market value of $6,542,000.
Consulting Agreement --------------------
In 1993, the Company entered into a three year consulting agreement with a former officer of a subsidiary, for an annual fee of $50,000.
13. Dependence upon key relationships Approximately 27% and 51% of the Company's revenues for the years ended December 31, 1995 and 1994 were attributable to agreements with a certain licensor. The agreements with this licensor expire through December 31, 1996.
14. Description of business and industry segments Selected segment and related information is presented in the table below. Operating income is total revenues less operating expenses. In computing operating income, general corporate expenses, interest expense, certain other income and income taxes have been excluded. The LIFO method of valuing inventories of certain electro mechanical equipment decreased operating income for that segment by $22,000, $8,000 and $10,000 in 1995, 1994 and 1993, respectively. Identifiable assets by industry are those assets that are used in the Company's operations in each industry.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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14. Description of business and industry segments (continued) Export revenues for the three years ended December 31, 1995, 1994 and 1993 were approximately $1,549,000, $1,276,000 and $811,000, respectively.
Industry segment information for 1995, 1994 and 1993 is summarized as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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14. Description of business and industry segments (continued)
[A] Excludes corporate assets of $6,207,000, $9,069,000 and $1,610,000 at December 31, 1995, 1994 and 1993, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(a) Reflects the reorganization of SFM Corporation into EXX Inc and the four for one stock split effective October 21, 1994.
(b) Includes the effect of a reclassification of approximately $3,900,000 of royalties to general and administrative expenses.
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SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
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