<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 1996.
REGISTRATION NO. 333-10021
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 5
to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INDEX, INC.
(Exact Name of Registrant as Specified in Its Charter)
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TEXAS 5084 76-0509661
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
580 WESTLAKE PARK BOULEVARD, SUITE 1100
HOUSTON, TEXAS 77079
(713) 531-4214
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
DAVID R. LITTLE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
INDEX, INC.
580 WESTLAKE PARK BOULEVARD, SUITE 1100
HOUSTON, TEXAS 77079
(713) 531-4214
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
---------------------
Copies to:
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GARY A. MESSERSMITH, ESQ. CURTIS W. HUFF, ESQ.
FOUTS & MOORE, L.L.P. FULBRIGHT & JAWORSKI L.L.P.
5555 SAN FELIPE, 17TH FLOOR 1301 MCKINNEY
HOUSTON, TEXAS 77056-2726 HOUSTON, TEXAS 77010
</TABLE>
---------------------
Approximate date of commencement of proposed sale of the securities to the
public: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT AND ONCE ALL OTHER CONDITIONS OF THE MERGER AGREEMENTS DESCRIBED IN
THE ENCLOSED PROXY STATEMENT/PROSPECTUS HAVE BEEN SATISFIED OR WAIVED.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
INDEX, INC.
---------------------
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 1 OF FORM S-4
AND ITEM 501(b) OF REGULATION S-K
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CAPTION OR LOCATION
ITEM OF FORM S-4 IN PROXY STATEMENT/PROSPECTUS
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A. Information about Transaction
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Forepart of the Registration Statement;
Cross Reference Sheet; Outside Front Cover
Page of Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Table of Contents; Inside Front Cover Page
of Proxy Statement/Prospectus
3. Risk Factors and Ratio of Earnings (Loss)
to Fixed Charges and Other Information... Summary; Risk Factors
4. Terms of the Transaction................... Summary; The Reorganization; Certain Terms
of the Merger Agreements
5. Pro Forma Financial Information............ Summary; Selected Consolidated Financial
Data
6. Material Contracts with Company Being
Acquired................................. Certain Terms of the Merger Agreements
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................... Not Applicable
8. Interests of Named Experts and Counsel..... Experts; Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Part II
B. Information about the Registrant
10. Information with Respect to S-3
Registrant............................... Not Applicable
11. Incorporation of Certain Information by
Reference................................ Not Applicable
12. Information with Respect to S-2 or S-3
Registrants.............................. Not Applicable
13. Incorporation of Certain Information by
Reference................................ Not Applicable
14. Information with Respect to Registrants
other than S-3 or S-2 Registrants........ Summary; Risk Factors; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business Information Concerning the
Company; Market for Common Stock, Sepco
Common Stock and Newman Common Stock and
Related Shareholder Matters; Management;
Beneficial Ownership of Securities;
Certain Transactions; Description of
Company Capital Stock
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<PAGE> 3
<TABLE>
<CAPTION>
CAPTION OR LOCATION
ITEM OF FORM S-4 IN PROXY STATEMENT/PROSPECTUS
------------------------------------------- -------------------------------------------
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C. Information about the Company being
Acquired
15. Information with Respect to S-3
Companies................................ Not Applicable
16. Information with Respect to S-2 or S-3
Companies................................ Not Applicable
17. Information with Respect to Companies other
than S-3 or S-2 Companies................ Summary; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business
Information Concerning Newman; Market for
Common Stock, Sepco Common Stock and
Newman Common Stock and Related
Shareholder Matters; Description of
Newman Capital Stock
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations are to be Solicited....... Outside Front Cover Page of Proxy
Statement/Prospectus; Summary; The
Meetings; The Reorganization
19. Information if Proxies, Consents or
Authorizations are not to be Solicited in
an Exchange Offer........................ Not Applicable
</TABLE>
<PAGE> 4
EXPLANATORY NOTE
This Registration Statement covers the registration of 15,564,509 shares of
the Common Stock, par value $.01 per share (the "Common Stock"), of Index, Inc.
(the "Company") to be issued pursuant to the Newman Merger Agreement and the
Sepco Merger Agreement (the "Reorganization"), up to 412,500 shares of Common
Stock issuable to holders of certain Class C Warrants of Newman pursuant to the
Newman Merger in the event that such holders exercise such Class C Warrants
prior to the consummation of the Newman Merger and 2,184,000 shares of Common
Stock issuable upon conversion of the Company's Series B Convertible Preferred
Stock, $1.00 par value per share. This Registration Statement also covers the
registration of 347,391 shares of Common Stock for resale by Halter Financial
Group, Inc. ("Halter"). The complete Proxy Statement/Prospectus relating to the
Reorganization (the "Proxy Statement/Prospectus") follows immediately after this
Explanatory Note. Following the Proxy Statement/Prospectus are certain pages of
the Prospectus relating solely to such resales by Halter (the "Halter
Prospectus"), including alternate front and inside front cover pages, a section
entitled "Risk Factors -- No Public Market for the Common Stock; Possible
Volatility of Stock Price" to be used in lieu of the section "Risk Factors -- No
Public Market; Possible Volatility of Stock Price", a section entitled "Market
for the Common Stock and Related Shareholder Matters" to be used in lieu of the
section entitled "Market for the Company's Stock, Sepco Common Stock and Newman
Common Stock and Related Shareholder Matters", an alternate section entitled
"Legal Matters" and an additional section entitled "Plan of Distribution". In
addition, the Halter Prospectus will not include the information under the
following captions: "Summary -- The Meetings", "Summary -- Record Dates; Shares
Entitled to Vote; Quorum; Vote Required", "The Reorganization",
"Summary -- Market Price Data", "Risk Factors -- No Fairness Opinion Obtained by
the Company, Sepco or Newman", "Risk Factors -- Changes in Voting Rights of
Holders of Sepco Common Stock", "The Meetings", "The Reorganization", "Certain
Terms of the Merger Agreements", "Business Information Concerning Newman",
"Comparison of Rights of Shareholders of Sepco and the Company", "Comparison of
Rights of Holders of Newman Common Stock and Common Stock", "Description of
Sepco Capital Stock", "Description of Newman Capital Stock", "Certain Federal
Income Tax Consequences", and Appendices A through F. All other sections of the
Proxy Statement/Prospectus are to be used in the Halter Prospectus.
<PAGE> 5
SEPCO INDUSTRIES, INC.
6500 BRITTMOORE ROAD
HOUSTON, TEXAS 77041
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 4, 1996
Notice is hereby given that a special meeting of shareholders of Sepco
Industries, Inc., a Texas corporation ("Sepco"), will be held at 10:00 a.m.,
Central Standard Time, on Tuesday, December 4, 1996, at the offices of Fulbright
& Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010, for the
following purposes:
(a) To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger dated August 12, 1996 by and among Index,
Inc., a Texas corporation (the "Company"), Sepco Acquisition Corporation, a
Nevada corporation and wholly-owned subsidiary of the Company ("Sepco
Acquisition"), and Sepco (the "Sepco Merger Agreement"), providing for the
merger of Sepco Acquisition with and into Sepco (the "Sepco Merger") and
pursuant to which (a) each outstanding share of Sepco's Class A Common
Stock will be converted automatically into the right to receive 16 shares
of common stock of the Company, (b) each outstanding share of Sepco's Class
B Common Stock will be converted automatically into the right to receive
18.1232 shares of common stock of the Company, (c) each outstanding share
of Sepco's Class A Convertible Preferred Stock will be converted
automatically into the right to receive one share of Series B Convertible
Preferred Stock of the Company and (d) each outstanding share of Sepco's
Preferred Stock will be converted automatically into the right to receive
one share of Series A Preferred Stock of the Company, all as more fully
described in this Proxy Statement/Prospectus.
(b) To consider and take action upon any other matter that may
properly come before the special meeting, or any adjournment or
postponement thereof.
The Sepco Merger is being effected in connection with a related merger (the
"Newman Merger") of Newman Acquisition Corporation, a Nevada corporation and
wholly-owned subsidiary of the Company ("Newman Acquisition"), with and into
Newman Communications Corporation, a New Mexico corporation ("Newman"), as part
of an overall reorganization. The Sepco Merger and Newman Merger shall be
effected contemporaneously and each are conditioned upon the consummation of the
other. The Sepco Merger, Newman Merger and the resulting reorganization of Sepco
and its affiliated companies are collectively referred to as the
"Reorganization". The Company was formed recently for the sole purpose of
effecting the Reorganization and succeeding to the business and operations of
Sepco. You are not being asked to vote on the Newman Merger or the Newman Merger
Agreement.
The Sepco Merger will be consummated only if certain conditions are
satisfied, including (a) the contemporaneous consummation of the Newman Merger
and (b) approval of the Sepco Merger Agreement by the holders of at least
two-thirds of the outstanding shares of Sepco's Class A Common Stock and Class B
Common Stock and the approval of the Sepco Merger Agreement by the holders of at
least two-thirds of the outstanding shares of Sepco Class A Convertible
Preferred Stock and Sepco Preferred Stock, each voting separately as a series.
The shareholders of Sepco have the right to dissent from the Sepco Merger under
the Texas Business Corporation Act and, subject to certain conditions set forth
therein, receive payment for their shares. These rights are more fully described
in the accompanying Proxy Statement/Prospectus.
Shareholders of record of Sepco Class A Common Stock, Sepco Class B Common
Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock at
the close of business on October 15, 1996 will be entitled to notice of and to
vote at the special meeting or any adjournment or postponement thereof. A list
of the shareholders of record of Sepco's Class A Common Stock, Class B Common
Stock, Class A Convertible Preferred Stock and Preferred Stock as of October 15,
1996 will be open to the examination of any such shareholder for any purpose
germane to the special meeting at Sepco's offices at 580 Westlake Park
Boulevard, Suite 1100, Houston, Texas, after November 22, 1996 during ordinary
business hours.
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON, BUT IN
ANY EVENT YOU ARE URGED TO MARK, DATE, SIGN AND RETURN THE ENCLOSED PROXY AT
YOUR EARLIEST CONVENIENCE IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN
PERSON OR BY YOUR PROXY.
By order of the Board of Directors,
Gary A. Allcorn
Secretary
Houston, Texas
November 14, 1996
<PAGE> 6
NEWMAN COMMUNICATIONS CORPORATION
211 WEST WALL STREET
MIDLAND, TEXAS 79701
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 4, 1996
Notice is hereby given that a special meeting of shareholders of Newman
Communications Corporation, a New Mexico corporation ("Newman"), will be held at
10:00 a.m., Central Standard Time, on Tuesday, December 4, 1996, at the offices
of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010,
for the following purposes:
(a) To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger dated August 12, 1996 by and among Index,
Inc., a Texas corporation (the "Company"), Newman Acquisition Corporation,
a Nevada corporation and wholly-owned subsidiary of the Company ("Newman
Acquisition"), Newman and Little & Company Investment Securities, a Texas
corporation (the "Newman Merger Agreement"), pursuant to which Newman
Acquisition will be merged with and into Newman (the "Newman Merger"). Upon
consummation of the Newman Merger, each outstanding share of common stock
of Newman will be converted automatically into the right to receive
one-fourth of one share of common stock of the Company.
(b) To consider and take action upon any other matter that may
properly come before the special meeting, or any adjournment or
postponement thereof.
The Newman Merger is being effected in connection with a related merger
(the "Sepco Merger") of Sepco Acquisition Corporation, a Nevada corporation and
wholly-owned subsidiary of the Company ("Sepco Acquisition"), with and into
Sepco Industries, Inc., a Texas corporation ("Sepco"), as part of an overall
reorganization. The Sepco Merger and Newman Merger shall be effected
contemporaneously and each are conditioned upon the consummation of the other.
The Sepco Merger, Newman Merger and the resulting reorganization of Sepco and
its affiliated companies are collectively referred to as the "Reorganization".
The Company was formed recently for the sole purpose of effecting the
Reorganization and succeeding to the business and operations of Sepco. You are
not being asked to vote on the Sepco Merger or the Sepco Merger Agreement.
The Newman Merger will be consummated only if certain conditions are
satisfied, including (a) the contemporaneous consummation of the Sepco Merger
and (b) the approval of the Newman Merger Agreement by the holders of at least a
majority of the outstanding shares of common stock of Newman. The shareholders
of Newman have the right to dissent from the Newman Merger under the New Mexico
Business Corporation Act and, subject to certain conditions contained therein,
receive payment for their shares. These rights are more fully described in the
accompanying Proxy Statement/Prospectus.
Only shareholders of record at the close of business on October 15, 1996
are entitled to notice of and to vote at the special meeting or any adjournment
thereof.
WE HOPE THAT YOU ATTEND THE SPECIAL MEETING IN PERSON, BUT IN ANY EVENT YOU
ARE URGED TO MARK, DATE, SIGN AND RETURN YOUR PROXY IN THE ENCLOSED
SELF-ADDRESSED ENVELOPE AS SOON AS POSSIBLE SO THAT YOUR SHARES MAY BE VOTED IN
ACCORDANCE WITH YOUR WISHES. ANY PROXY GIVEN BY A SHAREHOLDER MAY BE REVOKED BY
THAT SHAREHOLDER AT ANY TIME PRIOR TO THE VOTING OF THE PROXY.
By Order of the Board of Directors
Glenn Little
President
Midland, Texas
November 14, 1996
<PAGE> 7
SUBJECT TO COMPLETION, DATED NOVEMBER 8, 1996
INDEX, INC.
---------------------
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus is being furnished to shareholders of Sepco
Industries, Inc., a Texas corporation ("Sepco"), in connection with the
solicitation of proxies by its board of directors for use at a special meeting
of Sepco shareholders (the "Sepco Meeting") scheduled to be held on Tuesday,
December 4, 1996, at 10:00 a.m., Central Standard Time, at the offices of
Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010,
and any adjournment or postponement thereof.
This Proxy Statement/Prospectus also is being furnished to the shareholders
of Newman Communications Corporation, a New Mexico corporation ("Newman"), in
connection with the solicitation of proxies by its board of directors for use at
a special meeting of shareholders of Newman (the "Newman Meeting") scheduled to
be held on Tuesday, December 4, 1996, at 10:00 a.m., Central Standard Time, at
the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston,
Texas 77010, and any adjournment or postponement thereof.
At the Sepco Meeting, the holders of Class A Common Stock, $.01 par value
per share, of Sepco (the "Sepco Class A Common Stock"), Class B Common Stock,
$.01 par value, of Sepco (the "Sepco Class B Common Stock" and, together with
the Sepco Class A Common Stock, the "Sepco Common Stock"), Class A Convertible
Preferred Stock, $100.00 par value per share, of Sepco (the "Sepco Class A
Convertible Preferred Stock") and preferred stock, $1.00 par value per share, of
Sepco (the "Sepco Preferred Stock") will be asked to consider and vote upon a
proposal to approve the merger of Sepco Acquisition, Inc., a Nevada corporation
("Sepco Acquisition"), with and into Sepco (the "Sepco Merger"), and the Plan
and Agreement of Merger dated August 12, 1996, by and among Index, Inc., a Texas
corporation and sole shareholder of Sepco Acquisition (the "Company"), Sepco
Acquisition and Sepco (the "Sepco Merger Agreement"), providing for the Sepco
Merger. Such approval is a condition to Sepco consummating the Sepco Merger. In
the Sepco Merger (i) each outstanding share of Sepco Class A Common Stock will
be converted automatically into the right to receive 16 shares of the Company's
common stock, par value $.01 per share (the "Common Stock"), (ii) each
outstanding share of Sepco Class B Common Stock will be converted automatically
into the right to receive 18.1232 shares of Common Stock, (iii) each outstanding
share of Sepco Class A Convertible Preferred Stock will be converted
automatically into the right to receive one share of series B convertible
preferred stock, par value $1.00 per share, of the Company (the "Series B
Convertible Preferred Stock"), and (iv) each outstanding share of Sepco
Preferred Stock will be converted automatically into the right to receive one
share of series A preferred stock, par value $1.00 per share, of the Company
(the "Series A Preferred Stock"), all as more fully described in this Proxy
Statement/Prospectus. The Sepco shareholders are not being asked to vote on the
Newman Merger or the Newman Merger Agreement.
At the Newman Meeting, the holders of common stock of Newman, no par value
(the "Newman Common Stock") will be asked to consider and vote upon a proposal
to approve the merger of Newman Acquisition Corporation, a Nevada corporation
("Newman Acquisition"), with and into Newman (the "Newman Merger"), and the Plan
and Agreement of Merger dated August 12, 1996, by and among the Company, the
sole shareholder of Newman Acquisition, Newman Acquisition, Little & Company
Investment Securities, a Texas corporation ("LITCO"), and Newman (the "Newman
Merger Agreement"), providing for the Newman Merger. Such approval is a
condition to Newman consummating the Newman Merger. In the Newman Merger each
outstanding share of Newman Common Stock will be converted automatically into
the right to receive one-fourth of one share of Common Stock. The Newman
shareholders are not being asked to vote on the Sepco Merger or the Sepco Merger
Agreement.
The Company was formed recently for the sole purpose of effecting a
reorganization of Sepco and its affiliated companies, succeeding to the business
and operations of Sepco and acquiring by merger Newman. The Reorganization will
be effected through the contemporaneous consummation of the Sepco Merger and
Newman Merger (the "Mergers"). The Mergers and the resulting reorganization of
Sepco and its affiliated companies are collectively referred to herein as the
"Reorganization". Upon consummation of the Reorganization, the prior holders of
Sepco Class A Common Stock and Sepco Class B Common Stock will hold
approximately 96% of the outstanding shares of Common Stock and the prior
holders of Newman Common Stock will hold approximately 4% of the outstanding
shares of Common Stock.
THE COMMON STOCK, SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES A
PREFERRED STOCK INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 12.
THE SHARES OF COMMON STOCK, SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES A
PREFERRED STOCK TO BE ISSUED IN CONNECTION WITH THE MERGERS HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is November , 1996.
<PAGE> 8
This Proxy Statement/Prospectus also constitutes the prospectus of the
Company pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the issuance of up to 15,564,509 shares of Common Stock,
19,500 shares of Series B Convertible Preferred Stock and 3,366 shares of Series
A Preferred Stock in connection with the Reorganization, up to 2,184,000 shares
of Common Stock issuable upon conversion of the Series B Convertible Preferred
Stock and up to 412,500 shares of Common Stock issuable to holders of certain
Class C Warrants of Newman pursuant to the Newman Merger in the event that such
holders exercise such Class C Warrants prior to the consummation of the Newman
Merger. See "Description of Newman Capital Stock -- Class C Warrants". This
Proxy Statement/Prospectus does not cover the issuance of 347,391 shares of
Common Stock issuable to Halter Financial Group in connection with the
Reorganization. Such shares will be "restricted securities" as that term is
defined under Rule 144 promulgated under the Securities Act. See "The
Reorganization -- Arrangement with Halter".
There is no current market for the Common Stock, the Series B Convertible
Preferred Stock or the Series A Preferred Stock and there can be no assurance
that such a market will develop. The Company intends to apply for quotation of
the Common Stock on the OTC Bulletin Board of the National Association of
Securities Dealers, Inc. upon effectiveness of the Registration Statement.
This Proxy Statement/Prospectus is being mailed to shareholders of Sepco
and Newman on or about November 14, 1996.
No person has been authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Prospectus in
connection with the solicitation of proxies or the offering of securities made
hereby and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company, Sepco, Newman or any other
person. This Proxy Statement/Prospectus does not constitute an offer to sell, or
a solicitation of an offer to buy, any securities, or the solicitation of a
proxy in any jurisdiction to or from any person to whom it is not lawful to make
any such offer or solicitation in such jurisdiction. Neither the delivery of
this Proxy Statement/Prospectus nor any distribution of securities made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company, Sepco or Newman since the date
hereof or that the information herein is correct as of any time subsequent to
its date.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act with respect to the Common Stock to be
issued in the Reorganization. This Proxy Statement/Prospectus does not contain
all of the information set forth in the Registration Statement, certain portions
of which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered by this Proxy Statement/Prospectus, reference is made to the
Registration Statement, including the exhibits thereto. Statements contained in
this Proxy Statement/Prospectus as to the contents of any contract or other
document filed as an exhibit to the Registration Statement are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
Prior to the Reorganization, neither the Company nor Sepco has been subject
to the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Newman is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. Upon consummation of the Reorganization,
Newman will cease to be a reporting company under the Exchange Act. The reports,
proxy statements and other information to be filed by the Company, and as filed
by Newman, with the Commission may be inspected without charge, and copies may
be obtained at prescribed rates, at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission at Northwest Atrium
Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60661-2511 and 7
World Trade Center, New York, New York 10048. The Commission also maintains a
Worldwide Web site on the Internet at http://www.sec.gov which contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
<PAGE> 9
TABLE OF CONTENTS
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SUMMARY............................................................................... 1
RISK FACTORS.......................................................................... 12
No Fairness Opinion Obtained by the Company, Sepco or Newman........................ 12
Control by Existing Shareholders, Directors and Executive Officers of Sepco......... 12
Substantial Competition............................................................. 12
Risks Associated with Implementation of Corporate Strategy.......................... 12
Dependence on Key Personnel......................................................... 13
Changes in Voting Rights of Holders of Sepco Common Stock........................... 13
IRS Examination..................................................................... 13
Risks Associated with Hazardous Materials........................................... 13
Limitation on Ability to Pay Dividends.............................................. 14
Dilution............................................................................ 14
Potential Anti-Takeover Effects of Articles of Incorporation and Bylaws............. 14
No Public Market; Possible Volatility of Stock Price................................ 14
RECENT DEVELOPMENTS................................................................... 15
THE MEETINGS.......................................................................... 15
General............................................................................. 15
Record Dates; Shares Entitled to Vote; Quorum; Vote Required........................ 16
Solicitation of Proxies............................................................. 16
Appointment and Revocation of Proxies............................................... 17
Voting of Shares and Exercise of Discretion of Proxies.............................. 17
Other Matters....................................................................... 17
THE REORGANIZATION.................................................................... 18
General Description of the Mergers.................................................. 18
Sepco's Reasons for the Reorganization; Recommendation of Sepco's Board of
Directors........................................................................ 18
Newman's Reasons for the Newman Merger; Recommendation of Newman's Board
of Directors..................................................................... 19
Certain Federal Income Tax Consequences............................................. 20
Anticipated Accounting Treatment.................................................... 21
Dissenters' Rights.................................................................. 21
Arrangement with Halter............................................................. 26
Restrictions on Resales by Affiliates............................................... 26
CERTAIN TERMS OF THE MERGER AGREEMENTS................................................ 27
Sepco Merger Agreement.............................................................. 27
Newman Merger Agreement............................................................. 29
SEPCO SELECTED CONSOLIDATED FINANCIAL DATA............................................ 32
NEWMAN SELECTED FINANCIAL DATA........................................................ 33
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS..................................... 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 37
The Company/Sepco................................................................... 37
General............................................................................. 37
Results of Operations............................................................... 38
Liquidity and Capital Resources..................................................... 40
Accounting Pronouncements........................................................... 41
Inflation........................................................................... 41
Newman.............................................................................. 41
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i
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<TABLE>
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BUSINESS INFORMATION CONCERNING THE COMPANY........................................... 43
General............................................................................. 43
Industry Overview and Business Objectives........................................... 44
Products and Services............................................................... 45
The iPower Consortium............................................................... 46
Manufacturers....................................................................... 46
Competition......................................................................... 46
Customers........................................................................... 47
Properties.......................................................................... 47
Backlog............................................................................. 47
Employees........................................................................... 47
Insurance........................................................................... 48
Intellectual Property............................................................... 48
Government Regulation and Environmental Matters..................................... 48
Legal Proceedings................................................................... 48
BUSINESS INFORMATION CONCERNING NEWMAN................................................ 49
Background.......................................................................... 49
Bankruptcy Proceedings.............................................................. 49
Current Business of Newman.......................................................... 49
MARKET FOR THE COMPANY'S STOCK, SEPCO COMMON STOCK AND NEWMAN COMMON STOCK AND RELATED
SHAREHOLDER MATTERS................................................................. 50
The Company......................................................................... 50
Sepco............................................................................... 51
Newman.............................................................................. 51
DIVIDEND POLICY....................................................................... 51
MANAGEMENT............................................................................ 52
Board of Directors' Compensation.................................................... 53
Committees of the Board of Directors................................................ 53
Employment Agreements............................................................... 53
Executive Compensation.............................................................. 55
Benefit Plans....................................................................... 56
The Sepco Industries, Inc. Employee Stock Ownership Plan............................ 56
Nonqualified Stock Option Agreements................................................ 57
Long Term Incentive Plan............................................................ 57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 63
CERTAIN TRANSACTIONS.................................................................. 66
Sepco............................................................................... 66
COMPARISON OF RIGHTS OF SHAREHOLDERS OF SEPCO AND THE COMPANY......................... 66
Common Stock........................................................................ 66
Preferred Stock..................................................................... 66
Vote Required on Certain Matters.................................................... 66
COMPARISON OF RIGHTS OF HOLDERS OF NEWMAN COMMON STOCK AND COMMON STOCK............... 67
Mergers............................................................................. 67
Appraisal Rights.................................................................... 68
Special Meetings.................................................................... 68
Shareholder Action Without a Meeting................................................ 68
Election of Directors............................................................... 68
Voting on Other Matters............................................................. 69
</TABLE>
ii
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Distributions to Shareholders....................................................... 69
Liquidation Rights.................................................................. 69
Limitation of Liability and Indemnification......................................... 70
Removal of Directors................................................................ 70
Inspection of Books and Records..................................................... 70
DESCRIPTION OF COMPANY CAPITAL STOCK.................................................. 71
General............................................................................. 71
Common Stock........................................................................ 71
Preferred Stock..................................................................... 71
Transfer Agent...................................................................... 72
DESCRIPTION OF SEPCO CAPITAL STOCK.................................................... 73
General............................................................................. 73
Sepco Common Stock.................................................................. 73
Sepco Preferred Stock............................................................... 74
DESCRIPTION OF NEWMAN CAPITAL STOCK................................................... 75
General............................................................................. 75
Newman Common Stock................................................................. 75
Newman Preferred Stock.............................................................. 75
Class C Warrants.................................................................... 75
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................... 76
Dividends on Company Stock.......................................................... 76
Conversion of Series B Convertible Preferred Stock into Common Stock................ 78
Redemption Premium.................................................................. 78
Adjustment of Conversion Price...................................................... 78
Redemption of the Series B Convertible Preferred Stock for Cash..................... 78
Backup Withholding and Information Reporting........................................ 79
LEGAL MATTERS......................................................................... 79
EXPERTS............................................................................... 80
APPENDIX A: Sepco Merger Agreement
APPENDIX B: Newman Merger Agreement
APPENDIX C: Articles 5.12 and 5.13 of the Texas Business Corporation Act
APPENDIX D: Sections 53-15-3 and 53-15-4 of the New Mexico Business Corporation Act
APPENDIX E: Articles of Incorporation of the Company
APPENDIX F: Bylaws of the Company
</TABLE>
iii
<PAGE> 12
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. This summary does not contain a complete
statement of all material information relating to the Sepco Merger, the Newman
Merger, the Sepco Merger Agreement, the Newman Merger Agreement, the
Reorganization or the other transactions contemplated thereby and is subject to
and qualified in its entirety by reference to the more detailed information and
financial statements contained elsewhere in this Proxy Statement/Prospectus, the
Sepco Merger Agreement and the Newman Merger Agreement, which are attached
hereto and incorporated herein by reference, and the other Appendices attached
hereto. Shareholders are urged to read this Proxy Statement/Prospectus and the
Appendices hereto in their entirety. Unless the context otherwise requires,
references in this Proxy Statement/Prospectus to the "Company" shall mean Index,
Inc., as the successor to Sepco following the completion of the Reorganization.
THE COMPANIES
The Company was incorporated in the State of Texas in July 1996 for the
sole purpose of effecting the Reorganization and succeeding to the business and
operations of Sepco. Sepco is a distributor of maintenance, repair and operating
supplies and equipment for industrial customers engaged in various businesses,
principally the oil and gas, petrochemical and wood products industries. The
Company currently distributes over 125,000 items, consisting primarily of pumps
and pump accessories, valves and valve automation products and bearings and
power transmission equipment. The Company also provides system design,
fabrication, installation, repair and maintenance services for its customers.
The Company's products currently are distributed from over 30 distribution
centers strategically located throughout the Southwest. The Company's sales
force includes approximately 100 sales representatives. See "Business
Information Concerning the Company".
Newman was incorporated in the State of New Mexico in June 1981. Newman was
in the business of publishing and distributing non-musical audio cassette
recordings of fiction and non-fiction books, recorded interviews and seminars
and other original spoken word recordings containing ideas, information or
entertainment similar to that presented in books. In 1987, Newman began
experiencing financial difficulties and, by late 1987, Newman no longer had
sufficient cash flow to meet its obligations as they became due and ceased
substantially all of its business operations. At this time, the business purpose
of Newman is to seek an acquisition or merger transaction with a business that
Newman believes has significant growth potential, thereby allowing its
shareholders to benefit by owning an interest in a viable business enterprise.
While Newman has no significant assets or operations, it possesses a shareholder
base which Newman believes makes it an attractive merger candidate to a
privately-held corporation seeking to become a public company. See "Business
Information Concerning Newman".
THE MEETINGS
GENERAL
Sepco. The Sepco Meeting will be held 10:00 a.m., Central Standard Time, on
Tuesday, December 4, 1996 at the offices of Fulbright & Jaworski L.L.P., 1301
McKinney, Suite 5100, Houston, Texas 77010 to consider and vote upon (i) a
proposal to approve and adopt the Sepco Merger Agreement and (ii) such other
business as may properly be brought before the Sepco Meeting or any adjournment
or postponement thereof. The Sepco Board of Directors has unanimously approved
the Sepco Merger Agreement and the Sepco Merger and has determined that the
Sepco Merger is in the best interests of Sepco and its shareholders. The Sepco
Board of Directors recommends that the Sepco shareholders vote for the approval
and adoption of the Sepco Merger Agreement. See "The Meetings -- General --
Sepco".
Newman. The Newman Meeting will be held at 10:00 a.m., Central Standard
Time, on Tuesday, December 4, 1996 at the offices of Fulbright & Jaworski
L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010 to consider and vote
upon (i) a proposal to approve and adopt the Newman Merger Agreement and (ii)
such other business as may properly be brought before the Newman Meeting or any
adjournment or postponement thereof. The Newman Board of Directors has
unanimously approved the Newman Merger
1
<PAGE> 13
Agreement and the Newman Merger and has determined that the Newman Merger is in
the best interests of Newman and its shareholders. The Newman Board of Directors
unanimously recommends that the Newman shareholders vote for approval and
adoption of the Newman Merger Agreement. See "The Meetings --
General -- Newman".
RECORD DATES; SHARES ENTITLED TO VOTE; QUORUM; VOTE REQUIRED
Sepco. Only holders of record of the Sepco Class A Common Stock, the Sepco
Class B Common Stock, the Sepco Class A Convertible Preferred Stock and the
Sepco Preferred Stock at the close of business on October 15, 1996 (the "Sepco
Record Date") are entitled to notice of, and to vote at, the Sepco Meeting. A
majority of the shares entitled to vote, present in person or represented by
proxy, will constitute a quorum at the Sepco Meeting.
At the close of business on the Sepco Record Date, there were 758,899
shares of Sepco Class A Common Stock, 176,900 shares of Sepco Class B Common
Stock, 19,500 shares of Sepco Class A Convertible Preferred Stock and 3,366
shares of Sepco Preferred Stock outstanding and entitled to vote at the Sepco
Meeting. Directors and executive officers of Sepco held 587,399 shares of Sepco
Class A Common Stock, representing approximately 62.8% of the outstanding
shares, 12,035 shares of Sepco Class B Common Stock, representing approximately
6.8% of the outstanding shares, 15,000 shares of Sepco Class A Convertible
Preferred Stock, representing approximately 76.9% of such series, and no shares
of Sepco Preferred Stock. Such persons have indicated to Sepco that they intend
to vote their shares in favor of the approval and adoption of the Sepco Merger
and the Sepco Merger Agreement. Each share of Sepco Common Stock entitles the
holder thereof to one vote on each matter submitted for shareholder approval.
Under Texas law and Sepco's Articles of Incorporation, approval and adoption of
the Sepco Merger and the Sepco Merger Agreement require the affirmative vote of
the holders of at least two-thirds of the shares of Sepco Common Stock
outstanding and entitled to vote thereon. Approval and adoption of the Sepco
Merger and the Sepco Merger Agreement also requires the approval of the holders
of at least two-thirds of the shares of Sepco Class A Common Stock, Sepco Class
B Common Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred
Stock, each voting as a separate class or series, as the case may be. Under
Texas law, abstentions contained on a returned proxy card will be considered
present for purposes of determining the existence of a quorum at the Sepco
Meeting and will have the effect of a vote against the Sepco Merger and Sepco
Merger Agreement. See "The Meetings -- Record Dates; Shares Entitled to Vote;
Quorum; Vote Required -- Sepco".
Newman. Only holders of record of Newman Common Stock at the close of
business on October 15, 1996 (the "Newman Record Date") are entitled to notice
of, and to vote at, the Newman Meeting. A majority of the shares entitled to
vote, present in person or represented by proxy, will constitute a quorum at the
Newman Meeting.
Under New Mexico law and Newman's articles of incorporation, approval and
adoption of the Newman Merger and the Newman Merger Agreement require the
affirmative vote of a majority of the issued and outstanding shares of Newman
Common Stock entitled to vote therein. At the close of business on the Newman
Record Date, there were 2,552,064 shares of Newman Common Stock outstanding and
entitled to vote at the Newman Meeting. The officers and directors of Newman
have recommended that the shareholders vote their shares of Newman Common Stock
in favor of approval and adoption of the Newman Merger Agreement.
On the Newman Record Date, there were approximately 199 holders of record
of the 2,552,064 shares of Newman Common Stock then issued and outstanding. Each
share of Newman Common Stock entitles the holder thereof to one vote on each
matter submitted for shareholder approval. See "The Meetings -- Record Dates;
Shares Entitled to Vote; Quorum; Vote Required -- Newman".
Under applicable rules of the National Association of Securities Dealers,
Inc., brokers will not be permitted to submit proxies to authorize the Newman
Merger and the Newman Merger Agreement in the absence of specific instructions
from beneficial owners. Any unvoted position in a brokerage account (i.e.,
2
<PAGE> 14
broker non-votes) with respect to any matter will be considered as not voted.
Under New Mexico law, abstentions contained on a returned proxy card will be
considered present for purposes of determining the existence of a quorum at the
Newman Meeting. Accordingly, broker non-votes and abstentions will have the
effect of votes against the Newman Merger and the Newman Merger Agreement.
THE REORGANIZATION
GENERAL DESCRIPTION OF THE MERGERS
Sepco Merger. Upon consummation of the Sepco Merger, Sepco Acquisition will
merge with and into Sepco, with Sepco being the surviving corporation, and (i)
each outstanding share of Sepco Class A Common Stock will be converted
automatically into the right to receive 16 shares of Common Stock, (ii) each
outstanding share of Sepco Class B Common Stock will be converted automatically
into the right to receive 18.1232 shares of Common Stock, (iii) each outstanding
share of Sepco Class A Convertible Preferred Stock will be converted
automatically into the right to receive one share of Series B Convertible
Preferred Stock and (iv) each outstanding share of Sepco Preferred Stock will be
converted automatically into the right to receive one share of Series A
Preferred Stock. As a consequence of the Sepco Merger, Sepco will become a
wholly-owned subsidiary of the Company. Based on the number of shares of Sepco
capital stock and Newman Common Stock outstanding as of the Sepco Record Date
and Newman Record Date, respectively, Sepco shareholders collectively will hold
15,384,384 shares, or approximately 96%, of the issued and outstanding Common
Stock, upon consummation of the Reorganization. See "The
Reorganization -- General Description of the Mergers -- Sepco".
Newman Merger. Upon consummation of the Newman Merger, Newman Acquisition
will merge with and into Newman, with Newman being the surviving corporation,
and each outstanding share of Newman Common Stock will be converted into
one-fourth of one share of Common Stock. As a consequence of the Newman Merger,
Newman will become a wholly-owned, non-operating subsidiary of the Company.
Newman shareholders collectively will own 639,516 shares of the outstanding
Common Stock, or approximately 4.0% of the issued and outstanding Common Stock,
upon consummation of the Reorganization. See "The Reorganization -- General
Description of the Mergers -- Newman".
REASONS FOR THE MERGERS; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Sepco Merger. During 1995, Sepco began an investigation with respect to the
possibility of becoming a public company in order to obtain better access to
equity capital for purposes of supporting its acquisition program and proposed
growth plans and to provide greater liquidity for the Sepco Common Stock. After
analyzing the costs and benefits of different possibilities and the
probabilities of success, the board of directors of Sepco ultimately concluded
that the most desirable means for Sepco to achieve its objectives would be to
merge with an existing public company. In connection with this decision, Sepco
retained Halter Financial Group, Inc. ("Halter"), a consulting firm, to assist
it in identifying a desirable public company with which to merge. As part of
this arrangement, Sepco agreed that Halter would be entitled to receive up to
2.7% of the outstanding shares of common stock of the surviving corporation upon
the consummation of a merger between Sepco and a public company secured by
Halter for the transaction. See "The Reorganization -- Sepco's Reasons for the
Reorganization; Recommendation of Sepco's Board of Directors".
In February 1996, after reviewing several potential public companies as
acquisition candidates, including Newman, management of Sepco determined that
Newman would be a desirable candidate for Sepco to merge. From February to April
1996, Sepco conducted due diligence with respect to the prior business and
operations of Newman. Sepco also concluded that the most desirable means for
effecting a merger or business combination with Newman would be through the
creation of the Company and the concurrent acquisition by the Company of all of
the outstanding shares of Newman through the Newman Merger and of all the
outstanding shares of Sepco through the Sepco Merger. In connection with this
structure, Halter entered into an agreement with Newman pursuant to which Halter
acquired a 66.2% interest in Newman which was intended to provide Halter with an
approximate 2.7% ownership interest in the Company upon the
3
<PAGE> 15
consummation of the Reorganization. See "The Reorganization -- Sepco's Reasons
for the Reorganization; Recommendation of Sepco's Board of Directors" and "The
Reorganization -- Arrangements With Halter".
On August 12, 1996, the Company entered into the Sepco Merger Agreement and
the Newman Merger Agreement. The Board of Directors of each of Sepco and Newman
have determined that the Sepco Merger and the Newman Merger, respectively, are
in the best interest of their respective shareholders and have recommended to
their shareholders that such mergers be approved.
Newman Merger. The Newman Merger is the result of Newman's efforts to
obtain value for the Newman Common Stock. Newman has no significant assets or
operations; however, it possesses a shareholder base which Newman believes makes
it an attractive merger candidate to a privately-held corporation seeking to
become a public company. The board of directors of Newman has concluded that the
Newman Merger is in the best interests of the shareholders of Newman, has
approved the Newman Merger Agreement and has recommended that the shareholders
of Newman approve and adopt the Newman Merger Agreement.
The board of directors of Newman believes that the terms of the Newman
Merger Agreement are fair to, and in the best interests of, Newman and its
shareholders. In reaching its conclusion, Newman's Board of Directors considered
(i) the matters set forth above, (ii) the judgment and advice of Newman's
management, (iii) the historical financial performance and future operating
prospects of Newman, (iv) detailed business and financial information regarding
Sepco and (iv) the terms of the Newman Merger Agreement. See "The
Reorganization -- Newman's Reasons for the Newman Merger; Recommendation of
Newman's Board of Directors".
APPRAISAL RIGHTS
Sepco Shareholders. Any shareholder of record of Sepco who objects to the
Sepco Merger and who follows the procedures prescribed by Articles 5.12 and 5.13
of the Texas Business Corporation Act (the "TBCA") may be entitled, in lieu of
receiving the shares of Common Stock, Series B Convertible Preferred Stock or
Series A Preferred Stock, as the case may be, in the Sepco Merger, to receive
cash equal to the fair value of such shares, which value will be determined by
agreement or appraisal. See "The Reorganization -- Dissenters' Rights -- Sepco
Shareholders" and Appendix C to this Proxy Statement/Prospectus, which contains
the applicable provisions of the TBCA in their entirety.
Newman Shareholders. Any shareholder of record of Newman who objects to the
Newman Merger and who follows the procedures prescribed by Section 53-15-4 of
the New Mexico Business Corporation Act (the "NMBCA") may be entitled, in lieu
of receiving the shares of Common Stock in the Newman Merger, to receive cash
equal to the fair value of such shares, which value will be determined by
agreement or appraisal. See "The Reorganization -- Dissenters' Rights -- Newman
Shareholders" and Appendix D to this Proxy Statement/Prospectus, which contains
the applicable provisions of the NMBCA in their entirety.
EFFECTIVE TIMES OF THE MERGERS
The Sepco Merger will become effective at the effective time set forth in
the certified Articles of Merger issued by the Secretary of State of Texas and
the Secretary of State of Nevada with respect to the Sepco Merger. The Newman
Merger will become effective at the effective time set forth in the certified
Articles of Merger issued by the Secretary of State of New Mexico and the
Secretary of State of Nevada with respect to the Newman Merger. Assuming all
conditions to the Mergers contained in each of the Sepco Merger Agreement and
the Newman Merger Agreement are satisfied or waived prior thereto, it is
anticipated that the effective time of the Sepco Merger and the Newman Merger
will occur on the business day immediately following the Sepco Meeting (the
"Sepco Effective Time") and the Newman Meeting (the "Newman Effective Time"),
respectively. See "Certain Terms of the Merger Agreements -- Sepco Merger
Agreement -- Closing Date and Effective Time of the Merger" and "Certain Terms
of the Merger Agreements -- Newman Merger Agreement -- Closing Date and
Effective Time of the Merger".
4
<PAGE> 16
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable following the Sepco Effective Time, the Company or
its transfer agent will mail to each record holder of Sepco Class A Common
Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and
Sepco Preferred Stock a letter of transmittal and other information advising
such holder of the consummation of the Sepco Merger and for use in exchanging
certificates representing Sepco Class A Common Stock, Sepco Class B Common
Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock for
certificates representing Common Stock, Series B Convertible Preferred Stock and
Series A Preferred Stock, respectively. As soon as practicable following the
Newman Effective Time, the Company or its transfer agent will mail to each
record holder of Newman Common Stock immediately prior to the Newman Effective
Time, a letter of transmittal and other information advising such holder of the
consummation of the Newman Merger and for use in exchanging certificates
representing Newman Common Stock for certificates representing Common Stock.
SHAREHOLDERS MUST SURRENDER SHARE CERTIFICATES REPRESENTING SEPCO CAPITAL STOCK
OR NEWMAN COMMON STOCK, TOGETHER WITH THE LETTER OF TRANSMITTAL, TO RECEIVE THE
SHARES OF STOCK OF THE COMPANY ISSUED PURSUANT TO THE SEPCO MERGER OR THE NEWMAN
MERGER. SHARE CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE BY
SHAREHOLDERS OF SEPCO OR NEWMAN PRIOR TO THE APPROVAL OF THE SEPCO MERGER AND
THE NEWMAN MERGER AND THE RECEIPT OF A LETTER OF TRANSMITTAL. See "Certain Terms
of the Merger Agreements -- Sepco Merger Agreement -- Manner and Basis of
Converting Shares" and "Certain Terms of the Merger Agreements -- Newman Merger
Agreement -- Manner and Basis of Converting Shares".
CONDITIONS TO THE MERGERS
The consummation of each of the Mergers is conditioned on (i) the
effectiveness of the Registration Statement, of which this Proxy
Statement/Prospectus forms a part, (ii) shareholder approval of each of the
Mergers, the Sepco Merger Agreement and the Newman Merger Agreement and (iii)
other conditions customary to transactions similar to the Mergers. See "Certain
Terms of the Merger Agreements -- Sepco Merger Agreement -- Conditions to the
Merger" and "Certain Terms of the Merger Agreements -- Newman Merger
Agreement -- Conditions to the Merger".
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENTS
The Sepco Merger Agreement may be terminated, among other circumstances, by
the Company if the Sepco Merger has not closed by December 31, 1996 or by either
party if a court of competent jurisdiction shall have issued an order, decree or
ruling or taken any other action to enjoin or otherwise prohibit the Sepco
Merger. The Sepco Merger Agreement may be amended, modified or supplemented only
by an instrument in writing executed by all parties to the Sepco Merger
Agreement. See "Certain Terms of the Merger Agreements -- Sepco Merger
Agreement -- Termination or Amendment of the Sepco Merger Agreement".
The Newman Merger Agreement may be terminated, among other circumstances,
by the Company if the Newman Merger has not closed by December 31, 1996 or by
either party if a court of competent jurisdiction shall have issued an order,
decree or ruling or taken any other action to enjoin or otherwise prohibit the
Newman Merger. The Newman Merger Agreement may be amended, modified or
supplemented only by an instrument in writing executed by all parties to the
Newman Merger Agreement. See "Certain Terms of the Merger Agreement -- Newman
Merger Agreement -- Termination or Amendment of the Newman Merger Agreement".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Sepco Merger and the Newman Merger are intended to be treated as an
exchange of shares of Sepco and Newman capital stock for shares of Common Stock,
Series B Convertible Preferred Stock and Series A Preferred Stock, as the case
may be, and therefore, should constitute a non-taxable transaction for the
holders of Sepco Common Stock, Sepco Class A Convertible Preferred Stock and
Sepco Preferred Stock (collectively referred to herein as "Sepco Stock") or
Newman Common Stock, except to the extent of cash received, if any, in lieu of
fractional shares of Common Stock or as a result of the exercise of his
dissenter's rights. For a
5
<PAGE> 17
discussion of these and other federal income tax considerations in connection
with the Sepco Merger and the Newman Merger, see "The Reorganization -- Certain
Federal Income Tax Consequences" and "Certain Federal Income Tax Consequences".
ANTICIPATED ACCOUNTING TREATMENT
The Reorganization will be treated as a recapitalization of Sepco into the
Company, a newly formed holding company, and the issuance of shares of the
Company's capital stock for the underlying tangible net assets of Newman. As a
result, the historical pre-Reorganization financial statements of the Company
upon completion of the Reorganization will be those of Sepco. See "The
Reorganization -- Anticipated Accounting Treatment".
COMPARATIVE RIGHTS OF SHAREHOLDERS OF THE COMPANY AND SHAREHOLDERS OF SEPCO AND
NEWMAN
The rights of the shareholders of Sepco currently are governed by Sepco's
articles of incorporation, as amended, Sepco's bylaws and the laws of the State
of Texas. The rights of the shareholders of Newman currently are governed by
Newman's articles of incorporation, Newman's bylaws and the laws of the State of
New Mexico. The rights of the shareholders of the Company will be governed by
the Company's Restated Articles of Incorporation (the "Company's Articles"), the
Company's Bylaws (the "Company's Bylaws") and the laws of the State of Texas.
The significant differences, as they impact the rights of the shareholders of
Sepco and the shareholders of Newman, are summarized elsewhere in this Proxy
Statement/Prospectus. See "Comparison of Rights of Shareholders of Sepco and the
Company" and "Comparison of Rights of Holders of Newman Common Stock and Common
Stock".
6
<PAGE> 18
MARKET PRICE DATA
THE COMPANY
There currently is no market for the Common Stock, the Series B Convertible
Preferred Stock or the Series A Preferred Stock, and there can be no assurance
that such a market will develop. The Company intends to apply for quotation of
the Common Stock on the OTC Bulletin Board of the National Association of
Securities Dealers, Inc. upon effectiveness of the Registration Statement. See
"Risk Factors -- No Public Market; Possible Volatility of Stock Price" and
"Market for the Company's Stock, Sepco Common Stock and Newman Common Stock and
Related Shareholder Matters -- The Company".
SEPCO
There is no established public trading market for the Sepco Common Stock.
See "Market for the Company's Stock, Sepco Common Stock and Newman Common Stock
and Related Shareholder Matters -- Sepco".
NEWMAN
The Newman Common Stock has been quoted on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc. under the trading symbol "NWMC"
since October 1994. The Company believes, however, that such quotations have
been limited and sporadic and therefore do not constitute an "established public
trading market" under Item 201 of Regulation S-K of the Securities Act. The
following table sets forth the range of high and low closing bid prices for the
Newman Common Stock for the periods indicated. Quotations represent inter-dealer
prices, do not include retail markups, markdowns or commissions and may not
represent actual transactions. See "Market for the Company's Stock, Sepco Common
Stock and Newman Common Stock and Related Shareholder Matters -- Newman".
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL 1994
First Quarter............................................... $.25 $.25
Second Quarter.............................................. .25 .25
Third Quarter............................................... .25 .25
Fourth Quarter.............................................. .25 .25
FISCAL 1995
First Quarter............................................... .25 .25
Second Quarter.............................................. .25 .25
Third Quarter............................................... .25 .25
Fourth Quarter.............................................. .25 .25
FISCAL 1996
First Quarter............................................... .25 .25
Second Quarter.............................................. .25 .25
Third Quarter............................................... .25 .25
</TABLE>
On August 9, 1996, the last full day of trading before the Newman Merger
Agreement and the Sepco Merger Agreement were executed, the last reported
closing price per share of Newman Common Stock was $.25 and, since there is no
market for the Common Stock or the Sepco Stock, there was no reported closing
price for the Common Stock or the Sepco Stock.
7
<PAGE> 19
SEPCO
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The summary historical consolidated financial data of Sepco set forth below
for each of the years ended December 31, 1995, 1994 and 1993 and at December 31,
1995 and 1994 have been derived from the audited consolidated financial
statements of Sepco included elsewhere in this Proxy Statement/Prospectus. Such
financial statements have been audited by Ernst & Young LLP, independent
auditors. The selected financial data for the years ended December 31, 1992 and
1991 and at December 31, 1993, 1992 and 1991 are derived from the audited
financial statements of Sepco which are not included in this Proxy
Statement/Prospectus and which have been audited by Ernst & Young LLP,
independent auditors. The summary financial data set forth below for each of the
six-month periods ended June 30, 1996 and 1995 and at June 30, 1996 have been
derived from unaudited financial statements of Sepco included elsewhere in this
Proxy Statement/Prospectus. This information should be read in conjunction with
"Selected Consolidated Financial Data -- Sepco", "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Sepco" and Sepco's
consolidated financial statements and notes included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- -------- -------- ------- ------- -------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Revenues....................................... $63,021 $56,395 $111,328 $102,592 $99,353 $96,017 $93,239
Gross profit................................... 16,231 14,390 29,157 27,217 26,792 23,622 24,416
Operating income(1)............................ 1,425 2,010 4,598 4,150 3,288 1,827 4,171
Income before provision for income taxes,
minority interest and change in accounting
principle.................................... 931 1,470 3,512 3,038 2,346 620 2,511
Minority interest in earnings (loss) of
Subsidiaries(2).............................. -- -- -- -- (403) 136 (392)
Cumulative effect of change in accounting
principle(3)................................. -- -- -- -- 882
Net income(4).................................. 554 874 2,088 1,862 1,843 152 1,043
PER SHARE DATA:
Primary
Net income................................... $ 0.55 $ 0.66 $ 1.68 $ 1.41 $ 1.58 $ 0.14 $ 0.95
Fully diluted
Net income................................... $ 0.48 $ 0.66 $ 1.61 $ 1.40 $ 1.55 $ 0.14 $ 0.95
Number of shares used to calculate
Primary net income per share................. 1,016 1,331 1,244 1,319 1,163 1,102 1,102
Fully diluted net income per share........... 1,152 1,334 1,293 1,328 1,187 1,102 1,102
</TABLE>
<TABLE>
<CAPTION>
JUNE DECEMBER 31,
30, ---------------------------------------------------
1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $23,418 $23,967 $20,011 $18,402 $17,084 $15,069
Total assets.............................................. 43,071 43,254 38,163 38,686 37,243 34,327
Long-term debt obligations................................ 19,660 21,275 18,461 20,766 19,200 16,565
Stockholders' Equity...................................... 9,087 7,800 6,484 5,133 3,665 3,133
</TABLE>
- ---------------
(1) Six months ended June 30, 1996 includes a one-time charge to compensation
expense of $710,000 for the amendment of book value options to fair market
value options.
(2) In December 1992 and September 1993, Sepco acquired the remaining capital
stock of two subsidiaries, T.L. Walker Bearing Company and Southern Engine
and Pump Company. The acquisitions eliminated any need to account for
minority interest in earnings of the subsidiaries.
(3) Effective January 1, 1993, Sepco changed its method of accounting for income
taxes from the deferred method to the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes". As permitted under the new
rules, prior years' financial statements were not restated. The cumulative
effect of adopting Statement 109 as of January 1, 1993 was to increase net
earnings by $882,000.
(4) In August 1990, June 1991 and July 1992, Sepco acquired three separate
bearing and power transmission companies having revenues of approximately
$25,000,000, $10,000,000 and $7,000,000, respectively, at the time of their
purchase. In 1991, 1992 and 1993, operating income (loss) from these bearing
and power transmission companies was $188,000, ($1,091,000) and $379,000,
respectively.
8
<PAGE> 20
NEWMAN
SUMMARY HISTORICAL FINANCIAL DATA
The summary financial data of Newman for the fiscal years 1991 through 1995
were derived from the audited financial statements of Newman. Included elsewhere
in this Proxy Statement/Prospectus are the Balance Sheets for December 31, 1995
and March 31, 1995 and the Statements of Operations, Changes in Shareholders'
Equity and Cash Flows for the nine months and twelve months then ended. Such
financial statements have been audited by Cheshier & Fuller, Inc., P.C.,
independent public accountants. This information included elsewhere in the Proxy
Statement/Prospectus should be read in conjunction with the following summary
financial data. The summary financial data for the six months ended June 30,
1996 and 1995 are unaudited, but in the opinion of management of Newman, such
financial statements include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of Newman's financial position
and results of operations. The results of operations for the six months ended
June 30, 1996 may not be indicative of the results to be expected for the full
fiscal year. See "Selected Consolidated Financial Data -- Newman", "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Newman" and Newman's financial statements and notes thereto
included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS
JUNE 30,(3) YEAR ENDED MARCH(1)(2)(3) ENDED
-------------------- -------------------------------------------------- DECEMBER 31,
1996 1995 1995 1994 1993 1992 1995(1)(3)
-------- -------- -------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues......................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Income (loss) before
extraordinary items............ (13,688) (5,644) (4,392) (5,600) -- -- (5,978)
Extraordinary items(2)........... -- -- -- 4,026,333 -- -- --
Net income (loss)................ (13,688) (5,644) (4,392) 4,020,733 -- -- (5,978)
PER SHARE DATA:
Primary
Income (loss) before
extraordinary items.......... $ (.02) $ (.01) $ (.01) $ -- $ -- $ -- $ (.01)
Net income..................... $ (.02) $ (.01) $ (.01) $ 1.14 $ -- $ -- $ (.01)
Fully diluted
Net income (loss).............. $ (.02) $ (.01) $ (.01) $ -- $ -- $ -- $ (.01)
Average number of Shares of
Common Stock outstanding(4).... 858,500 834,500 763,792 3,540,407 5,310,610 5,310,610 839,833
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------- MARCH 26, MARCH 27, MARCH 28, DECEMBER 31,
1996 1995 1994 1993 1992 1995
------ ------ --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total assets.................................. $5,200 $2,640 $ 9,249 $ -0- $ -0- $ 12,854
Total liabilities............................. 6,034 2,250 25 4,031,509 4,031,509 -0-
Shareholders equity (deficit)................. (834) 390 9,224 (4,031,509) (4,031,509) 12,854
</TABLE>
- ---------------
(1) During 1995, Newman changed its fiscal year end from a fiscal year which is
based on a 52-week year ending on the last Saturday in March to a calendar
year end.
(2) Newman filed for Chapter 11 bankruptcy on August 12, 1992, and emerged as a
reorganized entity on November 22, 1993. See "Business Information
Concerning Newman -- Bankruptcy Proceedings".
(3) Newman has been a development stage company since its November 22, 1993
reorganization.
(4) Does not include 1,693,564 shares of Newman Common Stock issued to Halter in
August 1996 for approximately $1,694 in cash. See "The
Reorganization -- Sepco's Reasons for the Reorganization -- Recommendation
of Sepco's Board of Directors".
9
<PAGE> 21
SUMMARY UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed combined balance sheet and
statements of earnings reflect the completion of the Sepco Merger and Newman
Merger. The Sepco Merger and the Newman Merger are described more fully herein
and in the Sepco Merger Agreement and Newman Merger Agreement. The pro forma
condensed combined statements of earnings assume that the Sepco Merger and the
Newman Merger were consummated as of the beginning of the periods presented and
the pro forma condensed combined balance sheets assume that the Sepco Merger and
the Newman Merger were consummated as of the end of the periods presented. The
pro forma adjustments are explained in "Notes to Unaudited Pro Forma Combined
Financial Statements". The pro forma combined statements of operations are not
necessarily indicative of the results of operations had the proposed
transactions occurred at the beginning of each period presented, nor are they
necessarily indicative of the results of future operations.
PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
---------------- -----------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENTS OF EARNINGS DATA:
Revenues.................................................... $ 63,021 $ 111,328
Costs and expenses:
Costs of sales............................................ 46,790 82,171
Selling, general and administrative....................... 14,818 24,565
------- --------
Operating income............................................ 1,413 4,592
Other income (expense):
Other Income.............................................. 514 867
Interest expense.......................................... (1,008) (1,953)
------- --------
Total other expense............................... (494) (1,086)
------- --------
Earnings before income taxes................................ 919 3,506
Provision for income taxes.................................. (377) (1,424)
------- --------
Net income.................................................. $ 542 $ 2,082
======= ========
Earnings per share.......................................... $ .03 $ .10
======= ========
Number of shares used to compute pro forma earnings per
share..................................................... 17,263 20,925
======= ========
</TABLE>
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
(IN THOUSANDS)
<S> <C>
ASSETS:
Total Current Assets.......................................................... $36,744
Property, plant and equipment net............................................. 6,749
Total assets.......................................................... 45,078
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Total current liabilities..................................................... 13,325
Long-term debt, less current portion.......................................... 19,660
Deferred compensation.........................................................
Subordinated debt, less current portion.......................................
Deferred income taxes......................................................... 205
Equity subject to redemption.................................................. 2,800
Total shareholders' equity.................................................... 9,087
Total liabilities and shareholders' equity............................ 45,078
</TABLE>
10
<PAGE> 22
HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE DATA
The following table presents historical and pro forma per share data for
Sepco (whose financial statements will become the historical financial
statements of the Company) and historical and equivalent pro forma per share
information for Newman after giving effect to the Reorganization, assuming the
Reorganization had been effective during all periods presented. See "The
Reorganization -- Anticipated Accounting Treatment". The pro forma data are not
necessarily indicative of future operations or the results that would have
occurred had the Reorganization been consummated at the beginning of the periods
presented. The information set forth below should be read in conjunction with
"Selected Consolidated Financial Information", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto of Sepco and Newman included elsewhere in this
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
HISTORICAL NEWMAN
------------------ SEPCO EQUIVALENT
SEPCO NEWMAN(1) PRO FORMA PRO FORMA(2)
----- --------- --------- ------------
<S> <C> <C> <C> <C>
Income (loss) per common and common equivalent
share:
Six months ended June 30, 1996.................. $0.55 $ (0.02) $0.03 $ 0.01
Year ended December 31, 1995.................... 1.68 (0.01) 0.12 0.03
Book value per share:
June 30, 1996................................... $9.49(3) -- $0.57 $ 0.14
December 31, 1995............................... 8.36(3) .01 0.49 0.12
</TABLE>
- ---------------
(1) The historical information for Newman is for the twelve month period ended
December 31, 1995.
(2) The equivalent pro forma per share data for Newman is computed by
multiplying Sepco's pro forma per share information by the exchange ratio
of .25 to 1.
(3) The historical book value per common share for Sepco was determined by
dividing Sepco's total stockholders' equity (adjusted for the effects of
the liquidation preferences of preferred stock) by the number of shares of
Sepco Common Stock outstanding at such dates, after giving effect to
outstanding stock options using the treasury stock method.
11
<PAGE> 23
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Proxy Statement/Prospectus. This Proxy
Statement/Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed below and
elsewhere in this Proxy Statement/Prospectus.
NO FAIRNESS OPINION OBTAINED BY THE COMPANY, SEPCO OR NEWMAN
None of the Company, Sepco or Newman engaged an independent third party to
review the terms of the Reorganization or to prepare a fairness opinion related
to the applicable exchange ratios set forth in the Sepco Merger Agreement and
Newman Merger Agreement. Each exchange ratio was determined by negotiations
between management of the Company, on the one hand, and Sepco and Newman,
respectively, on the other hand, related to the relative value of each entity.
The factors considered in establishing the exchange ratio with respect to the
Newman Merger included (i) the publicly held nature and existing shareholder
base of Newman, (ii) the operating and financial history of Newman and (iii) the
potential value of the shares of Common Stock to be issued to Newman
shareholders in light of Newman's present financial condition, which includes no
significant assets or operations. The factors considered in establishing the
exchange ratios with respect to the Sepco Merger included (i) the operating and
financial history of Sepco, (ii) the fair value of the Sepco Common Stock at
December 31, 1995, as determined by an independent appraiser for purposes of the
Sepco Employee Stock Ownership Plan ("Sepco ESOP"), and (iii) a desire that the
Reorganization result in an aggregate of 16,000,000 outstanding shares of Common
Stock, based upon the advice of Halter. See "The Reorganization -- Newman's
Reasons for the Mergers; Recommendation of Newman's Board of
Directors; -- Sepco's Reasons for the Reorganization; Recommendation of Sepco's
Board of Directors".
CONTROL BY EXISTING SHAREHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS OF SEPCO
Sepco's existing shareholders, executive officers, directors and their
affiliates will beneficially own approximately 96% of the outstanding shares of
Common Stock following the Reorganization. As a result, such persons, acting
together, will be able to elect all of the Company's directors, will retain the
voting power to approve most matters requiring shareholder approval and will
have significant influence on the affairs of the Company. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company. See "Beneficial Ownership of Securities".
SUBSTANTIAL COMPETITION
The Company's business is highly competitive. The Company competes with a
variety of industrial supply distributors, some of which may have greater
financial and other resources than the Company. Although many of the Company's
traditional distribution competitors are small enterprises selling to customers
in a limited geographic area, the Company also competes with larger distributors
that provide integrated supply programs such as those offered through the iPower
Consortium and outsourcing services similar to those that are planned to be
offered by American MRO, Inc. ("AMRO"), a wholly-owned subsidiary of Sepco. Some
of these large distributors may be able to supply their products in a more
timely and cost-efficient manner than the Company. The Company's competitors
include direct mail suppliers, large warehouse stores and, to a lesser extent,
certain manufacturers. See "Business Information Concerning the Company".
RISKS ASSOCIATED WITH IMPLEMENTATION OF CORPORATE STRATEGY
Future results for the Company also will be dependent on the success of the
Company in implementing its acquisition and growth strategy. This strategy
includes taking advantage of a consolidation in the industry and effecting
acquisitions of distributors with complementary or desirable new product lines,
strategic distribution locations and attractive customer bases and manufacturer
relations. The Company's strategy also includes expanding its product lines,
adding new product lines and establishing alliances and joint ventures with
other suppliers in order to provide the Company's customers with a source of
integrated supply. The ability of the Company to implement this strategy will be
dependent on its ability to identify, consummate and assimilate acquisitions on
economic terms, to acquire and successfully integrate new product lines and to
establish and successfully market new integrated forms of supply arrangements
such as that being pursued by
12
<PAGE> 24
AMRO. Although the Company is actively seeking acquisitions and integrated
supply arrangements that would meet its strategic objectives, it currently has
no agreements or understandings with respect to any such acquisition and there
can be no assurance that the Company will be successful in these efforts.
Further, the ability of the Company to effect its strategic plans will be
dependent on its obtaining financing for its planned expansions and
acquisitions. There can be no assurance that such financing will be available on
a timely basis or on terms satisfactory to the Company. The Company plans to
examine appropriate methods of financing any such acquisition, including
issuance of additional capital stock, debt or other securities or a combination
of both. If the Company were to issue shares of its capital stock in any
acquisition, such issuance could be dilutive to existing shareholders.
DEPENDENCE ON KEY PERSONNEL
The Company will continue to be dependent to a significant extent upon the
efforts and ability of David R. Little, its President and Chief Executive
Officer. The loss of the services of Mr. Little or any other executive officer
of the Company could have a material adverse effect on the Company's financial
condition and results of operations. The Company does not maintain key-man life
insurance on Mr. Little or on the lives of its other executive officers. In
addition, the Company's ability to grow successfully will be dependent upon its
ability to attract and retain qualified management and technical and operational
personnel. The failure to attract and retain such persons could materially
adversely effect the Company's financial condition and results of operations.
See "Management".
CHANGES IN VOTING RIGHTS OF HOLDERS OF SEPCO COMMON STOCK
Pursuant to the Sepco Merger, the holders of Sepco Class A Common Stock and
Class B Common Stock will receive shares of Common Stock in accordance with the
exchange ratios set forth in the Sepco Merger Agreement. As a result, the former
holders of Sepco Class A Common Stock and Class B Common Stock will no longer
have the right to a class vote with respect to certain matters that under Texas
law require the approval of each class or series of stock. In addition, the
holders of Sepco Common Stock currently have the right to approve any changes in
the terms of the Sepco Class A Convertible Preferred Stock and Sepco Preferred
Stock. As holders of Common Stock, the former holders of Sepco Common Stock will
not have the right to approve any changes in the terms of the Series B
Convertible Preferred Stock or the Series A Preferred Stock. Furthermore, a
holder of Sepco Class B Common Stock is entitled to receive $7.5075 upon the
liquidation of Sepco. Such liquidation right is in preference to the liquidation
rights of holders of Sepco Class A Convertible Preferred Stock. As a holder of
Common Stock, the former holders of Sepco Class B Common Stock will have no such
liquidation rights or preference. The holders of Sepco Class A Convertible
Preferred Stock and Sepco Preferred Stock, except as otherwise provided by law,
have no right to vote on the election of directors or any matters presented to
the Sepco shareholders. Each share of Series A Preferred Stock and Series B
Convertible Preferred Stock entitles the holder thereof to one-tenth of a vote
on all matters to come before a meeting of the shareholders of the Company. In
addition, matters that previously required the vote of two-thirds of the
outstanding shares of Sepco stock will only require the approval of a majority
of the outstanding shares of the Company. See "Comparison of Rights of Holders
of Sepco Stock and Common Stock".
IRS EXAMINATION
Sepco currently is undergoing an examination of its tax returns by the
Internal Revenue Service ("IRS") which is asserting claims against Sepco for
additional taxes and penalties of approximately $1 million plus interest of
approximately $240,000. The claim relates primarily to a challenge by the IRS of
Sepco's use of the LIFO method of accounting for inventory. Although Sepco
believes that its LIFO elections were valid and is pursuing its rights to
administrative appeal, an unfavorable outcome on this matter would result in the
payment of additional taxes and impact the Company's liquidity position. See
"Business -- Legal Proceedings".
RISKS ASSOCIATED WITH HAZARDOUS MATERIALS
Certain of the Company's activities involve the controlled use of hazardous
materials and chemicals. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury
13
<PAGE> 25
from these materials cannot be eliminated completely. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company. See "Business
Information Concerning the Company -- Government Regulation and Environmental
Matters".
LIMITATION ON ABILITY TO PAY DIVIDENDS
The Company anticipates that future earnings, except for dividends payable
on the Series B Convertible Preferred Stock, will be retained to finance the
continuing development of its business. In addition, Sepco's loan agreement with
its principal lender prohibits Sepco from declaring or paying any dividends or
other distributions on its capital stock except for dividends to the Company to
allow for payment of dividends on the Company's preferred stock. Accordingly,
the Company does not anticipate paying cash dividends on the Common Stock in the
foreseeable future. See "Dividend Policy".
DILUTION
Shareholders of Newman will receive shares of Common Stock as a result of
the Newman Merger. The percentage of ownership of the former Newman shareholders
in the Company will be significantly less than their percentage of ownership in
Newman prior to the Newman Merger as a result of the terms of the Newman Merger
Agreement and issuance of Common Stock to the shareholders of Sepco in the Sepco
Merger, although this dilution is somewhat offset by the fact that the former
Newman shareholders' smaller ownership percentage interest will be in a larger
operating enterprise.
POTENTIAL ANTI-TAKEOVER EFFECTS OF ARTICLES OF INCORPORATION AND BYLAWS
The Company's Articles allow the Board of Directors of the Company to issue
shares of preferred stock without shareholder approval on such terms as the
Board of Directors may determine. The rights of all the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. In addition, the
Company's Articles do not allow cumulative voting in the election of directors.
All of the foregoing could have the effect of delaying, deferring or preventing
a change in control of the Company and could limit the price that certain
investors might be willing to pay in the future for shares of the Common Stock.
See "Description of Company Capital Stock".
NO PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
The Common Stock, Series B Convertible Preferred Stock and the Series A
Preferred Stock are new issues of securities that will have no established
trading market. The Company intends to apply for quotation of the Common Stock
on the OTC Bulletin Board of the National Association of Securities Dealers,
Inc. upon effectiveness of the Registration Statement, of which this Proxy
Statement/Prospectus forms a part. While there can be no assurance in this
regard, the Company believes that the Common Stock should qualify for quotation
on the OTC Bulletin Board. There can be no assurance, however, that a market in
the Common Stock will develop or, if developed, will be sustained. Upon the
consummation of the Mergers, over 90% of the outstanding shares of Common Stock
will be held by less than 20 holders. Concentration of ownership and the lack of
a public market for the Common Stock could adversely affect the liquidity of
such shares and the amount that could be realized on a sale thereof. See "Market
for the Company's Stock, Sepco Common Stock and Newman Common Stock and Related
Shareholder Matters -- The Company". The limited number of unaffiliated
shareholders and factors such as market expansion, the development of additional
services, its competitors and other third parties, as well as quarterly
variations in the Company's anticipated or actual results of operations or
market conditions generally, may cause the market price of the Common Stock to
fluctuate significantly if a trading market does in fact develop for the Common
Stock. In addition, the stock market has on occasion experienced extreme price
and volume fluctuations, which have particularly affected the market prices of
many companies. These broad market fluctuations may adversely affect the market
price of the Common Stock, if a public trading market is established.
14
<PAGE> 26
RECENT DEVELOPMENTS
SEPCO
Sepco recently reported financial results for the third quarter and nine
months ended September 30, 1996. Revenues for the third quarter ended September
30, 1996 increased 15.0% to $32.2 million from $28.0 million for the same period
in 1995, primarily due to sales of bearings and power transmission products at
locations where pump and pump products were sold previously, revenue
attributable to the two companies acquired in December 1995 and February 1996
and from increased sales volume. Gross margins remained constant at 26.1% for
each of the third quarters of 1996 and 1995.
Operating income for the third quarter of 1996 decreased 7.7% to $985,000
from $1.1 million for the same period in 1995. Net income for the three months
ended September 30, 1996 was $336,000 compared with $482,000 for the three
months ended September 30, 1995. The decrease in operating income and net income
for the third quarter of 1996 as compared to the third quarter of 1995 was due
to increased professional fees associated with the Reorganization and interest
and other costs associated with Sepco's expansion of operations. Operating
results also were affected by inefficiencies associated with the conversion of
the Company's software system. Excluding the costs associated with the
Reorganization, operating income and net income would have been slightly higher
for the third quarter of 1996 compared to the same quarter of 1995. The Company
expects that the installation of its new software system should be completed by
the end of 1996, and that the expenses associated with such installation should
decrease in 1997.
Revenues for the nine months ended September 30, 1996 increased 11.4% to
$95.2 million from $84.4 million for the same period in 1995, primarily due to
sales of bearings and power transmission products at locations where pump and
pump products were sold previously, revenue attributable to the two companies
acquired in December 1995 and February 1996 and from increased sales volume.
Gross margins increased slightly by .1% in the first nine months of 1996
compared to the same period in 1995. Operating income for the nine months ended
September 30, 1996 decreased 21.7% to $2.4 million from $3.1 million for the
first nine months of 1995, due to a one-time charge of $710,000 for additional
compensation expense associated with the amendment of certain book value stock
options into market-based stock options, interest and other costs associated
with Sepco's expansion of operations and software conversion, and increased
professional fees related to the Reorganization. Net income for the nine months
ended September 30, 1996 decreased 34.4% to $.9 million from $1.4 million for
the same period of 1995.
NEWMAN
Newman also recently announced financial results for the three months and
nine months ended September 30, 1996. Newman had no revenues in the three months
and nine months ended September 30, 1996. Operating and net loss were $4,557 for
the three months ended September 30, 1996 and $18,264 for the nine months ended
September 30, 1996.
THE MEETINGS
GENERAL
Sepco. The Sepco Meeting will be held at 10:00 a.m., Central Standard Time,
on Tuesday, December 4, 1996 at the offices of Fulbright & Jaworski L.L.P., 1301
McKinney, Suite 5100, Houston, Texas 77010.
Newman. The Newman Meeting will be held at 10:00 a.m., Central Standard
Time, on Tuesday, December 4, 1996 at the offices of Fulbright & Jaworski
L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010.
RECORD DATES; SHARES ENTITLED TO VOTE; QUORUM; VOTE REQUIRED
Sepco. Only holders of record of the Sepco Class A Common Stock, the Sepco
Class B Common Stock, the Sepco Class A Convertible Preferred Stock and the
Sepco Preferred Stock at the close of business on the Sepco Record Date are
entitled to notice of, and to vote at, the Sepco Meeting. A majority of the
shares entitled to vote, present in person or represented by proxy, will
constitute a quorum at the Sepco Meeting.
At the close of business on the Sepco Record Date, there were 758,899
shares of Sepco Class A Common Stock, 176,900 shares of Sepco Class B Common
Stock, 19,500 shares of Sepco Class A Convertible Preferred Stock and 3,366
shares of Sepco Preferred Stock outstanding and entitled to vote at the Sepco
15
<PAGE> 27
Meeting. Directors and executive officers of Sepco held 587,399 shares of Sepco
Class A Common Stock, representing approximately 62.8% of the outstanding
shares, 12,035 shares of Sepco Class B Common Stock, representing approximately
6.8% of the outstanding shares of such class, 15,000 shares of Sepco Class A
Convertible Preferred Stock, representing approximately 76.9% of the outstanding
shares of such series, and no shares of Sepco Preferred Stock. Such persons have
indicated to Sepco that they intend to vote their shares in favor of the
approval and adoption of the Sepco Merger and the Sepco Merger Agreement. Each
share of Sepco Common Stock entitles the holder thereof to one vote on each
matter submitted for shareholder approval. Under Texas law and Sepco's Articles
of Incorporation, approval and adoption of the Sepco Merger and the Sepco Merger
Agreement require the affirmative vote of the holders of at least two-thirds of
the shares of Sepco Common Stock outstanding and entitled to vote thereon and
approval by the holders of at least two-thirds of the shares of Sepco Class A
Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred
Stock and Sepco Preferred Stock, each voting as a separate class or series, as
the case may be. Under Texas law, abstentions contained on a returned proxy card
will be considered present for purposes of determining the existence of a quorum
at the Sepco Meeting and will have the effect of a vote against the Sepco Merger
and Sepco Merger Agreement.
The Sepco Class A Common Stock, the Sepco Class B Common Stock, the Sepco
Class A Convertible Preferred Stock and the Sepco Preferred Stock were held by
17, one, five and six holders of record, respectively, as of the Sepco Record
Date. The Sepco Class B Common Stock is currently held by the Sepco ESOP. The
participants in the Sepco ESOP will be entitled to direct the vote of the shares
allocated to their accounts in connection with the Sepco Merger. As of the Sepco
Record Date, there were 522 participants in the Sepco ESOP.
Newman. Only holders of record of Newman Common Stock at the close of
business on the Newman Record Date are entitled to notice of, and to vote at,
the Newman Meeting. A majority of the shares entitled to vote, present in person
or represented by proxy, will constitute a quorum at the Newman Meeting.
Under New Mexico law and Newman's Articles of Incorporation, approval and
adoption of the Newman Merger and the Newman Merger Agreement require the
affirmative vote of a majority of the issued and outstanding shares of Newman
Common Stock entitled to vote thereon. At the close of business on the Newman
Record Date, there were 2,552,064 shares of Newman Common Stock outstanding and
entitled to vote at the Newman Meeting. The officers and directors have
recommended that the shareholders vote their shares of Newman Common Stock in
favor of approval and adoption of the Newman Merger Agreement.
On the Newman Record Date, there were approximately 199 holders of record
of the 2,552,064 shares of Newman Common Stock then issued and outstanding. Each
share of Newman Common Stock entitles the holder thereof to one vote on each
matter submitted for shareholder approval.
Under applicable rules of the National Association of Securities Dealers,
Inc., brokers will not be permitted to submit proxies to authorize the Newman
Merger and the Newman Merger Agreement in the absence of specific instructions
from beneficial owners. Under New Mexico law, abstentions contained on a
returned proxy card will be considered present for purposes of determining the
existence of a quorum at the Newman Meeting. Accordingly, abstentions and broker
non-votes will have the effect of votes against the Newman Merger and the Newman
Merger Agreement.
SOLICITATION OF PROXIES
Sepco. In addition to solicitation by mail, the directors, officers and
employees of Sepco may solicit proxies from its shareholders by personal
interview, telephone, facsimile or otherwise. Halter will bear the costs of the
solicitation of proxies. Arrangements also will be made with custodians,
nominees and fiduciaries who hold the voting securities of record for the
forwarding of solicitation materials to the beneficial owners thereof. Halter
will reimburse such custodians, nominees and fiduciaries for the out-of-pocket
expenses incurred by them in connection therewith.
Newman. The cost of soliciting proxies on behalf of Newman, including the
cost of preparing and mailing the Notice of the Newman Meeting and this Proxy
Statement/Prospectus to the Newman shareholders, will be paid by Halter.
Solicitation will be primarily by mailing this Proxy Statement/Prospectus to all
shareholders of Newman entitled to vote at the Newman Meeting. Proxies may be
solicited by officers of
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Newman personally, but at no compensation in addition to their regular
compensation as officers. Halter may reimburse brokers, banks and others holding
shares in their names for others for the cost of forwarding proxy materials and
obtaining proxies from their principals.
Halter estimates that it will incur $25,000 of costs in connection with its
obligations described above.
APPOINTMENT AND REVOCATION OF PROXIES
A shareholder has the right to appoint a person to attend and act for him
on his behalf at either the Sepco Meeting or the Newman Meeting other than the
person(s) named in the enclosed instruments of proxy. To exercise this right, a
shareholder shall strike out the names of the person(s) named in the appropriate
instrument of proxy and insert the name of his nominee in the space provided or
complete another instrument of proxy.
The proxies for the Sepco Meeting and the Newman Meeting, respectively,
must be signed by an individual shareholder or by his attorney authorized in
writing and executed by the shareholder. If the shareholder is a corporation, it
must either be under its common seal or signed by a duly authorized officer, or
if the shareholder is a partnership, it must be signed by either a general
partner, managing partner or duly authorized officer of the partnership.
A shareholder of either Sepco or Newman who has given a proxy may revoke it
at any time before it is exercised. In addition to revocation in any other
manner permitted by law, a proxy may be revoked by an instrument in writing
executed by a shareholder of Sepco or a shareholder of Newman or by their
respective attorneys authorized in writing and executed by the shareholder. If
the shareholder is a corporation, it must either be under its common seal, or
signed by a duly authorized officer, or if the shareholder is a partnership it
must be signed by either a general partner, managing partner or duly authorized
officer of the partnership. A revocation of a proxy by a shareholder of Sepco
should be deposited with the Secretary of Sepco, 580 Westlake Park Boulevard,
Suite 1100, Houston, Texas 77079. A revocation of a proxy by a shareholder of
Newman should be deposited with General Securities Transfer Agency, Inc., P. O.
Box 3805, Albuquerque, New Mexico 87190. Revocation of a proxy by either a
shareholder of Sepco or Newman may be delivered at any time up to and including
the day of the Sepco Meeting and the Newman Meeting, respectively, or any
adjournment or postponement thereof, at which the proxy is to be used. A proxy
is also revoked if a shareholder is present at either the Sepco Meeting or the
Newman Meeting, respectively, and elects to vote in person.
VOTING OF SHARES AND EXERCISE OF DISCRETION OF PROXIES
All properly executed proxies that are not revoked will be voted at the
Sepco Meeting and the Newman Meeting in accordance with the instructions
contained therein. If a shareholder of Sepco executes and returns a proxy and
does not specify otherwise, the shares represented by such proxy will be voted
FOR approval and adoption of the Sepco Merger and Sepco Merger Agreement in
accordance with the recommendation of the Sepco board of directors. If a
shareholder of Newman executes and returns a proxy and does not specify
otherwise, the shares represented by such proxy will be voted FOR approval and
adoption of the Newman Merger and Newman Merger Agreement in accordance with the
recommendation of the Newman board of directors.
The accompanying instruments of proxy confer discretionary authority on the
persons named therein with respect to amendments or variations to matters
identified in the respective Notices of Meetings and with respect to other
matters which may properly come before the Meetings. At the date hereof,
management of Sepco and Newman, respectively, know of no such amendments,
variations or other matters to come before the Meetings other than the matters
referred to in the respective Notices of Meeting.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the boards of directors
of Sepco and Newman do not know of any business to be presented at their
respective Meetings other than as set forth in the Notices of Meeting
accompanying this Proxy Statement/Prospectus. If any other matters should
properly come before the respective Meetings, it is intended that the shares
represented by proxies will be voted with respect to such matters in accordance
with the judgment of the persons voting such proxies.
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THE REORGANIZATION
GENERAL DESCRIPTION OF THE MERGERS
Sepco Merger. Upon consummation of the Sepco Merger, Sepco Acquisition will
merge with and into Sepco, with Sepco being the surviving corporation. In the
Sepco Merger, (i) each outstanding share of Sepco Class A Common Stock will be
converted automatically into the right to receive 16 shares of Common Stock,
(ii) each outstanding share of Sepco Class B Common Stock will be converted
automatically into the right to receive 18.1232 shares of Common Stock, (iii)
each outstanding share of Sepco Class A Convertible Preferred Stock will be
converted automatically into the right to receive one share of Series B
Convertible Preferred Stock and (iv) each outstanding share of Sepco Preferred
Stock will be converted automatically into the right to receive one share of
Series A Preferred Stock. As a consequence of the Sepco Merger, Sepco will
become a wholly-owned subsidiary of the Company. Based on the number of shares
of Sepco Stock and Newman Common Stock outstanding as of the Sepco Record Date
and Newman Record Date, respectively, Sepco shareholders collectively will hold
15,384,384 shares, or approximately 96%, of the issued and outstanding Common
Stock, upon consummation of the Reorganization.
Newman Merger. Upon consummation of the Newman Merger, Newman Acquisition
will merge with and into Newman, with Newman being the surviving corporation. In
the Newman Merger, each outstanding share of Newman Common Stock will be
converted into one-fourth of one share of Common Stock. As a consequence of the
Newman Merger, Newman will become a wholly-owned, non-operating subsidiary of
the Company. Based on the number of shares of Newman Common Stock and Sepco
Stock outstanding as of the Newman Record Date and the Sepco Record Date,
respectively, Newman shareholders collectively will hold 639,516 shares, or
approximately 4.0%, of the issued and outstanding Common Stock, upon
consummation of the Reorganization.
The Sepco Merger and the Newman Merger will be consummated simultaneously.
SEPCO'S REASONS FOR THE REORGANIZATION; RECOMMENDATION OF SEPCO'S BOARD OF
DIRECTORS
During 1995, Sepco began an investigation with respect to the possibility
of becoming a public company in order to obtain better access to equity capital
for purposes of supporting its acquisition program and proposed growth plans and
to provide greater liquidity for the Sepco Common Stock. In connection with this
review, Sepco considered the possibility of an initial public offering in which
it would issue additional shares as well as the possibility of a merger with an
existing public company that would provide Sepco with a broader shareholder
base. After analyzing the costs and benefits of each and probabilities of
success, the board of directors of Sepco ultimately concluded that the most
desirable means for Sepco to achieve its objectives would be to merge with an
existing public company. In connection with this decision, Sepco retained
Halter, an independent third-party consulting firm that advises private
companies in connection with becoming public companies through business
combinations with existing public companies, to assist it in identifying a
desirable public company with which to merge. Timothy P. Halter is the sole
officer, director and shareholder of Halter. As part of this arrangement, Sepco
agreed that Halter would be entitled to receive up to 2.7% of the outstanding
shares of common stock of the surviving corporation upon the consummation of a
merger between Sepco and a public company secured by Halter for the transaction.
In February 1996, after reviewing several potential public companies as
acquisition candidates, including Newman, management of Sepco determined that
Newman would be a desirable merger candidate for Sepco. From February to April
1996, Sepco conducted due diligence with respect to the prior business and
operations of Newman. Sepco also concluded that the most desirable means for
effecting a merger or business combination with Newman would be through the
creation of the Company and the concurrent acquisition by the Company of all of
the outstanding shares of Newman through the Newman Merger and of all the
outstanding shares of Sepco through the Sepco Merger. Sepco believed that this
structure reduced the risk of any liabilities associated with Newman's prior
operations affecting the assets of Sepco and provided a desirable structure from
a tax standpoint.
In connection with this structure, Halter entered into an agreement with
Newman on August 12, 1996 pursuant to which Halter acquired directly from Newman
in a private transaction 1,693,564 shares of Newman Common Stock, or a 66.2%
interest in Newman, in consideration for approximately $1,694 in cash.
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The ownership interest acquired by Halter in Newman was intended to provide
Halter with an approximate 2.7% ownership interest in the Company upon the
consummation of the Reorganization. The agreement was negotiated on behalf of
Newman by Newman's president, Glenn A. Little, and Newman's financial and legal
representatives. The agreement between Newman and Halter and the issuance of the
shares of Newman Common Stock to Halter did not require the approval of the
Newman shareholders. Subsequent to the issuance of such shares, Halter
transferred an aggregate of 304,000 shares of Newman Common Stock to certain of
its employees and consultants. Halter will be entitled to vote its remaining
1,389,564 shares of Newman Common Stock at the Newman Meeting, and, if it votes
its shares for the Newman Merger, approval of the Newman Merger will be assured.
In light of the agreement between Halter and Newman, Sepco and Halter
agreed to an amendment to the terms of Halter's engagement with Sepco that
eliminated Halter's right to receive shares from Sepco in connection with the
Reorganization. Halter, however, continued to be responsible for various costs
and expenses relating to the Reorganization, including filing fees with the
Commission, printing costs and various legal costs associated with the document
preparation for the Newman Merger. Halter further agreed as an inducement to
Sepco to enter into the Reorganization to assist the Company in making
application for the listing or quotation of its stock on the Nasdaq Stock
Market, preparing a shareholder communications and relations program,
identifying a market maker for the stock of the Company and establishing a
program of communication with brokerage professionals, investment bankers and
market makers.
The Company also has agreed to maintain a registration statement providing
for the registration under the Securities Act of the resale of shares of Common
Stock issuable to Halter in the Newman Merger for a period of 90 days following
the Newman Merger or for such other period of time as the Company deems
desirable. The Company will bear the costs associated with maintaining such
registration statement and Halter will bear the cost of all selling, printing
and other expenses. The agreement between the Company and Halter regarding such
registration provides for customary indemnification, including indemnification
for liability under securities laws.
On August 12, 1996, the Company entered into the Sepco Merger Agreement and
the Newman Merger Agreement. The Board of Directors of each of Sepco and Newman
have determined that the Sepco Merger and the Newman Merger, respectively, are
in the best interest of their respective shareholders and have recommended to
their shareholders that such mergers be approved.
The exchange ratios for the shares of stock of the Company to be issued to
the shareholders of Sepco were determined by negotiations of the parties. The
factors considered in establishing the exchange ratios with respect to the Sepco
Merger included (i) the operating and financial history of Sepco, (ii) the fair
value of the Sepco Common Stock at December 31, 1995, as determined by an
independent appraiser for purposes of the Sepco ESOP and (iii) a desire that the
Reorganization result in an aggregate of 16,000,000 outstanding shares of Common
Stock, based upon the advice of a financial advisor. As determined by the
independent appraiser, the fair value per share of the Sepco Class A Common
Stock and the Sepco Class B Common Stock at December 31, 1995 was $8.74 and
$9.90, respectively.
NEWMAN'S REASONS FOR THE NEWMAN MERGER; RECOMMENDATION OF NEWMAN'S BOARD OF
DIRECTORS
The Newman Merger is the result of Newman's efforts to obtain value for the
Newman Common Stock. Newman has no significant assets or operations; however, it
possesses a shareholder base which makes it an attractive merger candidate to a
privately-held corporation seeking to become a public company. The board of
directors of Newman has concluded that the Newman Merger is in the best
interests of the shareholders of Newman, has approved the Newman Merger
Agreement and unanimously has recommended that the shareholders of Newman
approve and adopt the Newman Merger Agreement.
The board of directors of Newman believes that the terms of the Newman
Merger Agreement are fair to, and in the best interests of, Newman and its
shareholders. In reaching its conclusion, Newman's board of directors considered
(i) the matters set forth above, (ii) the judgment and advice of Newman's
management, (iii) the historical financial performance and future operating
prospects of Newman, (iv) detailed business and financial information regarding
Sepco and (iv) the terms of the Newman Merger Agreement.
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The exchange ratio for the shares of Common Stock to be issued to
shareholders of Newman in the Newman Merger was determined by negotiations
between the parties. The factors considered in establishing the exchange ratio
with respect to the Newman Merger included (i) the publicly held nature and
existing shareholder base of Newman, (ii) the operating and financial history of
Newman and (iii) the potential value of the shares of Common Stock to be issued
to Newman shareholders in light of Newman's present financial condition, which
includes no significant assets or operations.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Introduction. This section summarizes the material federal income tax
considerations of general application that should be considered by shareholders
in evaluating the Sepco Merger and the Newman Merger. This discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Department regulations promulgated thereunder, court decisions and
administrative pronouncements published to date. Any or all of the above are
subject to change, possibly with retroactive effect. Subsequent statutory or
administrative changes or clarifications or court decisions could cause this
discussion to become inaccurate or incomplete. This discussion does not address
all tax matters that may affect the Company or the shareholders and does not
consider various factual limitations applicable to any particular shareholder
that may modify or alter the results described herein. In particular, it does
not address federal income tax considerations to investors who are nonresident
aliens, foreign entities or tax-exempt entities such as an employee stock option
plan ("ESOP") and does not address particular situations where shares are
received in exchange for services rendered or for reasons other than in exchange
for shares of the Company. In addition, the following discussion does not
address the tax consequences of the Sepco Merger and the Newman Merger under
foreign, state or local tax laws. Except as otherwise indicated, statements of
legal conclusion regarding tax treatments, tax effects or tax consequences
discussed in this section are the opinions of Fulbright & Jaworski L.L.P.,
special securities and tax counsel to the Company. A copy of such counsel's
opinion, which sets forth certain assumptions and qualifications made by such
counsel has been filed as an exhibit to the Registration Statement of which this
Proxy Statement/Prospectus forms a part. Such opinion has no binding effect or
official status of any kind and will not preclude the IRS from adopting a
contrary position.
The Company has not requested or received a ruling from the IRS on the
matters discussed herein. The IRS may disagree with some of the conclusions set
forth below, and no assurance can be given that such conclusions would be
sustained by a court if challenged by the IRS. In addition, tax counsel's
opinions set forth herein are subject to certain assumptions and qualifications
and are conditioned upon the accuracy of certain factual information and
representations provided to tax counsel by the Company, including those attached
to the opinion of special tax counsel filed as an exhibit to the Registration
Statement of which this Proxy Statement/Prospectus forms a part. Any inaccuracy
in those factual matters could adversely affect the conclusions identified
herein and, in particular, could result in a shareholder recognizing gain in the
Sepco Merger and the Newman Merger. Each shareholder, and particularly a
shareholder that is an ESOP, is urged to consult his own tax advisor with
respect to the consequences to him of the consolidation and the advisability of
obtaining and reviewing the factual information and representations that counsel
has relied upon in rendering its opinion.
The Sepco Merger and the Newman Merger. For federal income tax purposes,
the Sepco Merger and the Newman Merger will be treated as an exchange of shares
of Sepco Stock and Newman Common Stock for shares of Common Stock, Series B
Convertible Preferred Stock and Series A Preferred Stock (collectively referred
to herein as "Company Stock"), as the case may be. Subject to the assumptions
and qualifications in its opinion filed as an exhibit to the Registration
Statement of which this Proxy Statement/Prospectus forms a part, in the opinion
of Fulbright & Jaworski L.L.P., the tax consequences to a shareholder of Sepco
or Newman who receives shares of Company Stock in either the Sepco Merger or the
Newman Merger will be as follows:
- Receipt of Company Stock. A shareholder of Sepco or Newman who receives
solely shares of Company Stock in either the Sepco Merger or the Newman
Merger in exchange for their Sepco Stock or Newman Common Stock will not
recognize gain or loss on the exchange.
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- Tax Basis. A shareholder's aggregate basis in all shares of Company Stock
received (including any fractional share deemed received) in either the
Sepco Merger or the Newman Merger will equal his aggregate basis in his
shares of Sepco Stock or Newman Common Stock, respectively, surrendered in
exchange therefor.
- Holding Period. A shareholder's holding period for the shares of Company
Stock received (including any fractional share deemed received) in either
the Sepco Merger or the Newman Merger will include the holding period of
his shares of Sepco Stock or Newman Common Stock, respectively,
surrendered in exchange therefor; provided, however, that such shares of
Sepco Stock or Newman Common Stock, as the case may be, are held as
capital assets at the time of the Sepco Merger and the Newman Merger,
respectively.
- Cash in Lieu of Fractional Shares. A holder of shares of Sepco Stock or
Newman Common Stock who receives cash in lieu of a fractional share of
Company Stock will recognize gain or loss equal to the difference, if any,
between such holder's basis in such fractional share (as described above)
and the amount of cash received. Such gain or loss should be long-term
capital gain or loss if such shares of Sepco Stock or Newman Common Stock
are held as a capital asset at the time of the Sepco Merger or the Newman
Merger, respectively, and the holding period for the fractional share (as
described above) is more than one year.
- Reporting Requirements. Each shareholder will be required to file with
his federal income tax return a statement that provides details relating
to such shareholder's shares of Company Stock received in the Sepco Merger
or the Newman Merger and such shareholder's shares of Sepco Stock or
Newman Common Stock surrendered in exchange therefor.
Any holder of Sepco Stock who dissents from the Sepco Merger, perfects his
dissenter's rights under the TBCA, and, accordingly, receives cash for the value
of his Sepco Stock, and any holder of Newman Common Stock who dissents from the
Newman Merger, perfects his dissenter's rights under the NMBCA, and,
accordingly, receives cash for the value of his Newman Common Stock, should be
treated as having received such cash as a distribution from Sepco or Newman, as
the case may be, in full payment in exchange for such Sepco Stock or Newman
Common Stock. The dissenting shareholder would recognize gain or loss measured
by the difference between the cash received and the basis for such Sepco Stock
or Newman Common Stock exchanged, if the redemption does not have the effect of
the distribution of a dividend under Section 302 of the Code (after applying the
constructive ownership rules of Section 318 of the Code).
For additional information regarding the material federal income tax
considerations that should be considered by shareholders in evaluating the Sepco
Merger and the Newman Merger, see "Certain Federal Income Tax Consequences".
ANTICIPATED ACCOUNTING TREATMENT
The Reorganization will be treated as a recapitalization of Sepco into the
Company (with respect to the Sepco Merger) and the issuance of the Company's
capital stock for the underlying tangible net assets of Newman (with respect to
the Newman Merger) for accounting and financial statement purposes because,
among other factors, the Company is a recently formed holding company with
nominal net assets, Newman is a non-operating public shell company with cash as
its primary asset, and the Sepco stockholders will control the Company after the
Reorganization. Accordingly, the historical pre-Reorganization financial
statements of the combined Company after the Closing will be those of Sepco. The
retained earnings of Sepco will be carried forward after the Reorganization and
the historical stockholders' equity of Sepco prior to the Reorganization will be
retroactively restated for the equivalent number of shares received in the
Reorganization.
DISSENTERS' RIGHTS
Sepco Shareholders. Articles 5.11 through 5.13 of the TBCA entitle any
shareholder of Sepco as of the Sepco Record Date who objects to the Sepco Merger
and who follows the procedures prescribed by such Articles, in lieu of receiving
the Common Stock, Series B Convertible Preferred Stock or Series A Preferred
Stock, as the case may be, to receive cash equal to the "fair value" of such
shareholder's shares as determined
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by agreement or appraisal. Set forth below is a summary of the procedures
relating to the exercise of the right to dissent as provided in the TBCA. The
summary does not purport to be complete and is qualified in its entirety by
reference to Articles 5.12 and 5.13 of the TBCA, which have been reproduced and
attached hereto as Appendix C. FAILURE TO COMPLY WITH ANY OF THE REQUIRED STEPS
MAY RESULT IN TERMINATION OF ANY SUCH RIGHT TO DISSENT THE SHAREHOLDER MAY HAVE
UNDER THE TBCA.
Shareholders of Sepco who follow the procedures set forth in Articles 5.12
and 5.13 of the TBCA may receive a cash payment equal to the fair value of their
shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A
Convertible Preferred Stock or Sepco Preferred Stock, as the case may be,
determined as of the day preceding the Sepco Meeting, exclusive of any element
of value arising from or in anticipation of the Reorganization. Unless all of
the procedures set forth in Articles 5.12 and 5.13 of the TBCA are followed by a
shareholder of Sepco who wishes to exercise dissenters' rights, such shareholder
will be bound by the terms of the Sepco Merger. To be entitled to a cash payment
upon exercise of dissenters' rights, a shareholder must (i) file with Sepco,
prior to the Sepco Meeting, a written objection to the Sepco Merger, setting out
that the shareholder's right to dissent will be exercised if the Sepco Merger is
effected and giving the shareholder's address to which notice thereof shall be
delivered or mailed in the event the Sepco Merger is consummated, (ii) not vote
his shares in favor of the adoption and approval of the Sepco Merger and Sepco
Merger Agreement and (iii) demand such cash payment in writing within ten days
after the delivery or mailing by Sepco of a notice that the Sepco Merger has
become effective. The demand must state the number of shares of the Sepco Class
A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred
Stock and Sepco Preferred Stock owned by the shareholder and the fair value of
such shares as estimated by the shareholder. ANY SHAREHOLDER FAILING TO MAKE
DEMAND WITHIN THE TEN-DAY PERIOD SHALL BE BOUND BY THE SEPCO MERGER AGREEMENT
AND THE SEPCO MERGER. Within 20 days after demanding payment for his shares,
each holder of certificates formerly representing shares of Sepco Class A Common
Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and
Sepco Preferred Stock so demanding payment shall submit such certificates to
Sepco for notation thereon that such demand has been made. The failure of
holders of such certificates to do so shall, at the option of Sepco, terminate
such shareholders' rights to dissent unless a court of competent jurisdiction
for good and sufficient cause shall otherwise direct.
Within 20 days after receipt by Sepco of a demand for payment made by a
dissenting shareholder, Sepco shall deliver or mail to the dissenting
shareholder a written notice that either shall set out that Sepco accepts the
amount claimed in the demand and agrees to pay that amount within 90 days after
the Sepco Effective Time, upon the surrender of the share certificates duly
endorsed, or shall contain an estimate by Sepco of the fair value of the shares
of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A
Convertible Preferred Stock or Sepco Preferred Stock, as the case may be,
together with an offer to pay the amount of that estimate within 90 days after
the Sepco Effective Time, upon receipt of notice within 60 days after the
effective time of the Sepco Merger, from the shareholder that the shareholder
agrees to accept that amount upon the surrender of the certificates duly
endorsed.
If, within the period of 60 days after the Sepco Effective Time,
shareholder and Sepco do not so agree, the shareholder or Sepco may, within 60
days after the expiration of such 60-day period, file a petition in any court of
competent jurisdiction in Harris County, Texas, asking for a finding and
determination of the fair value of the shareholder's shares of Sepco Class A
Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred
Stock or Sepco Preferred Stock, as the case may be. The clerk of the court shall
give notice of the time and place fixed for the hearing of the petition by
registered mail to Sepco and to the shareholders who have demanded payment for
their shares and with whom agreements as to the value of their shares have not
been reached by Sepco. Sepco and all of its shareholders so notified shall be
bound by the final judgment of such court.
After hearing of the petition, the court shall determine the shareholders
who have complied with the provisions of Articles 5.12 of the TBCA and have
become entitled to the valuation of and payment of their shares, and shall
appoint one or more qualified appraisers to determine that value. In addition to
having the power to examine the books and records of Sepco, the appraisers shall
afford a reasonable opportunity to the parties interested to submit to them
pertinent evidence as to the value of the shares of Sepco Class A
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Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred
Stock or Sepco Preferred Stock, as the case may be.
The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by Sepco,
together with interest thereon, to the date of such judgment, to the shareholder
entitled to payment. The judgment shall be payable to the holders of shares only
upon, and simultaneously with, the surrender to Sepco of duly endorsed
certificates for those shares. Upon payment of the judgment, the dissenting
shareholders shall cease to have any interest in those shares or in Sepco. The
court shall allow the appraisers a reasonable fee as court costs, and all costs
shall be allocated between the parties in the manner that the court determines
to be fair and equitable.
Any shareholder who has demanded payment for his shares in accordance with
the TBCA shall not thereafter be entitled to vote or exercise any other rights
of a shareholder except the right to receive payment for his shares of Sepco
Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible
Preferred Stock or Sepco Preferred Stock, as the case may be, in accordance with
the TBCA and the right to maintain an appropriate action to obtain relief on the
ground that the Sepco Merger would be or was fraudulent, and the respective
shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A
Convertible Preferred Stock or Sepco Preferred Stock, as the case may be, for
which payment has been demanded shall not thereafter be considered outstanding
for the purposes of any subsequent vote of shareholders.
Any shareholder who has demanded payment for his shares of Sepco Class A
Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred
Stock or Sepco Preferred Stock, as the case may be, in accordance with the TBCA
may withdraw such demand at any time before payment for his shares or before any
petition has been filed pursuant to the TBCA asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made, or, unless the Company shall consent
thereto, after any such petition has been filed. If, however, (i) such demand
shall be withdrawn as hereinbefore provided, (ii) pursuant to the TBCA the
Company shall terminate the shareholder's rights under the TBCA, (iii) no
petition asking for a finding and determination of fair value of such shares of
Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A
Convertible Preferred Stock or Sepco Preferred Stock, as the case may be, by a
court shall have been filed within the time provided in the TBCA, or (iv) after
the hearing of a petition filed pursuant to the TBCA, the court shall determine
that such shareholder is not entitled to the relief provided by the TBCA, then,
in any such case, such shareholder and all persons claiming under him shall be
conclusively presumed to have approved and ratified the merger and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings that may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
A vote against approval and adoption of the Sepco Merger and the Sepco
Merger Agreement will not satisfy the requirement for a written objection to
approval and adoption of the Sepco Merger and the Sepco Merger Agreement or a
written demand for payment of the "fair value" of the shares owned by a
dissenting shareholder. Failure to vote against approval and adoption of the
Sepco Merger and the Sepco Merger Agreement (i.e., abstention from voting) will
not constitute a waiver of a shareholder's dissenters' rights.
Exercise of the right to dissent under the TBCA may result in a judicial
determination that the "fair value" of a dissenting shareholder's shares of
Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A
Convertible Preferred Stock or Sepco Preferred Stock, as the case may be, is
higher or lower than the shares of Common Stock, Series B Convertible Preferred
Stock, or Series A Preferred Stock, as the case may be, to be issued pursuant to
the Sepco Merger.
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The TBCA provides that, in the absence of fraud in the transaction, the
right to an appraisal as set forth above to a shareholder objecting to the Sepco
Merger is the exclusive remedy for the recovery of the value of his shares or
for money damages to such shareholder with respect to the Sepco Merger. If Sepco
complies with the requirements of the TBCA, any shareholder who fails to comply
with the requirements of the TBCA shall not be entitled to bring suit for the
recovery of the value of his shares or for money damages to the shareholder with
respect to the Sepco Merger.
The Sepco ESOP shall act as a single shareholder with respect to appraisal
rights.
SEPCO SHAREHOLDERS WHO ARE CONSIDERING EXERCISING DISSENTERS' RIGHTS WITH
RESPECT TO THE SEPCO MERGER ARE URGED TO CONSULT THEIR OWN LEGAL COUNSEL.
Newman Shareholders. Any shareholder of record of Newman may exercise
dissenters' rights in connection with the Newman Merger by properly complying
with the requirements of Section 53-15-4 of the NMBCA. By exercising dissenters'
rights, any such shareholder would have the "fair value" of his Newman Common
Stock paid to him in cash.
The following is a summary of the statutory procedures that a shareholder
of a New Mexico corporation must follow in order to exercise his dissenters'
rights under New Mexico law. This summary is not complete and is qualified in
its entirety by reference to Section 53-15-4 of the NMBCA, the text of which is
set forth in full in Appendix D to this Proxy Statement/Prospectus.
The NMBCA provides that each shareholder of a New Mexico corporation has
the right to dissent from certain transactions, including a merger requiring
shareholder approval. The NMBCA also provides that shareholders electing to
exercise their right to dissent must file with the corporation a written
objection to the merger at or prior to the meeting of shareholders called to
consider and vote upon the merger. If the merger is approved at the meeting,
those shareholders who do not vote in favor of the merger may make written
demand on the corporation for payment of the fair value of their shares as
determined in accordance with the applicable provisions of the NMBCA. This
demand must be made either within ten days following the meeting at which the
merger was approved or within 25 days after the plan of the merger has been
mailed to the shareholder. Any shareholder who fails to properly make demand
within the prescribed time periods shall not acquire a right to receive payment
for his shares.
Newman shareholders should send their written demand for payment to 211
West Wall Street, Midland, Texas 79701, Attention: Secretary. Thereafter,
assuming compliance with the provisions of the NMBCA, dissenting Newman
shareholders who properly exercise their rights will receive cash equal to the
fair value of their shares in lieu of shares of Common Stock.
The NMBCA provides that, upon receiving a demand for payment from any
dissenting shareholder, the corporation shall make an appropriate notation
thereof in its shareholder records. Within 20 days after demanding payment for
his shares, each holder of shares represented by certificates demanding payment
shall submit the certificates to the corporation for notation thereon that such
demand has been made. Failure of the shareholder to do so shall, at the option
of the corporation, terminate his rights under the NMBCA unless a court of
competent jurisdiction, for good and sufficient cause shown, otherwise directs.
If uncertified shares for which payment has been demanded or shares represented
by a certificate on which notation has been so made is transferred, any new
certificate issued therefor shall bear similar notation, together with the name
of the original dissenting holder of the shares, and a transferee of the shares
acquires by such transfer no rights in the corporation other than those which
the original dissenting shareholder had after making demand for payment of the
fair value thereof.
The corporation, or in the case of a merger or consolidation, the surviving
or new corporation shall give written notice thereof to each dissenting
shareholder who has made written demand within ten days after such corporate
action is effected. The surviving corporation shall make a written offer to each
shareholder for shares at a specified price determined by the corporation to be
the fair value thereof. The notice and offer shall be accompanied by (i) a
balance sheet of the corporation as of the latest available date and not more
than 12 months prior to the making of the offer and (ii) a profit and loss
statement of the corporation for the
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<PAGE> 36
12 month period ended on the date of the balance sheet. If the value of the
shares is agreed upon by the corporation and the shareholder within 30 days
after the date on which the corporate action was effected, payment for the
shares shall be made within 90 days after the date on which the action was
effected. Upon payment of the agreed value, the shareholder shall cease to have
any interest in the shares or in the corporation.
If, within the period of 30 days after the date on which the corporate
action was effected, a dissenting shareholder and the New Mexico corporation do
not agree to the fair value of the shares, the corporation shall file a petition
in any court of competent jurisdiction in the county and the state where the
registered office of the corporation is located praying that the fair value of
such shares be found and determined. The corporation should take such action
within 30 days after receipt of written demand from any dissenting shareholder,
given within 60 days after the date on which such corporate action was effected,
or at the election of the corporation at any time within the period of 60 days.
If, in the case of a merger or consolidation, the surviving or new corporation
is a foreign corporation without a registered office in this state, the petition
shall be filed in the county where the domestic corporation was last located.
If the corporation fails to institute the proceedings as provided above,
any dissenting shareholder may do so in the name of the corporation. All
dissenting shareholders, wherever residing, shall be made parties to the
proceeding as an action against their shares quasi in rem. A copy of the
petition shall be served upon each dissenting shareholder who is a resident of
New Mexico and shall be served by registered or certified mail on each
dissenting shareholder who is a non-resident. Service on non-residents shall
also be made by publication as provided by law. The jurisdiction of the court
shall be plenary and exclusive. All shareholders who are parties to the
proceeding shall be entitled to judgment against the corporation for the amount
of the fair value of their shares. A court may, if it so elects, appoint one or
more persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The NMBCA leaves the final determination of fair value
to the courts.
The costs and expenses of any such proceeding shall be determined by the
court and shall be assessed against the corporation, but all or any part of the
costs and expenses may be apportioned and assessed as the court deems equitable
against any or all of the dissenting shareholders who are parties to the
proceeding, and who received from the corporation an offer to pay for the shares
if the court finds that the shareholders' actions in failing to accept the
corporation's offer were arbitrary, vexatious or not in good faith. Such
expenses shall include reasonable expenses and compensation for the appraisers,
excluding the fees and expenses of counsel for experts employed by any party. If
the fair value of the shares as determined materially exceeds the amount which
the corporation offered to pay therefor, or if no offer was made, the court in
its discretion may award to any shareholder who is a party to the proceeding
such sum as the court determines to be reasonable compensation to any expert
employed by the shareholder in the proceeding, together with reasonable fees of
legal counsel.
Payment of the fair value or judgment extinguishes a dissenting
shareholder's interest in such shares. The judgment shall include an allowance
for interest at such rate as the court may find to be fair and equitable, in all
the circumstances, from the date on which the vote was taken on the proposed
corporate action to the date of payment.
Under New Mexico law, no demand may be withdrawn unless the corporation
consents thereto. If (i) the demand is withdrawn upon consent, (ii) the proposed
corporate action is abandoned or rescinded or the shareholders revoke the
authority to effect the action, (iii) in the case of a merger, on the date of
the filing of the articles of merger the surviving corporation is the owner of
all of the outstanding shares of the other corporations that are parties to the
merger, (iv) no demand or petition for the determination of fair value by a
court has been properly made, or (v) if a court of competent jurisdiction
determines that the shareholder is not entitled to the relief provided by the
NMBCA, then the right of the shareholder to be paid the fair value of such
shares ceases and the dissenter's status as a shareholder shall be restored,
without prejudice, to any corporate proceedings which may have been taken during
the interim.
Shareholders of Newman considering appraisal rights should consider that
the payment which they eventually receive in exchange for their shares in a
dissenters' rights proceeding under Texas law could be less
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<PAGE> 37
than, equal to, or greater than the eventual market value of the consideration
they would receive as a result of the consummation of the Newman Merger.
A Newman shareholder who exercises his appraisal rights and receives cash
in exchange for his shares of Newman Common Stock will recognize taxable gain or
loss in an amount equal to the difference between (i) the sum of cash received
and (ii) the basis of the common stock so exchanged. Any such gain or loss
recognized would be long-term capital gain or loss if the shares of Newman
Common Stock constitute capital assets in the hands of the dissenting Newman
shareholder and have been held by such shareholder for more than one year at the
Newman Closing Date (as defined herein).
NEWMAN SHAREHOLDERS WHO ARE CONSIDERING EXERCISING DISSENTERS' RIGHTS WITH
RESPECT TO THE NEWMAN MERGER ARE URGED TO CONSULT THEIR OWN LEGAL COUNSEL.
ARRANGEMENT WITH HALTER
As described in "The Reorganization -- Sepco's Reasons for the
Reorganization; Recommendation of Sepco's Board of Directors", Sepco and Halter
entered into an agreement in early 1996, pursuant to which Halter was to
identify possible merger candidates for Sepco and assist Sepco in consummating
such a merger. In connection with the final negotiations of the terms of the
Newman Merger and Newman's agreement to issue to Halter shares of Newman Common
Stock prior to the Newman Merger, the agreements between Sepco and Halter were
amended. As an inducement to Sepco to participate in the Reorganization, Halter
agreed to assist the Company in the preparation of the documents relating to the
Newman Merger, assist in the preparation of the Company's filings with the
Commission to effect the Reorganization, pay all printing costs relating to the
Reorganization, pay all listing and similar fees with respect to the
authorization for quotation of the stock of the Company on the Nasdaq Stock
Market, assist in obtaining a market maker for the Common Stock following the
Reorganization, assist in the preparation of a shareholder relations program for
the Company and assist in a communication program for the Company with brokerage
professionals, investment bankers and market makers. Under the agreement between
Sepco and Halter, Halter is not entitled to any compensation for the foregoing
services and the only consideration being received by Halter in connection with
the Reorganization is through its ownership interest in Newman through its
purchase of shares of Newman Common Stock from Newman. Sepco and the Company
have agreed to indemnify Halter for various liabilities that may be incurred by
it relating to Sepco and the Company, including liabilities under the securities
laws.
The Company also has agreed to maintain a registration statement providing
for the registration under the Securities Act of the resale of shares of Common
Stock issuable to Halter in the Newman Merger for a period of 90 days following
the Newman Merger or for such other period of time as the Company deems
desirable. The Company will bear the costs associated with maintaining such
registration statement and Halter will bear the cost of all selling, printing
and other expenses. The agreement between the Company and Halter regarding such
registration provides for customary indemnification, including indemnification
for liability under securities laws.
RESTRICTIONS ON RESALES BY AFFILIATES
All shares of Common Stock received by Newman in the Newman Merger and all
shares of Common Stock, Series B Convertible Preferred Stock and Series A
Preferred Stock received by Sepco shareholders in the Sepco Merger will be
freely transferable, except that shares of Common Stock, Series B Convertible
Preferred Stock and Series A Preferred Stock received by persons who are deemed
to be "affiliates" (as such term is defined under the Securities Act) of the
Company prior to the Sepco Merger and the Newman Merger may be resold by them
only in transactions permitted by the resale provisions of Rule 145 promulgated
under the Securities Act or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of the Company generally include
individuals or entities that control, are controlled by, or are under common
control with, such party and may include certain officers and directors of such
party as well as principal shareholders of such party or persons who hold
restricted shares.
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<PAGE> 38
CERTAIN TERMS OF THE MERGER AGREEMENTS
The following description does not purport to be complete and is qualified
in its entirety by reference to the Sepco Merger Agreement and Newman Merger
Agreement, respectively, copies of which are attached to this Proxy
Statement/Prospectus as Appendices A and B, respectively, and are incorporated
herein by reference.
SEPCO MERGER AGREEMENT
Closing Date and Effective Time of the Merger. The Sepco Merger will become
effective at the effective time set forth in the certified Articles of Merger
issued by the Secretary of State of Texas and the Secretary of State of Nevada
with respect to the Sepco Merger. Assuming all conditions to the Merger
contained in the Sepco Merger Agreement are satisfied or waived prior thereto,
it is anticipated that the Sepco Effective Time will occur on the business day
immediately following the Sepco Meeting (the "Sepco Closing Date"). The Sepco
Merger and the Newman Merger will be consummated simultaneously.
Manner and Basis of Converting Shares. At the Sepco Effective Time (i) each
outstanding share of Sepco Class A Common Stock will be converted into the right
to receive 16 shares of Common Stock, (ii) each outstanding share of Sepco Class
B Common Stock will be converted into the right to receive 18.1232 shares of
Common Stock, (iii) each outstanding share of Sepco Class A Convertible
Preferred Stock will be converted into the right to receive one share of Series
B Convertible Preferred Stock and (iv) each outstanding share of Sepco Preferred
Stock will be converted into the right to receive one share of Series A
Preferred Stock.
As soon as practicable following the Sepco Effective Time, the Company or
its transfer agent will mail to each record holder of Sepco Class A Common
Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and
Sepco Preferred Stock a letter of transmittal and other information advising
such holder of the consummation of the Sepco Merger and for use in exchanging
certificates representing Sepco Class A Common Stock, Sepco Class B Common
Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock for
certificates representing Common Stock, Series B Convertible Preferred Stock and
Series A Preferred Stock, respectively. After the Sepco Effective Time, there
will be no further registration of transfers on the stock transfer books of
Sepco of shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco
Class A Convertible Preferred Stock and Sepco Preferred Stock. SHARE
CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE BY SHAREHOLDERS OF SEPCO
PRIOR TO THE SEPCO EFFECTIVE TIME AND THE RECEIPT OF A LETTER OF TRANSMITTAL.
No fractional shares of Common Stock shall be issued in the Sepco Merger.
In lieu thereof, all fractional shares of Common Stock that a holder of Sepco
Class A Common Stock otherwise would be entitled to receive as a result of the
Sepco Merger shall be converted automatically into the right to receive an
amount of cash to be determined by multiplying $.58 by the fraction of a share
of Common Stock to which such holder would otherwise have been entitled.
Further, all fractional shares of Common Stock that a holder of Sepco Class B
Common Stock would otherwise be entitled to receive as a result of the Sepco
Merger shall be automatically converted into the right to receive an amount of
cash to be determined by multiplying $.58 by the fraction of a share of Common
Stock to which such holder would otherwise be entitled. Fractional shares of
Series B Convertible Preferred Stock and Series A Preferred Stock will be issued
in the Sepco Merger to the holders of Sepco Class A Convertible Preferred Stock
and Sepco Preferred Stock, respectively.
Until surrendered and exchanged, each certificate previously evidencing
Sepco Class A Common Stock and Sepco Class B Common Stock shall represent solely
the right to receive Common Stock. Each certificate previously evidencing Sepco
Class A Convertible Preferred Stock shall represent solely the right to receive
Series B Convertible Preferred Stock and each certificate previously evidencing
Sepco Preferred Stock shall represent solely the right to receive Series A
Preferred Stock.
Conditions to the Sepco Merger. The respective obligations of the Company,
Sepco and Sepco Acquisition to consummate the Sepco Merger are subject to the
satisfaction or waiver of the following conditions: (i) the Registration
Statement, of which this Proxy Statement/Prospectus is a part, shall have
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<PAGE> 39
been declared effective by the Commission under the Securities Act, and no stop
order with respect thereto shall be in effect; (ii) the Sepco Merger Agreement
and the Sepco Merger shall have been approved and adopted by the requisite vote
of the shareholders of each of the Company, Sepco and Sepco Acquisition; (iii)
the Newman Merger shall have been approved by the shareholders of each of the
Company, Newman Acquisition and Newman; and (iv) no order, injunction or decree
shall have been entered and remains in effect in any action or proceeding before
any foreign, federal, state court or governmental agency that would prevent or
make illegal the consummation of the transactions contemplated by the Sepco
Merger.
The obligations of Sepco Acquisition and the Company to effect the Sepco
Merger are also subject to the satisfaction or waiver at or prior to the Sepco
Closing Date of the following conditions: (i) the representations and warranties
of Sepco contained in the Sepco Merger Agreement will be true and correct in all
material respects as of the Sepco Closing Date; (ii) Sepco shall have performed,
in all material respects, each obligation and agreement and complied with each
covenant to be performed and complied with by them contained in the Sepco Merger
Agreement prior to the Sepco Closing Date; (iii) all consents by governmental or
regulatory agencies or otherwise that are required for the consummation of the
transactions contemplated by the Sepco Merger Agreement or that are required for
the Company to own, operate or control Sepco or any portion of the assets of
Sepco to prevent a breach of or a default under or a termination of any
agreement material to Sepco to which Sepco is a party or to which any material
portion of the assets of Sepco is subject, will have been obtained; (iv) no
action or proceeding before any court or governmental body will be pending or
threatened wherein a judgment, decree or order would prevent or restrain any of
the transactions contemplated thereby or cause such transactions to be declared
unlawful, nullified or rescinded or which might adversely affect the right of
the Company to own, operate or control Sepco; (v) the Company and its financial
and legal advisors shall have completed a due diligence review of the business,
operations and financial statements of Sepco, the results of which shall be
satisfactory to the Company in its sole discretion; and (vi) no event shall have
occurred which in the reasonable judgment of the Company or Sepco Acquisition
would materially affect the purpose of the Sepco Merger.
The obligations of Sepco to effect the Sepco Merger are subject to the
satisfaction or waiver at or prior to the Sepco Closing Date of the following
conditions: (i) the representations and warranties of Sepco Acquisition and the
Company set forth in the Sepco Merger Agreement will be true and correct in all
material respects as of the Sepco Closing Date; (ii) the Company shall have
performed, in all material respects, each obligation and agreement and complied
with each covenant required to be performed and complied with by it contained in
the Sepco Merger Agreement prior to the Sepco Closing Date; and (iii) no action
or proceeding before any court or governmental body will be pending or
threatened wherein a judgment, decree or other would prevent any of the
transactions contemplated hereby or cause the transactions contemplated by the
Sepco Merger Agreement to be declared unlawful or rescinded.
There can be no assurance that all of the conditions to the Sepco Merger
will be satisfied.
Representations and Warranties. The Sepco Merger Agreement contains various
representations and warranties of the Company, Sepco and Sepco Acquisition
relating to, among other things, (i) the organization and similar corporate
matters of the Company and Sepco, (ii) the capitalization of the Company and
Sepco, (iii) the authorization, execution, delivery, performance and
enforceability of the Sepco Merger Agreement and related matters, and the
absence of conflicts, violations and defaults under the respective charters and
bylaws of the Company and Sepco and certain other agreements and documents, (iv)
Sepco's compliance with applicable laws, (v) the financial statements of Sepco,
(vi) the absence of certain changes and events with regard to Sepco, (vii)
litigation of Sepco, (viii) Sepco's employee benefit and labor matters, (ix)
certain business practices of Sepco and (x) environmental matters with regard to
Sepco.
Certain Covenants; Conduct of Business Prior to the Sepco Merger. Sepco has
agreed that, prior to the Sepco Closing Date, unless expressly contemplated by
the Sepco Merger Agreement or otherwise consented to by the Company, Sepco will
(i) operate its business in the usual and ordinary course consistent with past
practices; (ii) preserve substantially intact its business organization and
capital structure; (iii) use its best efforts not to take any action which would
render, or which reasonably may be expected to render, any representation or
warranty made by it in the Sepco Merger Agreement untrue at any time prior to
the Sepco
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<PAGE> 40
Closing Date as if then made; (iv) notify the Company of any change in the
normal course of Sepco's business or in the operation of its properties or of
any governmental or third party complaints, investigations or hearings; (v)
notify the Company of any material adverse event or circumstance affecting
Sepco; and (vi) comply with all legal requirements and contractual obligations
applicable to its operations and business and pay all applicable taxes.
Termination or Amendment of the Sepco Merger Agreement. The Sepco Merger
Agreement may be terminated, among other circumstances, by the Company if the
Sepco Merger has not closed by December 31, 1996 or by either party if a court
of competent jurisdiction shall have issued an order, decree or ruling or taken
any other action to enjoin or otherwise prohibit the Sepco Merger. The Sepco
Merger Agreement may be amended, modified or supplemented only by an instrument
in writing executed by all parties to the Sepco Merger Agreement.
NEWMAN MERGER AGREEMENT
Closing Date and Effective Time of the Newman Merger. The Newman Merger
will become effective at the effective time set forth in the certified Articles
of Merger issued by the Secretary of State of New Mexico and the Secretary of
State of Nevada with respect to the Newman Merger. Assuming all conditions to
the Newman Merger contained in the Newman Merger Agreement are satisfied or
waived prior thereto, it is anticipated that the Newman Effective Time will
occur on the business day immediately following the Sepco Meeting (the "Newman
Closing Date"). The Sepco Merger and the Newman Merger will be consummated
simultaneously.
Manner and Basis of Converting Shares. At the Newman Effective Time, each
outstanding share of Newman Common Stock will be converted automatically into
the right to receive one-fourth of one share of Common Stock. Newman's Class C
Warrants (as defined herein) will expire on November 22, 1996, prior to the date
of the Newman Meeting.
As soon as practicable following the Newman Effective Time, the Company or
its transfer agent will mail to each record holder of Newman Common Stock
immediately prior to the Newman Effective Time, a letter of transmittal and
other information advising such holder of the consummation of the Newman Merger
and for use in exchanging certificates representing Newman Common Stock for
certificates representing Common Stock. After the Newman Effective Time, there
will be no further registration of transfers on the stock transfer books of
Newman of shares of Newman Common Stock. SHARE CERTIFICATES SHOULD NOT BE
SURRENDERED FOR EXCHANGE BY SHAREHOLDERS OF NEWMAN PRIOR TO THE NEWMAN EFFECTIVE
TIME AND THE RECEIPT OF A LETTER OF TRANSMITTAL. Until surrendered and
exchanged, each certificate previously evidencing Newman Common Stock shall
represent solely the right to receive Common Stock.
No fractional shares of Common Stock shall be issued in the Newman Merger.
In lieu thereof, all fractional shares of Common Stock that a holder of Newman
Common Stock would otherwise be entitled to receive as a result of the Newman
Merger shall be automatically converted into the right to receive an amount of
cash to be determined by multiplying $1.00 by the fraction of a share of Common
Stock to which such holder would otherwise have been entitled.
Conditions to the Newman Merger. The respective obligations of the Company,
Newman Acquisition, Newman and LITCO to consummate the Newman Merger are subject
to the satisfaction or waiver of the following conditions: (i) the Registration
Statement, of which this Proxy Statement/Prospectus forms a part, shall have
been declared effective by the Commission, and no stop order with respect
thereto shall be in effect (ii) the Newman Merger Agreement and the Newman
Merger shall have been approved and adopted by the requisite vote of the
shareholders of each of Newman and Newman Acquisition, respectively; (iii) the
Sepco Merger shall have been approved by the shareholders of each of the Company
and Sepco, respectively; and (iv) no order, injunction or decree shall have been
entered and remain in effect in any action or proceeding before any foreign,
federal, state court or governmental agency that would prevent or make illegal
the consummation of the transactions contemplated by the Newman Merger.
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<PAGE> 41
The obligations of Newman Acquisition and the Company to effect the Newman
Merger are also subject to the satisfaction or waiver at or prior to the Newman
Closing Date of the following conditions: (i) the representations and warranties
of Newman and LITCO contained in the Newman Merger Agreement will be true and
correct in all material respects as of the Newman Closing Date; (ii) Newman and
LITCO shall have performed, in all material respects, each obligation and
agreement and complied with each covenant to be performed and complied with by
them contained in the Newman Merger Agreement prior to the Newman Closing Date;
(iii) all consents by governmental or regulatory agencies or otherwise that are
required for the consummation of the transactions contemplated by the Newman
Merger Agreement or that are required for the Company to own, operate or control
Newman or any portion of the assets of Newman to prevent a breach of or a
default under or a termination of any agreement material to Newman to which
Newman is a party or to which any material portion of the assets of Newman is
subject, will have been obtained; (iv) no action or proceeding before any court
or governmental body will be pending or threatened wherein a judgment, decree or
order would prevent or restrain any of the transactions contemplated hereby or
cause such transactions to be declared unlawful, nullified or rescinded or which
might adversely affect the right of the Company to own, operate or control
Newman; (v) the Company and its financial and legal advisors shall have
completed a due diligence review of the business, operations and financial
statements of Newman, the results of which shall be satisfactory to the Company
in its sole discretion; and (vi) no event shall have occurred which in the
reasonable judgment of the Company or Newman Acquisition would materially affect
the purpose of the Newman Merger.
The obligations of Newman and LITCO to effect the Newman Merger are subject
to the satisfaction or waiver at or prior to the Newman Closing Date of the
following conditions: (i) the representations and warranties of Newman
Acquisition and the Company set forth in the Newman Merger Agreement will be
true and correct in all material respects as of the Newman Closing Date; (ii)
the Company shall have performed, in all material respects, each obligation and
agreement and complied with each covenant required to be performed and complied
with by it contained in the Newman Merger Agreement prior to the Newman Closing
Date; and (iii) no action or proceeding before any court or governmental body
will be pending or threatened wherein a judgment, decree or other would prevent
any of the transactions contemplated hereby or cause the transactions
contemplated by the Newman Merger Agreement to be declared unlawful or
rescinded.
There can be no assurance that all of the conditions to the Newman Merger
will be satisfied.
Representations and Warranties. The Newman Merger Agreement contains
various representations and warranties of the Company, Newman Acquisition,
Newman and LITCO relating to, among other things, (i) the organization and
similar corporate matters of the Company and Newman, (ii) the capitalization of
the Company and Newman, (iii) the authorization, execution, delivery,
performance and enforceability of the Newman Merger Agreement and related
matters, and the absence of conflicts, violations and defaults under the
respective charters and bylaws of the Company and Newman and certain other
agreements and documents, (iv) Newman's compliance with applicable laws, (v) the
financial statements of Newman, (vi) the documents and reports filed by Newman
with the Commission and the accuracy of the information contained therein, (vii)
the absence of certain changes and events with regard to Newman, (viii)
litigation of Newman, (ix) employee benefit and labor matters of Newman, (x)
certain business practices of Newman, (xi) environmental matters with regard to
Newman and (xii) the accuracy of information provided by the Company, Sepco and
Newman.
Certain Covenants; Conduct of Business Prior to the Newman Merger. Newman
and LITCO have jointly and severally agreed that, prior to the Newman Closing
Date, unless expressly contemplated by the Newman Merger Agreement or otherwise
consented to in writing by the Company, Newman will (i) operate its business in
the usual and ordinary course consistent with past practices; (ii) preserve
substantially intact its business organization and capital structure, except for
the repayment of indebtedness owed to LITCO in the amount of $6,040; (iii) use
its best efforts not to take any action which would render, or which reasonably
may be expected to render, any representation or warranty made by them in the
Newman Merger Agreement untrue at any time prior to the Newman Closing Date as
if then made; (iv) notify the Company of any change in the normal course of
Newman's business or in the operation of its properties or of any governmental
or third party complaints, investigations or hearings; (v) notify the Company of
any material adverse event or
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<PAGE> 42
circumstance affecting Newman; and (vi) comply with all legal requirements and
contractual obligations applicable to its operations and business and pay all
applicable taxes.
Indemnification by LITCO. Subject to certain conditions of the Newman
Merger Agreement, LITCO has agreed to indemnify, defend and hold the Company and
its directors, officers, agents, attorneys and affiliates harmless from and
against all losses, claims, actions, causes of action, fines, obligations,
demands, assessments, penalties, liabilities, costs, damages, attorneys' fees
and expenses (collectively, the "Damages"), asserted against or incurred by any
such person or entity by reason of or resulting from (i) a breach of any
representation, warranty, non-fulfillment of any agreement or covenant of Newman
or LITCO contained in the Newman Merger Agreement or in any written statement,
certificate or other document to be delivered in connection therewith or (ii)
any untrue, inaccurate or incomplete statements of a material fact contained in
the Registration Statement of which this Proxy Statement/Prospectus is a part,
except such statements that are based on information provided by the Company.
Indemnification by the Company. Subject to certain conditions of the Newman
Merger Agreement, the Company has agreed to indemnify, defend and hold Newman
and its directors, officers, agents, attorneys and affiliates harmless from and
against all Damages asserted against or incurred by any such person or entity by
reason of or resulting from (i) a breach of any representation, warranty or
covenant of the Company contained in the Newman Merger Agreement or (ii) any
untrue, inaccurate or incomplete statements of a material fact contained in the
Registration Statement of which this Proxy Statement/Prospectus is a part,
except such statements that are based on information provided by Newman or
LITCO.
Termination or Amendment of the Newman Merger Agreement. The Newman Merger
Agreement may be terminated, among other circumstances, by the Company if the
Newman Merger has not closed by December 31, 1996 or by either party if a court
of competent jurisdiction shall have issued an order, decree or ruling or taken
any other action to enjoin or otherwise prohibit the Newman Merger. The Newman
Merger Agreement may be amended, modified or supplemented only by an instrument
in writing executed by all parties to the Newman Merger Agreement.
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<PAGE> 43
SEPCO SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data of Sepco set forth
below for each of the years ended December 31, 1995, 1994 and 1993 and at
December 31, 1995 and 1994 have been derived from the audited consolidated
financial statements of Sepco included elsewhere in this Proxy
Statement/Prospectus. Such financial statements have been audited by Ernst &
Young LLP, independent auditors. The selected financial data for the years ended
December 31, 1992 and 1991 and at December 31, 1993, 1992 and 1991 are derived
from the audited financial statements of Sepco which are not included in this
Proxy Statement/Prospectus and which have been audited by Ernst & Young LLP,
independent auditors. The selected financial data set forth below for each of
the six-month periods ended June 30, 1996 and 1995 and at June 30, 1996 have
been derived from unaudited financial statements of Sepco included elsewhere in
this Proxy Statement/Prospectus. This information should be read in conjunction
with "Selected Consolidated Financial Data -- Sepco", "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Sepco" and
Sepco's consolidated financial statements and notes included elsewhere in this
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- -------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- -------- -------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Revenues.............................................. $63,021 $56,395 $111,328 $102,592 $99,353 $96,017 $93,239
Gross profit.......................................... 16,231 14,390 29,157 27,217 26,792 23,622 24,416
Operating income(1)................................... 1,425 2,010 4,598 4,150 3,288 1,827 4,171
Income before provision for income taxes, minority
interest and change in accounting principle......... 931 1,470 3,512 3,038 2,346 620 2,511
Minority interest in earnings (loss) of
Subsidiaries(2)..................................... -- -- -- -- (403) 136 (392)
Cumulative effect of change in accounting
principle(3)........................................ -- -- -- -- 882
Net income(4)......................................... 554 874 2,088 1,862 1,843 152 1,043
PER SHARE DATA:
Primary
Net income.......................................... $ 0.55 $ 0.66 $ 1.68 $ 1.41 $ 1.58 $ 0.14 $ 0.95
Fully diluted
Net income.......................................... $ 0.48 $ 0.66 $ 1.61 $ 1.40 $ 1.55 $ 0.14 $ 0.95
Number of shares used to calculate
Primary net income per share........................ 1,016 1,331 1,244 1,319 1,163 1,102 1,102
Fully diluted net income per share.................. 1,152 1,334 1,293 1,328 1,187 1,102 1,102
</TABLE>
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED DECEMBER 31,
JUNE 30, ---------------------------------------------------
1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Working capital........................................... $23,418 $23,967 $20,011 $18,402 $17,084 $15,069
Total assets.............................................. 45,071 43,254 38,163 38,686 37,243 34,327
Long-term debt obligations................................ 19,660 21,275 18,461 20,766 19,200 16,565
Stockholders' Equity...................................... 9,087 7,800 6,484 5,133 3,665 3,133
</TABLE>
- ---------------
(1) Six months ended June 30, 1996 includes a one-time charge to compensation
expense of $710,000 for the amendment of book value options to fair market
value options.
(2) In December 1992 and September 1993, Sepco acquired the remaining capital
stock of two subsidiaries, T.L. Walker Bearing Company and Southern Engine
and Pump Company. The acquisitions eliminated any need to account for
minority interest in earnings of the subsidiaries.
(3) Effective January 1, 1993, Sepco changed its method of accounting for income
taxes from the deferred method to the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes". As permitted under the new
rules, prior years' financial statements were not restated. The cumulative
effect of adopting Statement 109 as of January 1, 1993 was to increase net
earnings by $882,000.
(4) In August 1990, June 1991 and July 1992, Sepco acquired three separate
bearing and power transmission companies having revenues of approximately
$25,000,000, $10,000,000 and $7,000,000, respectively, at the time of their
purchase. In 1991, 1992 and 1993, operating income (loss) from these bearing
and power transmission companies was $188,000, ($1,091,000) and $379,000,
respectively.
32
<PAGE> 44
NEWMAN SELECTED FINANCIAL DATA
The selected financial data of Newman for the fiscal years 1991 through
1995 were derived from the audited financial statements of Newman. Included
elsewhere in this Proxy Statement/Prospectus are the Balance Sheets for December
31, 1995 and March 31, 1995 and the Statements of Operations, Changes in
Shareholders' Equity and Cash Flows for the nine months and twelve months then
ended. Such financial statements have been audited by Cheshier & Fuller, Inc.,
P.C., independent public accountants. This information should be read in
conjunction with the following selected financial data. The selected financial
data for the six months ended June 30, 1996 and 1995 are unaudited, but in the
opinion of management of Newman, such financial statements include all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of Newman's financial position and results of operations. The
results of operations for the six months ended June 30, 1996 may not be
indicative of the results to be expected for the full fiscal year. See "Selected
Consolidated Financial Data -- Newman", "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Newman" and Newman's financial
statements and notes thereto included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS
JUNE 30,(3) YEAR ENDED MARCH(1)(2)(3) ENDED
------------------- ----------------------------------------------- DECEMBER 31,
1996 1995 1995 1994 1993 1992 1995(1)(3)
-------- -------- -------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Income (loss) before extraordinary
items................................ (13,688) (5,644) (4,392) (5,600) -- -- (5,978)
Extraordinary items(2)................. -- -- -- 4,026,333 -- -- --
Net income (loss)...................... (13,688) (5,644) (4,392) 4,020,733 -- -- (5,978)
PER SHARE DATA:
Primary
Income (loss) before extraordinary
items.............................. $ (.02) $ (.01) $ (.01) $ -- $ -- $ -- $ (.01)
Net income........................... $ (.02) $ (.01) $ (.01) $ 1.14 $ -- $ -- $ (.01)
Fully diluted
Net income (loss).................... $ (.02) $ (.01) $ (.01) $ -- $ -- $ -- $ (.01)
Average number of Shares of Common
Stock outstanding(4)................. 838,500 834,500 763,792 3,540,407 5,310,610 5,310,610 839,833
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------- MARCH 26, MARCH 27, MARCH 28, DECEMBER 31,
1996 1995 1994 1993 1992 1995
------ ------ --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total assets....................................... $5,200 $2,640 $ 9,249 $ -- $ -- $ 12,854
Total liabilities.................................. 6,034 2,250 25 4,031,509 4,031,509 --
Shareholders equity (deficit)...................... (834) 390 9,224 (4,031,509) (4,031,509) 12,854
</TABLE>
- ---------------
(1) During 1995, Newman changed its fiscal year end from a fiscal year which is
based on a 52-week year ending on the last Saturday in March to a calendar
year end.
(2) Newman filed for Chapter 11 bankruptcy on August 12, 1992, and emerged as a
reorganized entity on November 22, 1993. See "Business Information
Concerning Newman -- Bankruptcy Proceedings".
(3) Newman has been a development stage company since its November 22, 1993
reorganization.
(4) Does not include 1,693,564 shares of Newman Common Stock issued to Halter in
August 1996 for approximately $1,694 in cash. See "The
Reorganization -- Sepco's Reasons for the Reorganization -- Recommendation
of Sepco's Board of Directors".
33
<PAGE> 45
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined balance sheets as of June 30, 1996 and the
unaudited pro forma combined statements of earnings for the six months ended
June 30, 1996 and the year ended December 31, 1995 give effect to the Sepco
Merger and the Newman Merger. The unaudited pro forma combined statements of
earnings assume all such transactions occurred at the beginning of the periods
presented. The unaudited pro forma combined balance sheets assume all such
transactions occurred at the end of the periods presented. The pro forma
information is based on the historical financial statements of Sepco and Newman,
giving effect to the Sepco Merger and the Newman Merger under the purchase
method of accounting and the adjustments accompanying the unaudited pro forma
combined financial statements.
The unaudited pro forma combined financial statements may not be indicative
of the results that would have occurred if the combination had been in effect on
the dates indicated or which may occur in the future. The unaudited pro forma
condensed combined financial statements should be read in conjunction with the
financial statements of Sepco and Newman, which are included elsewhere in this
Proxy Statement/
Prospectus.
PRO FORMA COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------------------
SEPCO NEWMAN PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash........................................... $ -- $ 5 $ 2(1) $ 7
Accounts receivable, net....................... 18,016 18,106
Inventories.................................... 17,247 17,247
Prepaid expense and other...................... 971 971
Deferred income taxes.......................... 503 503
------- ------- ------- -------
Total current assets...................... 36,737 5 2 36,744
Property, plant and equipment, net............... 6,749 6,749
Intangible assets, net........................... 1,585 1,585
------- ------- ------- -------
Total Assets.............................. $ 45,071 $ 5 $ 2 $45,078
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade account payables......................... $ 7,370 $ $ $ 7,370
Current portion of long-term debt.............. 1,347 1,347
Current portion of subordinated debt........... 1,308 1,308
Employee compensation.......................... 1,005 1,005
Other current liabilities...................... 2,289 6 2,295
------- ------- ------- -------
Total current liabilities................. 13,319 6 13,325
Long-term debt, less current portion............. 19,660 19,660
Deferred income taxes............................ 205 205
Total Liabilities......................... 33,184 6 33,190
Equity Subject to Redemption:
Preferred Stock................................ 150 (150) (4) --
Class A Convertible Preferred Stock............ 450 (450) (4) --
Class A Common Stock........................... 2,200 (2,200) (4) --
Shareholders' Equity:
Preferred Stock................................ 9 (1)(4) 3
(7)(3)
Convertible Preferred Stock.................... 1,500 450(4) 1,950
Common Stock................................... 9 1,421 2(1) 160
(1,417)(2)
142(3)
3(4)
Paid in capital................................ 1,421 (790)(3) 1,085
(5)(2)
459(4)
Retained earnings (deficit).................... 7,845 (1,422) 1,422(2) 8,690
(1,042)(3)
Treasury Stock................................. (1,697) 1,697(3)
1,887(4)
------- ------- ------- -------
Total shareholders' equity................... 9,087 (1) 2,802 11,888
------- ------- ------- -------
Total Liabilities and Shareholders'
Equity.................................. $ 45,071 $ 5 $ 2 $45,078
======= ======= ======= =======
</TABLE>
34
<PAGE> 46
PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996 YEAR ENDED DECEMBER 31, 1995
------------------------------------- -------------------------------------
SEPCO NEWMAN PRO FORMA SEPCO NEWMAN PRO FORMA
HISTORICAL HISTORICAL COMBINED HISTORICAL HISTORICAL COMBINED
---------- ---------- --------- ---------- ---------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $ 63,021 $ $63,021 $ 111,328 $ $ 111,328
Costs and expenses:
Cost of sales.................. 46,790 46,790 82,171 82,171
Selling, general and
administrative.............. 14,806 14 14,820 24,559 6 24,565
------- ------ ------- -------- ------ --------
Operating income (loss).......... 1,425 (14) 1,411 4,598 (6) 4,592
Other income (expense)
Other income................... 514 514 867 867
Interest expense............... (1,008) (1,008) (1,953) (1,953)
------- ------ ------- -------- ------ --------
Earnings (loss) before income
taxes.......................... 931 (14) 917 3,512 (6) 3,506
Provision for income taxes....... (377) (377) (1,424) (1,424)
------- ------ ------- -------- ------ --------
Net income (loss)................ $ 554 $ (14) $ 540 $ 2,088 $ (6) $ 2,082
======= ====== ======= ======== ====== ========
Net income (loss) per share...... $ 0.55 $(0.02) $ 0.03 $ 1.68 $(0.01) $ 0.10
======= ====== ======= ======== ====== ========
Weighted average shares
outstanding.................... 1,016 839 17,263 1,244 764 20,925
======= ====== ======= ======== ====== ========
</TABLE>
35
<PAGE> 47
PRO FORMA ADJUSTMENTS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. To record the issuance of 1,693,564 shares of Newman to Halter.
2. To record the issuance of shares of the Company to the Newman shareholders
as a result of the Reorganization.
3. To record issuance of shares of the Company to Sepco shareholders as a
result of the Reorganization and to eliminate Sepco treasury stock.
4. To record the reclassification of equity subject to redemption to permanent
equity as the redemption features are eliminated upon consummation of the
Reorganization.
36
<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY/SEPCO
The following analysis of the financial condition and results of operations
of the Company reflects the Company and Sepco on a combined basis after giving
effect to the Reorganization and should be read in conjunction with the
Consolidated Financial Statements of Sepco, including the notes thereto,
included elsewhere in this Proxy Statement/Prospectus.
GENERAL
The Company is a distributor of maintenance, repair and operating supplies
and equipment for industrial customers engaged in various businesses,
principally the oil and gas (transportation and production segments),
petrochemical and wood products industries. The Company also sells its products
to municipalities, food and beverage companies and companies in the construction
industry. The Company's principal products currently consist of pumps and pump
accessories, valves and valve automation products and bearings and power
transmission equipment. The Company also provides system design, fabrication,
installation, repair and maintenance services for its customers.
Demand for the Company's products is subject to changes in the United
States economy in general and economic trends affecting the Company's customers
and the industries in which they compete in particular. Many of these
industries, such as the oil and gas industry, are subject to volatility while
others, such as the petrochemical industry, are cyclical and materially affected
by changes in the economy. As a result, the Company may experience changes in
demand for its products as changes occur in the markets of its customers. Such
was the case in late 1994 when prices for natural gas declined substantially and
resulted in a drop in demand for the Company's valve automation products used
for natural gas transmission.
Future results for the Company also will be dependent on the success of the
Company in implementing its acquisition and growth strategy. This strategy
includes taking advantage of a consolidation in the industry and effecting
acquisitions of distributors with complementary or desirable new product lines,
strategic distribution locations and attractive customer bases and manufacturer
relations. The Company's strategy also includes expanding its product lines,
adding new product lines and establishing alliances and joint ventures with
other suppliers in order to provide the Company's customers with a source of
integrated supply. The ability of the Company to implement this strategy will be
dependent on its ability to identify, consummate and assimilate acquisitions on
economic terms, to acquire and successfully integrate new product lines and to
establish and successfully market new integrated forms of supply arrangements
such as that being pursued by AMRO. Although the Company is actively seeking
acquisitions and integrated supply arrangements that would meet its strategic
objectives, it currently has no agreements or understandings with respect to any
such acquisition and there can be no assurance that the Company will be
successful in these efforts. Further, the ability of the Company to effect its
strategic plans will be dependent on its obtaining financing for its planned
expansions, which there can be no assurance will be available. The Company plans
to examine appropriate methods of financing any such acquisition, including
issuance of additional capital stock, debt or other securities or a combination
of both. If the Company were to issue shares of its capital stock in any
acquisition such issuance would be dilutive to existing shareholders.
37
<PAGE> 49
RESULTS OF OPERATIONS
The following table sets forth selected items of the results of operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ -------------------------------
1996 1995 1995 1994 1993
------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Revenues............................. $63,021 $56,395 $111,328 $102,592 $99,353
Pumps and Pump Products.................. 33,870 31,773 61,630 58,774 56,004
Valve and Valve Automation............... 5,205 4,656 10,198 7,678 8,915
Bearings and Power Transmission.......... 23,946 19,966 39,500 36,140 34,434
------- ------- -------- -------- -------
Cost of Sales.............................. 74.2% 74.5% 73.8% 73.5% 73.0%
Gross Profit............................... 25.8 25.2 26.2 26.5 27.0
Selling, General and Administrative
Expense.................................. 23.5 22.0 22.1 22.5 23.7
Operating Income........................... 2.3 3.5 4.1 4.0 3.3
Other Income............................... .8 .8 .8 .8 .9
Interest Expense, net...................... 1.6 1.7 1.8 1.9 1.8
Income Before Taxes, Minority Interest and
Cumulative Effect of Change in Accounting
Principles............................... 1.5 2.6 3.2 3.0 2.4
Income Tax Expense (benefit)............... .6 1.1 1.3 1.1 1.0
Minority Interest in Earnings of
Subsidiaries............................. .4
Income Before Cumulative Effect of Change
in Accounting Principles................. 1.0
Effect of Change in Accounting Principle... .9
------- ------- -------- -------- -------
Net Income................................. .9% 1.5% 1.9% 1.8% 1.9%
======= ======= ======== ======== =======
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995.
Revenues for the six months ended June 30, 1996 increased 11.7% to $63.0
million from the six months ended June 30, 1995. The increase in revenues for
the 1996 period was primarily attributable to sales of bearings and transmission
products at locations where pump and pump products were previously the only
products sold and increased market penetration and higher prices. During the six
months ended June 30, 1996, sales of pumps and pump products increased 6.6% over
the comparable period in 1995, while sales of valves and valve automation
products increased 11.8% in the first six months in 1996 over the comparable
1995 period. Sales of bearings and power transmission equipment increased 19.9%
in the first six months of 1996 over the comparable period in 1995. Revenues for
the six months ended June 30, 1996, also included approximately $2,061,000 in
revenues attributable to two companies acquired in December 1995 and February
1996.
Gross margins increased slightly by .3% in the first six months of 1996
compared to the first six months of 1995 due to the ability of the Company to
pass on manufacturer price increases, in particular in the pump market. The
Company currently expects some increase in manufacturers' prices to continue due
to increased raw material costs and strong market conditions. Although the
Company intends to attempt to pass on these price increases to its customers to
maintain current gross margins, there can be no assurance that the Company will
be successful in this regard.
Selling, general and administrative expenses increased as a percentage of
revenues by 1.5% for the six months ended June 30, 1996 as compared to the six
months ended June 30, 1995, due primarily to the incurrence of a one-time charge
of $710,000 for additional compensation expense associated with the amendment of
certain book value stock options into market-based stock options and costs
associated with the Company's expansion of operations. Excluding the effect of
the amendments to the stock options, selling, general and administrative
expenses as a percentage of revenues remained relatively flat from period to
period.
38
<PAGE> 50
Operating income for the first six months of 1996 as a percentage of
revenues declined 1.2% compared to the first six months of 1995, due primarily
to the compensation recorded in connection with the stock option amendments.
Interest expense during the first six months of 1996 increased slightly
compared to the first six months of 1995, due to average debt increasing during
the period as a result of increased inventory levels to support sales. Average
interest rates were lower during the same period of 1995. Further increases in
inventories may be required to the extent sales and activity levels increase.
Any such increases would be subject to the nature of the increases and the
perceived profitability of any such increases.
The Company's provision for income taxes for the first six months of 1996
decreased by $219,000 compared to the first six months of 1995 notwithstanding
increased operating income due to higher compensation expense during the quarter
associated with the amendments to the Company's stock options.
Net income for the six months ended June 30, 1996, declined $320,000 from
the first six months of 1995 due to the effects of the additional compensation
expense associated with the amendments to the Company's stock options. Excluding
the effect of this expense, net income would have increased by approximately
$106,000 due to increased product sales.
Year Ended December 31, 1995 compared to Year Ended December 31, 1994.
Revenues for the year ended December 31, 1995 increased 8.5% to $111.3
million from $102.6 million for the year ended December 31, 1994. The increase
in revenues for the 1995 period was primarily attributable to sales of bearings
and transmission products at locations where pump and pump accessories were
previously the only products sold, increased sales of valve automation products
for use in the gas transmission market, increased market penetration for the
Company's bearings and valves, increased market penetration and higher prices.
During the year ended December 31, 1995, sales of pumps and pump products
increased 4.9% over 1994, while sales of valves and valve automation products
increased 32.8% in 1995 over 1994. Sales of bearings and power transmission
equipment increased 9.3% in 1995 over 1994.
Gross profit decreased .3% during the year ended December 31, 1995, due to
higher costs of sales relating to increases in manufacturer pricing compared to
1994. This relatively small percentage decrease was due to the inability to pass
on manufacturer price increases.
Selling, general and administrative expense for the year ended December 31,
1995, decreased as a percentage of revenues by .4% as compared to 1994 due
primarily to increased revenues.
Operating income for the year ended December 31, 1995, as a percentage of
revenues remained constant with 1994 notwithstanding higher manufacturer costs
due to the Company being able to reduce average selling, general and
administrative expense.
Interest expense for 1995 increased compared to 1994 due to higher average
debt incurred to finance increased sales. The increased levels of debt, however,
were partially offset by lower average borrowing costs during the year.
The provision for income taxes for 1995 increased by $248,000 as compared
to 1994 due primarily to increased pre-tax profits for the year as compared to
the prior year.
Year Ended December 31, 1994 compared to Year Ended December 31, 1993.
Revenues for the year ended December 31, 1994, increased 3.2% to $102.6
million from $99.4 million. During the year ended December 31, 1994, sales of
pumps and pump products increased 5.0% over 1993, while sales of bearings and
power transmission equipment increased 5.0% in 1994 over 1993. Sales of valves
and valve automation products decreased 13.9% in 1995 over 1994. The increased
revenues from pumps and pump products and bearings and power transmission
equipment resulted from better penetration of existing markets and increases in
manufacturer pricing. The decrease in the sales of valves and valve automation
products was primarily due to a depressed gas transmission market that prompted
some customers to push 1994 projects into 1995.
39
<PAGE> 51
Gross profit decreased .5% during the year ended December 31, 1994, due to
higher costs of sales relating to increases in manufacturer pricing compared to
1993. This relatively small percentage increase was due to the inability to
fully pass on manufacturer price increases.
Selling, general and administrative expenses decreased as a percentage of
revenues by 1.2% for 1994 as compared to 1993. This decrease was attributable to
increased revenues and average per unit selling, general and administrative
expense declining greater than per unit increases in costs of sales. The Company
also benefitted from reductions in insurance expense, which were partially
offset by increased compensation expense.
Operating income as a percentage of revenues increased by .7% between 1994
and 1993 due to the small increase in Cost of Sales as a percentage of revenues
being more than offset by the decrease in the selling, general and
administrative expenses as a percentage of revenues.
Interest expense in 1994 increased by $129,000 to $1.9 million in 1994 due
to higher interest rates. Average borrowings, however, decreased during the
year. Interest expense as a percentage of sales remained virtually constant at
1.9%.
The provision for income taxes increased by $194,000 from 1994 as compared
to 1993 due primarily to increased pre-tax profits for the year as compared to
the prior year.
The Company had no minority interest in earnings of subsidiaries for 1994
compared to $403,000 in 1993. The elimination of minority interests was due to
the Company's acquisition of the minority interest in Southern Engine & Pump
Company in September 1993.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". The cumulative
effect of this change in accounting principle resulted in a one time increase in
earnings of $882,000 in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Under the Company's credit facility, all available cash is generally
applied to reduce outstanding borrowings, with operations funded through
borrowings under the credit facility. As a result, at June 30, 1996, the Company
had no cash and cash equivalents compared to $1.5 million and $.9 million at
December 31, 1995, and 1994, respectively. The Company's policy is to maintain
low levels of cash and cash equivalents and to use borrowings under its line of
credit for working capital. The Company also had $3.0 million available for
borrowings under its working capital line of credit at June 30, 1996. Working
capital at June 30, 1996 was $23 million compared to $24 million and $20 million
at December 31, 1995 and 1994, respectively. During 1994 and 1995, Sepco
collected its trade receivables in approximately 48 days and turned its
inventory approximately five times.
The Company currently has a $20 million secured line of credit with an
institutional lender. The rate of interest is prime plus .5% (9.25% and 9.50% at
December 31, 1995 and 1994, respectively). The line of credit is secured by
receivables, inventory, and machinery and equipment and matures January 1999. At
June 30, 1996, the available line of credit was approximately $3.0 million. The
facility contains customary affirmative and negative covenants as well as
financial covenants that require the Company to maintain a positive cash flow
and other financial ratios, such as tangible net worth less than five to one and
current assets to current liabilities greater than two to one. The Company
currently expects to renew the line of credit at its maturity.
The Company generated cash from operating activities of $.7 million in the
first six months of 1996. The Company had a working capital deficit from
operations of $59,000 in 1995 compared to a positive $2.6 million in 1994,
primarily due to the financing of inventory and increases in receivables of
approximately $3.2 million incurred in connection with the expansion of the
distribution of the Company's bearing and power transmission equipment in
markets previously selling only pump and pump products.
The Company had capital expenditures of approximately $572,000 and $1.5
million during the first six months of 1996 and the year ended December 31,
1995, respectively. Capital expenditures in the first six
40
<PAGE> 52
months of 1996 were for the purchase of a facility in Lufkin, Texas ($190,000),
leasehold improvements and furniture and fixtures at the corporate office and
for office equipment and computer automation. Capital expenditures for 1995 were
primarily for office and shop equipment and computer automation. For the
remainder of 1996 the Company has budgeted approximately $400,000 for additional
capital expenditures primarily associated with the installation of the Company's
computer system.
During the first quarter of 1996, the Company expended approximately
$550,000 for the acquisition of the assets of Austin Bearings. During 1995, the
Company exchanged 4,500 shares of Sepco Class A Convertible Preferred Stock and
$50,000 for the acquisition of all of the outstanding stock of Bayou Pumps.
The Company is currently undergoing an examination of its tax returns by
the IRS which is asserting claims against Sepco for additional taxes and
penalties of approximately $1 million plus interest of approximately $240,000.
This claim relates primarily to a challenge by the IRS of Sepco's use of the
LIFO method of accounting for inventory. Sepco believes that its LIFO elections
were valid and currently is pursuing its rights to administrative appeal.
Although an unfavorable outcome on this matter would result in the payment of
additional taxes and impact the Company's liquidity position, the Company
believes that any liability that may ultimately result from the resolution of
this matter will not have a material adverse effect on the financial position of
the Company.
The Company believes that cash generated from operations and available
under its credit facility will meet its future ongoing operational and liquidity
needs and capital requirements. Funding of the Company's acquisition program and
integrated supply strategy will require capital in the form of the issuance of
additional equity or debt financing. There can be no assurance that such
financing will be available to the Company or as to the terms thereof.
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed. The Company
adopted Statement 121 in the first quarter of 1996. The adoption of Statement
121 did not have any material effect on the Company.
The Company currently follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
employee stock options. In October 1995, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", was issued, which
established a fair-value based method of accounting for stock-based compensation
plans. In accordance with the provisions of this new accounting standard, the
Company has elected to continue following the provisions of APB 25 and will
include in future financial statements pro forma disclosures for the new
standard.
INFLATION
The Company does not believe the effects of inflation have any material
adverse effect on its results of operations or financial condition and attempts
to minimize inflationary trends by passing manufacturer price increases on to
the customer whenever practicable.
NEWMAN
Newman, a development stage company, has had no business operations and no
material assets since it filed the Petition (as defined herein) in 1992. Since
1993, Newman's expenses were principally its audit fees and certain other filing
and administrative fees necessary to keep Newman in compliance with regulatory
requirements.
Newman filed with the Court (as defined herein) the Plan (as defined
herein) on April 14, 1993, which was confirmed on September 13, 1993. Under the
Plan, Newman's unsecured creditors received either cash or
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<PAGE> 53
a combination of Newman Common Stock and Class A, B and C Warrants. In addition,
holders of Pre-petition Common Stock (as defined herein) received, at their
option and upon payment of a $20 administrative fee to Newman's transfer agent,
a combination of common stock and Class A, B and C Warrants (each as defined
herein). A total of 332,500 shares of Newman Common Stock and 650,000 each of
Class A, B and C Warrants were issued to unsecured creditors and Newman
shareholders under the Plan. In addition, LITCO, Newman's principal shareholder,
contributed $20,000 to Newman and was designated as a separate class under the
Plan. LITCO received 1,000,000 each of Class A, B and C Warrants. The exercise
period for the Class A and B Warrants has expired, with the exercise period for
the Class C Warrants expiring on November 22, 1996.
During the six months ended June 30, 1996, there was no revenue or exercise
of warrants. Certain regulatory and operational expenses were paid in this
period resulting in a loss for the period of $998. Newman had $5,200 in cash as
of June 30, 1996 and accrued liabilities of $6,034 related to administrative
expenses incurred by LITCO for the benefit of Newman. Management of Newman is
unable to estimate the number, if any, of warrants that will be exercised in the
future.
On February 1, 1996, the Board of Directors of Newman changed Newman's
fiscal year end to December 31.
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BUSINESS INFORMATION CONCERNING THE COMPANY
The Company is a newly incorporated entity formed for the sole purpose of
effecting the Reorganization and succeeding to the business and operations of
Sepco. Unless the context otherwise requires, the term "Company" refers to the
Company, as the successor to Sepco, following the completion of the
Reorganization.
GENERAL
The Company is a distributor of maintenance, repair and operating supplies
and equipment for industrial customers engaged in various businesses,
principally the oil and gas, petrochemical and wood products industries. The
Company currently distributes over 125,000 items, consisting primarily of pumps
and pump accessories, valves and valve automation products and bearings and
power transmission equipment. The Company also provides system design,
fabrication, installation, repair and maintenance services for its customers.
The Company's products currently are distributed from over 30 distribution
centers strategically located throughout the Southwest. The Company's sales
force includes approximately 100 sales representatives.
The Company has been a distributor of industrial supplies in the Southwest
since 1908 when it was founded as a distributor of pumps and pump products for
companies in the agriculture industry. The Company has grown substantially since
that time through the addition of new product lines and distribution locations.
Since 1987, the Company has made various acquisitions with the objective of
expanding its product lines and distribution network. These acquisitions have
resulted in the Company becoming one of the largest regional distributors of
industrial supplies in the Southwest and the 36th largest distributor of
industrial supplies in the United States, based on the most recent survey
conducted by Industrial Distribution.
The Company's strategy is to continue to expand through acquisitions and
internal development. Through future acquisitions, the Company will seek to take
advantage of what it believes to be a trend toward consolidation in the highly
fragmented $200 billion industrial product distribution industry. The Company
believes that this consolidation is being driven by the customer's desire to
reduce costs through integrated sources of supply which can provide products at
lower costs through volume purchases. The integration of supply also reduces the
customer's need to maintain excess inventories and to coordinate purchasing
needs through numerous small suppliers. The Company intends to meet this
customer demand by engaging in selective acquisitions of small- to medium-sized
independent distributors with complementary or desirable new product lines,
strategic distribution locations and attractive customer bases and manufacturer
relations. The Company also will seek acquisitions that will provide it with the
ability to penetrate new geographical markets through the establishment of
distribution bases outside of the Company's current geographical markets. These
acquisitions are expected to be both within the Southwest and elsewhere in the
United States. Although the Company is actively seeking acquisitions that would
meet its strategic objectives, there can be no assurance that the Company will
be successful in its efforts.
The Company's strategy for internal development also is related to the
consolidation trend in the industry and focused on providing the Company's
customers with an integrated source of supply for a large portion of their
maintenance, repair and operating supply needs. The Company believes that as the
market for industrial supplies consolidates to compete successfully, it will be
necessary for distributors to provide the customer with a single source of
supply for a majority of their industrial supply needs either directly through
their own product lines or through alliances, consortiums or joint ventures. The
Company intends to seek to meet this competitive need by expanding its existing
product lines and adding new product lines through acquisitions, new
manufacturing arrangements and alliances and joint ventures with other
suppliers. The Company also intends to begin to actively market to its customers
through AMRO a comprehensive outsourcing program that is designed to provide all
aspects of the maintenance, repair and operating, supply procurement, inventory
management and distribution functions for its customers at the customer's
location.
The Company is a Texas corporation formed solely for the purpose of
effecting the Reorganization and succeeding to the business of Sepco. Sepco has
been a distributor of pumps and pump products since 1908 and was incorporated in
Texas in 1913. The Company's principal office is located at 580 Westlake Park
Boulevard, Suite 1100, Houston, Texas 77079 and its telephone number is (713)
531-4214.
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INDUSTRY OVERVIEW AND BUSINESS OBJECTIVES
The Company estimates that the United States market for industrial supplies
is currently approximately $200 billion annually. The principal products
provided to this market consist of (i) pumps and pump accessories, (ii) valves
and valve automation products, (iii) bearings and power transmission equipment,
(iv) electrical products and (v) general mill supplies and safety products. The
Company currently provides three of these five classes of products (pumps,
valves and bearings and power transmission) and, as part of its operating
strategy, intends to seek acquisitions of distributors who provide the other two
classes of products (electrical and general mills and safety).
The industrial distribution industry currently is highly fragmented.
Although there exist various national distribution companies, the 50 largest
industrial supply distributors currently account for less than 10% of the total
market. As a result, most industrial customers currently purchase their
industrial supplies through numerous local distribution and supply companies.
These distributors, like the Company, also generally provide the customer with
repair and maintenance services, technical support and application expertise
with respect to their own product lines. Products typically are purchased by the
distributor for resale directly from the manufacturer and warehoused at branch
distribution facilities of the distributor until sold to the customer. The
customer also typically will purchase an amount of product inventory for its
near term anticipated needs and warehouse those products at its industrial site
until the products are used.
The Company believes that the current distribution system for industrial
products in the United States creates inefficiencies at both the customer and
the distributor level through excess inventory requirements and duplicative cost
structures. The Company believes that with increased global competition and
pricing pressures, the current system will need to change and industrial
distributors will need to consolidate to meet their clients' objectives for
faster deliveries and lower costs. Consolidation will provide those distributors
that are able to consolidate the opportunity to better manage their inventory
levels, reduce per unit overhead and selling costs and improve purchasing power
from the manufacturer.
The Company believes that an additional factor underlying the consolidation
trend in the industry is a growing demand for new alternative distribution
programs in which an integrated source of supply is offered to the customer as a
means of simplifying the procurement of industrial supplies and reducing the
customer's own purchasing costs. This integrated source of supply currently is
being provided on a limited basis by the Company and other distributors through
a variety of differing forms of alliances, joint ventures and consortiums among
distributors that are designed to offer the customer a broader range of products
though a centralized source of supply. The Company expects that while such
alliances will continue to grow and be a factor in the market in the future, the
ability of a distributor to provide all or a substantial portion of the supply
needs of the customer will become a central aspect of competition in the
industry in the future.
Industrial supply distributors typically provide professional sales
expertise, engineering expertise, inventory availability, fabrication and
assembly and in-house and field service. The Company believes that the
acquisition of other businesses will not materially affect its ability to
provide these services to its customers on the same basis as smaller
distributors. The Company currently does not intend to eliminate any material
services that may be provided by companies which it may acquire, but rather to
maintain the same or higher level of service through acquired personnel and
non-duplicative locations. The Company also believes that the level of service
provided to the customers of the acquired business may be enhanced as a result
of the availability of a broader range of products, the elimination of
duplicative overhead and access to expanded product lines.
The Company's objective for future growth is to take advantage of the
current consolidation and integrated supply trends in the market. In this
regard, the Company intends to seek acquisitions that will both expand its
existing product lines and add new product lines. The Company also intends to
continue to pursue on a selective basis alliances and other similar arrangements
with other distributors, such as the Company's participation in the iPower
Consortium described below, that will allow it to provide a more integrated
source of supply to its customers. The Company also has recently created a new
subsidiary, AMRO, to market a comprehensive vendor outsourcing service through
which the Company will perform all aspects of supply procurement, inventory
management and distribution functions for large volume customers at the
customer's
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industrial site. Although AMRO has just recently begun the marketing of its
services and has not yet generated any revenues, the Company believes that the
services proposed to be provided by AMRO ultimately will become an important
component of the Company's distribution network.
The ability of the Company to implement its strategy for growth will be
dependent on its ability to identify, consummate and assimilate acquisitions on
economic terms, to acquire and successfully integrate new product lines and to
establish and successfully market new integrated forms of supply arrangements
such as those being pursued by AMRO. Although the Company is actively seeking
acquisitions and integrated supply arrangements that would meet its strategic
objectives, it currently has no agreements or understandings with respect to any
such acquisition and there can be no assurance that the Company will be
successful in these efforts. Further, the ability of the Company to effect its
strategic plans will be dependent on its obtaining financing for its planned
expansions, which there can be no assurance will be available. The Company plans
to examine appropriate methods of financing any such acquisition, including
issuance of additional capital stock, debt or other securities or a combination
of both. If the Company were to issue shares of its capital stock in any
acquisition, such issuance could be dilutive to existing shareholders.
PRODUCTS AND SERVICES
The Company currently stocks in inventory for distribution more than
125,000 different items for use primarily by customers engaged in the oil and
gas, petrochemical and wood products industries. Other industries served by the
Company include municipalities, food and beverage and construction. The
principal products currently distributed by the Company consist of (i) pumps and
pump accessories, (ii) valves and valve automation products and (iii) bearings
and power transmission equipment. The Company also provides system design,
fabrication, installation and repair and maintenance services for its customers.
The Company's products are distributed from over 30 distribution centers
strategically located throughout the Southwest and sold through a sales force of
approximately 100 sales representatives who operate on a commission basis.
Pumps and Pump Accessories
The Company's pump products include a full line of (i) centrifugal pumps
for transfer and process service applications, such as petrochemicals, refining
and crude oil production, (ii) rotary gear pumps for low-to medium-pressure
service applications, such as pumping lubricating oils and other viscous
liquids, (iii) plunger and piston pumps for high-pressure service applications
such as salt water injection and crude oil pipeline service and (iv)
air-operated diaphragm pumps. The Company also provides various pump
accessories. Sales of pumps and pump accessories accounted for 56%, 58% and 56%
of the Company's revenues for years ended December 31, 1995, 1994 and 1993,
respectively.
Valves and Valve Automation
The Company's valve and valve automation products include a full line of
pneumatic, hydraulic and electric actuators for critical or high-pressure
service applications or remote valve operation applications, such as refinery,
offshore and pipeline applications, as well as for applications involving
large-diameter pipe. The Company also provides a full line of manual worm gear
and bevel gear actuators for low-pressure applications not requiring remote
operation, including tank farms, water lines and municipal water systems. These
actuators may be fitted to either multi- or quarter-turn valves. The Company
also supplies various accessories and control equipment, such as positive
displacement gas meters, rupture disc replacement devices, control valves, limit
switches and valve positioners. Sales of valves and valve automation products
accounted for 9%, 7% and 9% of the Company's revenues for years ended December
31, 1995, 1994 and 1993, respectively.
Bearings and Power Transmission Equipment
The Company provides a full line of bearings, hoses, seals and power
transmission products. The Company's bearing products include several types of
mounted and unmounted bearings for a variety of applications, ranging from basic
applications such as pumps, motors and conveyors to complex applications. Hose
products distributed by the Company include a large selection of industrial
fittings and stainless steel
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hoses, hydraulic hoses, Teflon(R) hoses and expansion joints, as well as hoses
for chemical, petroleum, air and water applications. The Company also
distributes seal products, such as O-rings, Vee packings, retaining rings and
other related equipment. Power transmission products distributed by the Company
include speed reducers, flexible coupling drives, chain drives, sprockets,
gears, conveyors, clutches, brakes and hoses. Sales of bearings, hoses, seals
and power transmission equipment accounted for 35%, 35% and 35% of the Company's
revenues for years ended December 31, 1995, 1994 and 1993, respectively.
System Design, Fabrication, Installation and Repair and Maintenance Services
In addition to distributing products, the Company provides complete,
customized pumping, valve automation and power transmission system design and
fabrication services through its engineering personnel and fabrication
facilities. The Company also provides training services with respect to the
installation and basic applications of its products as well as around-the-clock
field repair services supported by a fleet of fully-equipped service vehicles.
THE IPOWER CONSORTIUM
As part of the Company's efforts to provide its customers with a source of
integrated supply, the Company currently is a member of the Texas Gulf, North
Texas and Louisiana Gulf South divisions of the iPower Consortium ("iPower").
iPower is an integrated supply consortium currently serving over 30 large
industrial customers nationwide and brings together a wide variety of suppliers
to provide all necessary products to an end-user customer using one efficient
software package which eliminates the need for multiple invoices. The Company
believes that iPower's streamlined distribution process enables the customer to
reduce its purchasing costs. iPower also provides multiple product application
expertise and technical support to those customers that require them. The
Company has participated in iPower for less than one year. To date, revenues
from the Company's participation in iPower have not been material and there can
be no assurance as to the future profitability of the Company's participation in
iPower.
MANUFACTURERS
The Company acquires its products through numerous original equipment
manufacturers. The Company has distribution agreements with these manufacturers,
some of which give the Company exclusive rights to distribute the manufacturer's
products in a specific geographic area. All of the Company's distribution
agreements are subject to cancellation by the manufacturer upon one year notice
or less. No one manufacturer provides products that account for 10% or more of
the Company's revenues. The Company believes that alternative sources of supply
could be obtained in a timely manner if any distribution agreement were
canceled. Accordingly, the Company does not believe that the loss of any one
distribution agreement would have a material adverse effect on its business,
financial condition or results of operations. Representative manufacturers of
Sepco's products include (i) G.H. Bettis (valve and valve automation products),
(ii) Gould's, G&L, Viking, Wilden and Gaso (pumps and pump products), (iii) SKF,
Torrington/Fafnir, Timkin and NTN (bearings) and (iv) Dodge/Reliance, Falk,
Gates, Martin Sprocket, T. B. Woods, Emerson, Rexnord and Baldor Electric (power
transmission products).
COMPETITION
The Company's business is highly competitive. The Company competes with a
variety of industrial supply distributors, many of which may have greater
financial and other resources than the Company. Many of the Company's
competitors are small enterprises selling to customers in a limited geographic
area. The Company also competes with larger distributors that provide integrated
supply programs such as those offered through iPower and outsourcing services
similar to those proposed to be offered by AMRO, some of which may be able to
supply their products in a more efficient and cost-effective manner than the
Company. The Company also competes with direct mail suppliers, large warehouse
stores and, to a lesser extent, manufacturers.
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CUSTOMERS
The Company provides its products and services to over 10,000 customers in
various industries, principally oil and gas, petrochemicals and wood products.
Other industries include chemicals, pulp and paper, food and beverage,
municipal, construction and general manufacturing.
PROPERTIES
Set forth below is certain information with respect to certain of the
Company's properties. The Company believes that all of these properties are
adequately insured, in good condition and suitable for the uses described below
for the foreseeable future.
<TABLE>
<CAPTION>
APPROXIMATE LEASE
SIZE OWNED/ EXPIRATION
LOCATION PRIMARY USE (SQUARE FEET) LEASED DATE
--------------------------- ---------------------- ------------- ----- -------------
<S> <C> <C> <C> <C>
580 Westlake Park Office 7,276 Leased February 2001
Houston, Texas
6500 Brittmoore Office 88,000 Owned(1)
Houston, Texas Distribution facility
2603 LaBranch Distribution facility 33,000 Owned(1)
Houston, Texas
4302 Creekmont Distribution facility 26,000 Owned(1)
Houston, Texas
Harahan, Louisiana Distribution facility 30,000 Owned(1)
Odessa, Texas Distribution facility 25,000 Owned(1)
Oklahoma City, Oklahoma Distribution facility 18,000 Leased November 1996
Irving, Texas Distribution facility 15,000 Owned
Hobbs, New Mexico Distribution facility 10,000 Owned
Lufkin, Texas Distribution facility 10,000 Owned
Broussard, Louisiana Distribution facility 10,000 Owned
Longview, Texas Distribution facility 7,000 Owned
Baytown, Texas Distribution facility 7,000 Owned
</TABLE>
- ---------------
(1) Property pledged to secure certain indebtedness of the Company.
The Company also leases 25 additional branch distribution facilities
located in Texas, Louisiana, Oklahoma and New Mexico. These facilities, which
average 5,000 square feet or less in size, are generally leased for a term of
three to five years. The leases provide for periodic specified rental payments
and certain leases are renewable at the option of the Company. The Company
believes that if the leases for any of its facilities were not renewed, other
suitable facilities could be leased with no material adverse effect on its
business, financial condition or results of operations.
BACKLOG
The Company typically fills and ships customer orders within 30 to 90 days
of receipt of the order and, therefore, maintains no significant backlog.
EMPLOYEES
As of June 30, 1996, the Company had 441 full-time employees. None of the
Company's employees are represented by a labor union. The Company believes that
it has good relations with its employees.
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INSURANCE
The Company maintains liability and other insurance that it believes to be
customary and generally consistent with industry practice. There can be no
assurance that such insurance will be adequate for the risks involved, that
coverage limits will not be exceeded or that such insurance will apply to all
liabilities. The occurrence of an adverse claim in excess of the coverage limits
maintained by the Company could have a material adverse effect on the Company's
financial condition and results of operations.
INTELLECTUAL PROPERTY
Many of the Company's products are subject to patents by the manufacturers
thereof. The Company's business, however, is not materially dependent on any
single patent or group of patents or generally upon patent protection.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to various laws and regulations relating to its
business and operations, and various health and safety regulations as
established by the Occupational Safety and Health Administration.
The Company's operations are also subject to federal, state and local laws
and regulations controlling the discharge of materials into or otherwise
relating to the protection of the environment. In recent years, laws and
regulations protecting the environment have generally become more stringent and
have sought to impose greater liability on a larger number of potentially
responsible parties. However, the Company is not currently aware of any
situation or condition that it believes is likely to have a material adverse
effect on its results of operations or financial condition. The Company's
expenditures in 1995 in order to comply with applicable environmental laws and
regulations were not material, and the Company expects that the costs of
compliance with such laws and regulations for 1996 will be minimal.
LEGAL PROCEEDINGS
The Company is currently undergoing an examination of its tax returns by
the IRS which is asserting claims against Sepco for additional taxes and
penalties of approximately $1 million plus interest of approximately $240,000.
This claim relates primarily to a challenge by the IRS of Sepco's use of the
LIFO method of accounting for inventory. Sepco believes that its LIFO elections
were valid and currently is pursuing its rights to administrative appeal.
Although an unfavorable outcome on this matter would result in the payment of
additional taxes and impact the Company's liquidity position, the Company
believes that any liability that may ultimately result from the resolution of
this matter will not have a material adverse effect on the financial position of
the Company.
From time to time the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. While the
outcome of lawsuits or other proceedings against the Company cannot be predicted
with certainty, except as described above, the Company does not believe that
these matters will have a material adverse effect on its business or financial
position.
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BUSINESS INFORMATION CONCERNING NEWMAN
BACKGROUND
Newman was incorporated in the State of New Mexico on June 25, 1981. Newman
was in the business of publishing and distributing non-musical audio cassette
recordings of fiction and non-fiction books, recorded interviews and seminars
and other original spoken word recordings containing ideas, information or
entertainment similar to that presented in books. Such audio cassette recordings
are commonly known in the publishing industry as "books on cassette". From its
inception through 1984, Newman's principal business was the distribution to
bookstores and other retailers throughout the United States of books on cassette
produced by third parties. Subsequent to the completion of an initial public
offering of its common stock in December 1984, Newman expanded its business and
began producing its own books on cassette and developing a consumer-direct
marketing catalog. Newman also expanded its distribution business to include
books on cassette produced by itself as well as those produced by third parties.
During 1986, Newman began selling books on cassette to other distributors who
resold them to specialty retailers, schools and libraries.
By early 1987, however, Newman began experiencing financial difficulties.
By late 1987, Newman no longer had sufficient cash flow to meet its obligations
as they became due and ceased substantially all of its business operations. By
November 1987, Newman had liquidated substantially all of its assets. In May
1991, LITCO purchased an aggregate of 1,792,000 shares of Newman's common stock,
or approximately 34% of Newman's outstanding capital stock from certain officers
of Newman for $5,000. In connection with this transaction, the two existing
members of Newman's Board of Directors appointed Mr. Glenn A. Little (an
officer, director and principal shareholder of LITCO) and Mr. Matthew Blair to
the Board of Directors and subsequently resigned as directors and officers of
Newman.
BANKRUPTCY PROCEEDINGS
Filing of Petition; Summary of the Plan of Reorganization. On August 12,
1992, Newman filed a petition (the "Petition") for reorganization under Chapter
11 of the United States Bankruptcy Code with the United States Bankruptcy Court
for the Western District of Texas (the "Court"). On April 14, 1993, Newman filed
with the Court a Plan of Reorganization (the "Plan"). The Court entered an order
confirming the Plan on September 13, 1993. The Plan generally provided as
follows:
- Newman's unsecured creditors were given the option of receiving cash or
a combination of Newman Common Stock and warrants to purchase Newman
Common Stock. Creditors that elected to receive cash were paid $5,010 as
a group. Creditors that elected to receive Newman Common Stock and
warrants each received four shares of Newman Common Stock and four each
of Class A, B and C Warrants (each as hereinafter defined) for each
dollar of their respective claims filed. The maximum number of
securities that would be issued for any one claim was 7,500 shares of
Newman Common Stock and 7,500 each of Class A, B and C Warrants. All
creditors electing to receive common stock and warrants were issued a
minimum of 100 shares of Newman Common Stock and 100 each of Class A, B
and C Warrants.
- Holders of Newman's common stock outstanding prior to the filing of the
Petition (the "Pre-petition Common Stock") were designated as a separate
class under the Plan and allowed to voluntarily participate in the Plan
by paying a $20 administrative fee directly to Newman's transfer agent.
Shareholders that elected to participate in the Plan each received 500
shares of Newman Common Stock and 1,000 each of Class A, B and C
Warrants, regardless of the number of shares of Pre-petition Common
Stock held. All shares of Pre-petition Common Stock held by shareholders
that did not elect to participate in the Plan were canceled.
- Newman's creditors and holders of Pre-petition Common Stock were given
until March 22, 1994 to subscribe to common stock and warrants. A total
of 332,500 shares of Newman Common Stock and 650,000 each of Class A, B
and C warrants were issued under the Plan to such creditors and holders
of Pre-petition Common Stock.
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- Under the Plan, LITCO contributed $20,000 to Newman and was designated
as a separate class. LITCO returned to Newman's treasury the 1,792,000
shares of Pre-petition Common Stock that it had purchased in March 1992
and received 500,000 shares of Newman Common Stock and 1,000,000 each of
Class A, B and C Warrants.
Description of the Warrants Issued Pursuant to the Plan of Reorganization.
The Plan provided for the issuance of the three following classes of warrants to
purchase shares of Newman Common Stock:
- Class A Warrant. Each class A warrant (the "Class A Warrant"), which are
now expired, allowed the holder to purchase one share of Newman Common
Stock at $.50 per share for a period of 12 months from November 22,
1993.
- Class B Warrant. Each class B warrant (the "Class B Warrant"), which are
now expired, allowed the holder to purchase one share of Newman Common
Stock at $1.00 per share for a period of 24 months from November 22,
1993.
- Class C Warrant. Each class C warrant (the "Class C Warrant") allows the
holder to purchase one share of Newman Common Stock at $2.00 per share
for a period of 36 months from November 22, 1993.
On October 1, 1994, the Newman Board of Directors extended the exercise
period of the Company's Class A Warrants. Accordingly, this extension allowed
LITCO, a company controlled by Glenn A. Little, an additional 12 months in which
to exercise 1,000,000 Class A Warrants. LITCO exercised 6,000 and 14,000 Class A
Warrants on July 14, 1995 and November 20, 1995, respectively.
CURRENT BUSINESS OF NEWMAN
At this time, the business purpose of Newman is to obtain an acquisition or
merger transaction with a business which Newman believes has significant growth
potential, thereby allowing its shareholders to benefit by owning an interest in
a viable business enterprise. Since Newman has no significant assets or
operations, its principal potential for profits comes solely from operations it
may receive in an acquisition or merger transaction. Newman is not currently
involved in any pending litigation. Newman is a New Mexico corporation and its
principal office is located at 211 West Wall Street, Midland, Texas 79701, and
its telephone number is (915) 682-1761.
MARKET FOR THE COMPANY'S STOCK, SEPCO COMMON STOCK
AND NEWMAN COMMON STOCK AND RELATED SHAREHOLDER MATTERS
THE COMPANY
There is no current public market for the Common Stock, Series A Preferred
Stock or Series B Convertible Preferred Stock, and there is no assurance that
such a market will develop. The Company intends to apply for quotation of the
Common Stock on the OTC Bulletin Board of the National Association of Securities
Dealers, Inc. upon effectiveness of the Registration Statement. See "Risk
Factors -- No Public Market; Possible Volatility of Stock Price".
Upon consummation of the Reorganization, the Company will have 15,987,900
shares of Common Stock outstanding, approximately 9,398,400 shares of which will
be held by affiliates of the Company and will be subject to the resale
limitations of Rule 144 promulgated under the Securities Act.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least two years, including an "affiliate", is entitled to sell, within any
three-month period, a number of his restricted shares that does not exceed the
greater of (i) 1% of the then outstanding shares of the Common Stock or (ii) an
amount equal to the average weekly reported volume of trading in such shares
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain manner of sale limitations, notice requirements and the
availability of current public
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<PAGE> 62
information about the Company. A person (or persons whose shares are aggregated)
who is not deemed an "affiliate" of the Company and who has beneficially owned
restricted shares for at least three years generally is entitled to sell such
shares under Rule 144 without restrictions or registration under the Securities
Act, unless thereafter held by an "affiliate" of the Company.
SEPCO
There is no public market for the Sepco Common Stock.
NEWMAN
The Newman Common Stock has been quoted on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc. under the trading symbol "NWMC"
since October 14, 1994. However, the Company believes that such quotations have
been limited and sporadic and therefore do not constitute an "established public
trading market" under Item 201 of Regulation S-K of the Securities Act. The
following table sets forth the range of high and low closing bid prices for the
Newman Common Stock for the periods indicated. Quotations represent inter-dealer
prices, do not include retail markups, markdowns or commissions and may not
represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL 1994
First Quarter.............................................. $.25 $.25
Second Quarter............................................. .25 .25
Third Quarter.............................................. .25 .25
Fourth Quarter............................................. .25 .25
FISCAL 1995
First Quarter.............................................. .25 .25
Second Quarter............................................. .25 .25
Third Quarter.............................................. .25 .25
Fourth Quarter............................................. .25 .25
FISCAL 1996
First Quarter.............................................. .25 .25
Second Quarter............................................. .25 .25
Third Quarter.............................................. .25 .25
</TABLE>
On August 1, 1996, there were approximately 199 record shareholders of the
Newman Common Stock. Upon consummation of the Merger, Newman shareholders will
own shares of the Common Stock and Newman, as the surviving entity of the Newman
Merger, will be a wholly-owned, non-operating subsidiary of the Company.
DIVIDEND POLICY
Neither the Company nor Newman has paid or declared any dividends on their
respective securities as of a recent date. Sepco has paid a monthly dividend of
$.05 per share on 15,000 shares of Sepco Class A Convertible Preferred Stock
from October 1995 through December 1995 and $.50 per share on 19,500 shares of
Sepco Class A Convertible Preferred Stock since January 1996. The terms of the
Series B Convertible Preferred Stock provide that the Company shall pay monthly
dividends on the Series B Convertible Preferred Stock equal to an annual rate of
6% of the stated value thereof, $100 per share. The Company anticipates that
future earnings, except for dividends payable on the Series B Convertible
Preferred Stock, will be retained to finance the continuing development of its
business. In addition, Sepco's loan agreement with its principal lender
prohibits Sepco from declaring or paying any dividends or other distributions on
its capital stock, except for dividends to the Company to allow for payment of
dividends on the Company's preferred stock.
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<PAGE> 63
Accordingly, the Company does not anticipate paying cash dividends on the Common
Stock in the foreseeable future. The payment of any future dividends will be at
the discretion of the Company's Board of Directors and will depend upon, among
other things, future earnings, the success of the Company's business activities,
regulatory and capital requirements, the general financial condition of the
Company and general business conditions.
MANAGEMENT
The following table sets forth certain information about the executive
officers and directors of the Company. All directors of the Company hold office
until the next annual meeting of shareholders or until their respective
successors have been elected and qualified. Executive officers are elected by
the Company's Board of Directors to hold office until their respective
successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
----------------------------------------- ----------------------------------------
<S> <C> <C>
David R. Little....................... 44 President, Chief Executive Officer and
Director
Gary A. Allcorn....................... 44 Senior Vice President/Finance
Jerry J. Jones........................ 57 Senior Vice President/Corporate
Development and Director
Bryan H. Wimberly..................... 57 Senior Vice President/Pump, Bearing,
Power Transmission and Valve Automation
Group and Director
Cletus Davis.......................... 66 Director
Kenneth H. Miller..................... 57 Director
Thomas V. Orr......................... 46 Director
</TABLE>
Set forth below is a description of the backgrounds of the executive
officers and directors of the Company.
David R. Little has served as a Director, President and Chief Executive
Officer of the Company since August 1996 and has also held these positions with
Sepco since 1986 and with Sepco's wholly-owned subsidiary, Bayou Pumps, Inc.,
since December 1995. Mr. Little has been employed by Sepco since 1975 in various
capacities, including Staff Accountant, Controller, Vice President/Finance and
President.
Gary A. Allcorn has served as Senior Vice President/Finance of the Company
since August 1996 and has also held this position with Sepco since June 1995 and
with Bayou Pumps, Inc. since December 1995. Mr. Allcorn has been employed by
Sepco since 1985 in various capacities, including Vice President/Finance and
Chief Financial Officer.
Jerry J. Jones has served as a Director and Senior Vice President/Corporate
Development of the Company since August 1996. Mr. Jones has also served as a
Director of Sepco since 1986 and as Senior Vice President/Corporate Marketing of
Sepco since June 1995. From February 1993 to June 1995, Mr. Jones served as
President of T.L. Walker Bearing Company, a subsidiary of Sepco. Prior to his
employment with Sepco, Mr. Jones served as President and Chief Executive Officer
of the Energy Partners, Inc./Perry Oceanographics, a renewable energy
development company and offshore underwater equipment manufacturer, from
November 1989 to December 1992.
Bryan H. Wimberly has served as a Director and Senior Vice President/Pump,
Bearing, Power Transmission and Valve Automation Group of the Company since
August 1996. Mr. Wimberly has also served as a Director of Sepco since 1987 and
the President and Chief Operating Officer of Sepco since October 1995. Mr.
Wimberly has been employed by Sepco since 1987 in various capacities, including
Senior Vice President/Operations.
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<PAGE> 64
Cletus Davis has served as a Director of the Company since August 1996. Mr.
Davis has also served as a Director of Sepco since May 7, 1996. Mr. Davis is an
attorney practicing in the areas of commercial real estate, banking, corporate,
estate planning and general litigation and is also a trained mediator. From May
1988 to February 1992, Mr. Davis was a member of the law firm of Wood,
Lucksinger & Epstein. Since March 1992, Mr. Davis has practiced law with the law
firm of Cletus Davis, P.C.
Kenneth H. Miller has served as a Director of the Company since August
1996. Mr. Miller has also served as a Director of Sepco since April 1989. Mr.
Miller is a Certified Public Accountant and has been a solo practitioner since
1983.
Thomas V. Orr has served as a Director of the Company since August 1996.
Mr. Orr has also served as a Director of Sepco since May 1996. Mr. Orr has
served as Senior Vice President and Divisional Manager of Morgan Keegan, Inc., a
full service brokerage firm, since February 1995. From June 1990 to January
1995, Mr. Orr was a Divisional Sales Manager for two years and Branch Office
Manager for three years for PaineWebber, Inc., an investment banking firm.
BOARD OF DIRECTORS' COMPENSATION
The Company's Bylaws provide that directors may be paid their expenses, if
any, and may be paid a fixed sum for attendance of each Board of Directors
meeting. The Company pays each non-employee director $1,000 per meeting
attended, plus expenses.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two committees, an Audit Committee and a
Compensation Committee, each composed of at least three independent directors.
The Audit Committee, composed of Messrs. Davis, Miller and Orr, makes
recommendations to the Board of Directors on matters regarding the independent
public accountants of the Company and the annual audit of the Company's
financial statements and accounts. The Compensation Committee, composed of
Messrs. Davis, Miller and Orr, will make recommendations to the Board of
Directors regarding compensation for the Company's executive officers,
directors, employees, consultants and agents, and will act as the administrative
committee for any stock plan of the Company, including the Long-Term Incentive
Plan.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement (the "Little
Employment Agreement"), effective July 1, 1996, with Mr. Little. The Little
Employment Agreement is for a term of three years, renewable annually for a term
to extend three years from such renewal date. The Little Employment Agreement
provides for compensation in a minimum amount of $260,000 per annum, to be
reviewed at least annually for possible increases, monthly bonuses equal to 3%
of the profit before tax of Sepco as shown on the books and records of Sepco at
the end of each month, and other perquisites in accordance with Sepco policy. In
the event Mr. Little terminates his employment for "Good Reason" (as defined
herein), or is terminated by the Company for other than "Good Cause" (as defined
herein), Mr. Little would receive a cash lump sum payment equal to the sum of
(i) the base salary for the remainder of the employment period under the Little
Employment Agreement, (ii) an amount equal to the sum of the most recent 12
months of bonuses paid to him, (iii) two times the sum of his current annual
base salary plus the total of the most recent 12 months of bonuses, (iv) all
compensation previously deferred and any accrued interest thereon, and any
accrued vacation pay not yet paid by the Company and (v) continuation of
benefits under the Company's benefit plans for the current employment period. In
the event Mr. Little dies, retires or is terminated by the Company for Good
Cause, Mr. Little or Mr. Little's estate, as applicable, would receive all
payments then due him under the Little Employment Agreement through the date of
termination, including a pro rated monthly bonus and any compensation previously
deferred. Also, in the event of death, Mr. Little's family shall receive Mr.
Little's base salary for 24 months and benefits provided by the Company to
surviving family members of the Company's key employees. Mr. Little is also
entitled under the Little Employment Agreement to certain gross-up payments if
an excise tax is imposed pursuant to Section 4999 of the Code, which imposes an
excise
53
<PAGE> 65
tax on certain severance payments in excess of three times an annualized
compensation amount following certain changes in control or any payment or
distribution made to him. The Little Employment Agreement also contains
non-competition and non-disclosure provisions. In the event Mr. Little were to
be terminated without cause, he currently would be entitled to receive
approximately $1.1 million under this agreement.
The term "Good Reason" is defined in the Little Employment Agreement to
mean (i) a change in the nature or scope of the functions, powers, authority,
duties or responsibilities of Mr. Little, unless remedied by the Company; (ii)
any failure by the Company to pay any form of compensation for which the Little
Employment Agreement provides, unless remedied by the Company; (iii) requiring
Mr. Little to be based at any office or location more than 30 miles from the
current location of the Company, other than travel reasonably required in the
performance of Mr. Little's responsibilities; (iv) any purported termination by
the Company of Mr. Little's employment other than due to Mr. Little's death or
for Good Cause; or (v) any failure of the Company to require a successor of the
Company to assume the terms of the Little Employment Agreement. The term "Good
Cause" is defined in the Little Employment Agreement and generally means (i) Mr.
Little's conviction of a felony that is no longer subject to direct appeal; (ii)
Mr. Little's adjudication to be mentally, physically and/or emotionally
incapacitated so as to render him incapable of performing his required duties
and services that is no longer subject to direct appeal; or (iii) Mr. Little has
been found to have committed fraud, theft or willful misfeasance that has
materially damaged the Company and such determination is no longer subject to
direct appeal.
The Company also has entered into employment agreements (each Employment
Agreement hereinafter referred to as "Employment Agreement" and the four
Employment Agreements hereinafter collectively referred to as "Employment
Agreements"), effective as of July 1, 1996, with Messrs. Jerry J. Jones, Bryan
H. Wimberly, Bob Evans and Gary A. Allcorn (each hereinafter referred to as
"Employee"). Each Employment Agreement is for a term of one year, renewable
automatically for a one-year term. The Employment Agreements provide for (i)
annual salary ("Salary") in the amounts of $113,000 for Mr. Jones, $130,000 for
Mr. Wimberly, $108,000 for Mr. Evans and $110,000 for Mr. Allcorn, and (ii)
other perquisites in accordance with Company policy. The Employment Agreements
provide for bonuses as follows: (i) Mr. Jones is entitled to a monthly bonus of
two percent of the monthly profit before tax of the Company, excluding sales of
fixed assets and extraordinary items; (ii) Mr. Wimberly is entitled to a monthly
bonus of two percent of the monthly profit before tax of Sepco, excluding sales
of fixed assets and extraordinary items; and (iii) Mr. Allcorn is entitled to a
quarterly bonus pursuant to the terms and conditions of Sepco's bonus pool. Mr.
Evans is not entitled to receive a bonus.
In the event Employee terminates his employment for "Good Reason" (as
defined below), or is terminated by the Company for other than "Cause" (as
defined below), each Employee would receive (i) 12 monthly payments each equal
to one month of the Salary, in the case of Messrs. Jones, Wimberly and Allcorn,
and six monthly payments each equal to one month of Salary, in the case of Mr.
Evans, (ii) a termination bonus equal to (A) the previous 12 monthly bonuses, in
the case of Messrs. Jones and Wimberly, (B) the previous four quarterly bonuses,
in the case of Mr. Allcorn and (C) six months of Salary, in the case of Mr.
Evans, and (iii) any other payments due through the date of termination. In the
event Employee dies, becomes disabled, terminates the Employment Agreement with
notice or the Employment Agreement is terminated by the Company for Cause,
Employee or Employee's estate, as applicable, would receive all payments then
due him under the Employment Agreement through the date of termination. The
Employment Agreements contain non-competition and non-disclosure provisions.
The term "Good Reason" is defined in each Employment Agreement to mean (i)
any failure of the Company to comply with any material provisions of the
applicable Employment Agreement unless remedied by the Company; (ii) failure by
the Company to pay any form of compensation for which the Employment Agreement
provides, unless remedied by the Company; or (iii) any failure of the Company to
obtain an agreement from a successor of the Company to assume the terms of the
Employment Agreement. The term "Cause" is defined in each Employment Agreement
and generally means (i) Employee's conviction of a felony or crime involving
moral turpitude; (ii) Employee has been found to have committed fraud,
dishonesty, gross negligence, willful misconduct or conduct that is
unprofessional, unethical or detrimental to the reputation, character or
standing of the Company; (iii) Employee's failure or refusal to comply with
54
<PAGE> 66
the Company's policies, standards and regulations; or (iv) Employee's failure to
faithfully and diligently perform the duties or comply with the provisions of
the applicable Employment Agreement.
EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid by
Sepco to its Chief Executive Officer and its three other most highly compensated
executive officers for the year ended December 31, 1995. Each of the individuals
set forth below will serve in the same or similar capacities for the Company.
None of Sepco's other officers and directors received cash or non-cash
compensation in excess of $100,000 for the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------ COMPENSATION
NAME AND OTHER ANNUAL AWARDS
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS(1)
- ------------------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
David R. Little...................... 1995 $222,567 $131,888 $ -- 200,000
Chief Executive Officer
Jerry J. Jones....................... 1995 113,330 67,503 357,216(2) 89,800
Senior Vice President/Corporate
Development
Bryan H. Wimberly.................... 1995 121,967 92,589 -- 12,200
Senior Vice President/Operations
Gary A. Allcorn...................... 1995 103,707 9,059 -- --
Senior Vice President/Finance
</TABLE>
- ---------------
(1) Under the terms of the Sepco Merger, each share of Sepco Class A Common
Stock will be converted into 16 shares of Common Stock. Assuming such
conversion, the number of shares of Common Stock underlying such options
held by Messrs. Little, Jones and Wimberly will be 3,200,000, 1,436,800 and
195,200 shares, respectively.
(2) Represents payments to Mr. Jones in respect of the repurchase by the Company
of shares acquired by Mr. Jones on exercise of options held by him.
The following table sets forth certain information regarding each exercise
of stock options by certain of Sepco's executive officers during the fiscal year
ended December 31, 1995.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES ACQUIRED VALUE FISCAL YEAR-END FISCAL YEAR-END
NAME ON EXERCISE REALIZED (EXERCISABLE)(1) (EXERCISABLE)(2)
- ------------------------------ --------------- -------- ---------------------- --------------------
<S> <C> <C> <C> <C>
David R. Little............... -- $ -- 200,000 $320,000
Jerry J. Jones................ 89,800 357,216 89,800 195,764
Bryan H. Wimberly............. -- -- 12,200 34,038
</TABLE>
- ---------------
(1) Under the terms of the Sepco Merger, each share of Sepco Class A Common
Stock will be converted into 16 shares of Common Stock. Assuming such
conversion, the number of shares of Common Stock underlying such options
held by Messrs. Little, Jones and Wimberly will be 3,200,000, 1,436,800 and
195,200 shares, respectively. The options are fully vested.
(2) The value of unexercised options at fiscal year end reported above was
calculated using the value of the Sepco Class A Common Stock, as determined
by an independent appraiser for purposes of valuing shares of Sepco Common
Stock held by the Sepco ESOP.
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<PAGE> 67
The following table sets forth certain information regarding stock options
granted by Sepco to certain of its executive officers during the fiscal year
ended December 31, 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- ----------------------------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
- ---------------------- ---------- ---------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
David R. Little....... 200,000(1) 66% $7.14 10/24/2005 $898,062 $2,275,864
Jerry J. Jones........ 89,800(2) 30 6.56 08/23/2000 162,754 359,644
Bryan H. Wimberly..... 12,200(3) 4 5.90 03/31/2000 20,055 44,317
</TABLE>
- ---------------
(1) Non-qualified stock option granted on October 24, 1995 for a term of ten
years, subject to earlier termination upon termination of employment. At the
date of grant, the market value per share of the Sepco Class A Common Stock
was equal to the exercise price. The option is fully vested. Pursuant to the
terms of the Sepco Merger, the option will become exercisable for 3,200,000
shares of Common Stock at an exercise price of $.44625 per share.
(2) Non-qualified stock option granted on August 23, 1995, for a term of five
years, subject to earlier termination upon termination of employment. At the
date of grant, the market value per share of the Sepco Class A Common Stock
was equal to the exercise price. The option is fully vested. Pursuant to the
terms of the Sepco Merger, the option will become exercisable for 1,436,800
shares of Common Stock at an exercise price of $.41 per share.
(3) Non-qualified stock option granted on March 31, 1995, for a term of five
years, subject to earlier termination upon termination of employment. At the
date of grant, the market value per share of the Sepco Class A Common Stock
was equal to the exercise price. The option is fully vested. Pursuant to the
terms of the Sepco Merger, the option will become exercisable for 195,200
shares of Common Stock at an exercise price of $.36875 per share.
(4) The grant date present value reported above was calculated using the value
of the stock based upon an appraisal thereof for ESOP purposes at December
31, 1995.
BENEFIT PLANS
THE SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN
General. The Sepco ESOP was established by Sepco in January 1985, as
subsequently effective on January 1, 1993. Under the Sepco ESOP, Sepco may make
annual contributions to a trust (the "Trust") for the benefit of eligible
employees. Contributions to the Trust historically have been invested primarily
in the Sepco Class B Common Stock. As a result of the Sepco Merger, the 176,900
shares of Sepco Class B Common Stock currently held in the Trust will be
converted into an aggregate of 3,206,000 shares of Common Stock and the 38,700
shares of Sepco Class A Common Stock currently held in the Trust will be
converted into an aggregate of 619,200 shares of Common Stock. Subsequent to the
completion of the Reorganization, the Company anticipates that contributions to
the Sepco ESOP will be invested primarily in the Common Stock. In addition, the
Company anticipates that following the Reorganization, certain modifications
will be made to the Sepco ESOP to allow the employees of the Company and any
other subsidiaries to participate in the Sepco ESOP.
The Sepco ESOP is qualified under the Code. The Sepco ESOP has obtained a
favorable determination letter from the IRS and Sepco believes that the Sepco
ESOP continues to so qualify.
Administration. The Sepco ESOP is administered by a plan administrator,
currently David R. Little. In addition, certain administrative functions are
performed by employees of Sepco. No such employee receives compensation from the
Sepco ESOP for performing such functions. All other administrative expenses are
paid for by the Sepco ESOP. Following the Reorganization, the Company's
Compensation Committee will serve as administrator of the Sepco ESOP.
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<PAGE> 68
The Sepco ESOP trustee invests, manages and holds the Sepco ESOP's assets.
The Trust provides for pass-through voting rights to the Sepco ESOP participants
with respect to all shares held by the Trust when required by the Employee
Retirement Income Security Act of 1974, as amended.
Contributions. The amount and form of the annual contribution is within the
discretion of Sepco's board of directors. Such contributions are limited to a
maximum of 15% of the total compensation paid to all participants eligible to
receive an allocation during the fiscal year. Sepco contributed $150,000 for
each of the years ended December 31, 1995, 1994 and 1993.
Eligibility, Vesting and Payment of Benefits. An employee becomes eligible
to participate in the Plan after 12 consecutive months of employment, provided
the employee worked at least 1,000 hours during such 12-month period. Benefits
vested in a participant will be distributed upon the participant's separation
from service, retirement, disability or death. Participants' benefits vest based
on the number of years of service in annual 20% increments beginning on the date
on which the participant completes three years of service.
A participant may borrow up to 50% of the vested balance of his or her
account, up to a maximum of $50,000. Promissory notes to evidence such
borrowings bear interest at reasonable rates and are secured by the
participant's vested account balance.
Termination. Upon termination of the Sepco ESOP (if not replaced by a
comparable employee benefit plan), participants are entitled to receive all
amounts then credited to their accounts after payment of all expenses and
adjustments for profits and losses to the date of distribution.
NONQUALIFIED STOCK OPTION AGREEMENTS
Sepco is currently a party to certain agreements ("Nonqualified Stock
Option Agreements"), pursuant to which options to purchase shares of Sepco
Common Stock have been granted to certain executive officers and directors of
the Company. Each of the Nonqualified Stock Option Agreements between Sepco and
each of Messrs. Little, Jones and Wimberly became effective as of March 1996 and
amended and replaced existing stock option agreements to eliminate a provision
that would permit the option holder to require Sepco to purchase, at book value,
the shares of stock issued upon exercise of the option. Each of the options in
the Nonqualified Stock Option Agreements described below were granted by Sepco
and were exercisable for shares of Sepco Class A Common Stock. Pursuant to the
Sepco Merger, the options are exercisable for shares of Common Stock.
Nonqualified Stock Option Agreements
Pursuant to a Non-Qualified Stock Option Agreement, Mr. Little received a
nonqualified option to purchase the equivalent of 3,200,000 shares of Common
Stock at an exercise price of $0.44625 per share exercisable until October 24,
2005. Such option became exercisable as of the date of grant.
Pursuant to a Non-Qualified Stock Option Agreement, Mr. Jones received a
nonqualified option to purchase the equivalent of 1,436,800 shares of Common
Stock at an exercise price of $0.41 per share exercisable until August 23, 2000.
Such option became exercisable as of the date of grant.
Pursuant to a Non-Qualified Stock Option Agreement, Mr. Wimberly received a
nonqualified option to purchase the equivalent of 195,200 shares of Common Stock
at an exercise price of $0.36875 per share exercisable until March 31, 2000.
Such option became exercisable as of the date of grant.
Pursuant to Non-Qualified Stock Option Agreements, each of Messrs. Davis,
Miller and Orr received nonqualified options to purchase the equivalent of
16,000 shares of Common Stock at an exercise price of $0.578125 per share
exercisable until March 30, 1999. Such options became exercisable as of the date
of grant.
LONG-TERM INCENTIVE PLAN
In August 1996, the Company established the Index, Inc. Long-Term Incentive
Plan (the "LTIP"). The LTIP is intended to advance the best interests of the
Company, its subsidiaries and its shareholders by
57
<PAGE> 69
attracting, retaining and motivating key employees. The LTIP provides for the
grant of stock options (which may be non-qualified stock options or incentive
stock options for tax purposes), stock appreciation rights issued independent of
or in tandem with such options ("SARs"), restricted stock awards and performance
awards to certain key employees of the Company and its subsidiaries, thereby
increasing the personal stake of such key employees in the continued success and
growth of the Company. It is anticipated that approximately 30 key employees of
the Company and its subsidiaries will initially be eligible to participate in
the LTIP.
Administration
The LTIP will be administered by the Board of Directors of the Company or
the Compensation Committee or other designated committee of the Board of
Directors, which consists solely of two or more nonemployee directors of the
Company who are intended to be "Non-Employee Directors" within the meaning of
Rule 16b-3 under the Exchange Act (the Board of Directors of such committee
being referred to as the "Committee"). The Committee will have broad authority
to interpret and administer the LTIP, including the power to grant and modify
awards and the power to limit or eliminate its discretion as it may deem
advisable to comply with or obtain preferential treatment under any applicable
tax or other law, rule or regulation. The Committee will also have broad
authority to accelerate the vesting of an award or the time at which any award
is exercisable or to waive any condition or restriction on the vesting, exercise
or receipt of any award. The Board of Directors may at any time amend, suspend,
discontinue or terminate the LTIP without shareholder approval or approval of
participants, subject to certain limitations.
Shares Subject to LTIP
Initially, 800,000 shares of Common Stock (approximately 5% of the current
outstanding shares of Common Stock) will be available for issuance under the
LTIP. In addition, as of January 1 of each year the LTIP is in effect, if the
total number of shares of Common Stock issued and outstanding, not including any
shares issued under the LTIP, exceeds the total number of shares of Common Stock
issued and outstanding as of January 1 of the preceding year (or, for 1996, as
of August 12, 1996 assuming all shares issued pursuant to the Sepco Merger and
Newman Merger are issued), the number of shares available will be increased by
an amount such that the total number of shares available for issuance under the
LTIP equals 5% of the total number of shares of Common Stock outstanding, not
including any shares issued under the LTIP. Lapsed, forfeited or cancelled
awards will not count against these limits. Cash exercises of SARs and cash
settlement of other awards will also not be counted against these limits but the
total number of SARs and other awards settled in cash shall not exceed the total
number of shares authorized for issuance under the LTIP (without reduction for
issuances).
The aggregate number of shares of Common Stock subject to stock options or
SARs that may be granted to any one participant in any one year under the LTIP
shall be 400,000 (subject to certain adjustment provisions relating to changes
in capitalization). The aggregate number of shares of Common Stock that may be
granted to any one participant in any one year in respect of restricted stock
shall be 400,000 (subject to certain adjustment provisions relating to changes
in capitalization). The aggregate number of shares of Common Stock that may be
received by any one participant in any one year in respect of a performance
award shall be 400,000 (subject to certain adjustment provisions relating to
changes in capitalization) and the aggregate amount of cash that may be received
by any one participant in any one year in respect of a performance award shall
be $500,000.
Stock Options
The Committee is authorized to determine the terms and conditions of all
option grants, which may be of incentive stock options subject to the limits of
Section 422 of the Code or non-qualified stock options. The aggregate number of
shares of Common Stock that are available for incentive stock options granted
under the LTIP is 800,000 (subject to certain adjustment provisions relating to
changes in capitalization). Stock options may be awarded subject to time,
performance or other vesting limitations imposed by the Committee. The term of
an incentive stock option shall not exceed ten years from date of grant. The
exercise price of an option shall be determined by the Committee upon the option
grant, provided that the exercise price of incentive
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<PAGE> 70
stock options shall be no less than the fair market value of the Common Stock on
the date of grant. Payment of the exercise price may be made in a manner
specified by the Committee (which may include payment in cash, Common Stock, a
combination thereof, or by "cashless exercise").
Stock Appreciation Rights
The Committee is authorized to grant SARs independent of or in tandem with
options under the LTIP. The terms, conditions and exercise price of SARs granted
independent of options under the LTIP will be determined by the Committee on the
date of grant. A tandem SAR can be exercised only to the extent the option with
respect to which it is granted is then exercisable and is subject to the same
terms and conditions as the option to which it is related. An option related to
a tandem SAR will terminate automatically upon exercise of the tandem SAR.
Similarly, when an option is exercised, the tandem SARs relating to the shares
covered by such option exercise shall terminate. Any tandem SAR which is
outstanding on the last day of the term of the related option will be
automatically exercised on such date for cash.
Upon exercise of an SAR, the holder will be entitled to receive, for the
number of shares referenced by the SAR, an amount per share (the "appreciation")
equal to the difference between the base price per share (which shall be the
exercise price per share of the related option in the case of a tandem SAR) and
the fair market value (as determined by the Committee) of a share of Common
Stock on the date of exercise of the SAR. The appreciation will be payable in
cash, Common Stock or a combination of both, at the discretion of the Committee.
Restricted Stock
The Committee is authorized to award restricted stock under the LTIP
subject to such terms and conditions as the Committee may determine consistent
with the LTIP. The Committee has the authority to determine the number of shares
of restricted stock to be awarded, the price, if any, to be paid by the
recipient of the restricted stock and the date or dates on which the restricted
stock will vest. The number of shares and vesting of restricted stock may be
conditioned upon the completion of a specified period of service with the
Company or its subsidiaries or upon the attainment of specified performance
objectives based on increases in share prices, operating income, margin, sales
increases on a Company wide, division, product line or other basis, net income
before or after taxes or before or after extraordinary charges, completions of
successful acquisitions, implementation of strategic expansions, net income or
cash flow thresholds, return on common equity or any combination of the
foregoing.
Stock certificates representing the restricted stock granted to an eligible
employee may be registered in the employee's name or held by the Company prior
to the achievement of certain criteria. The Committee will determine whether an
employee will have the right to vote and/or receive dividends on the restricted
stock before it vests. No share of restricted stock may be sold, transferred,
assigned or pledged by the employee until such share has vested in accordance
with the terms of the restricted stock award. Except as otherwise specified in
the grant of a restricted stock award, in the event of an employee's termination
of employment before all his or her restricted stock has vested, or in the event
other conditions to the vesting of restricted stock have not been satisfied
prior to any deadline for the satisfaction of such conditions set forth in the
award, the shares of restricted stock that have not vested will be forfeited and
any purchase price paid by the employee will be returned to the employee. At the
time the restricted stock vests, a certificate for such vested shares will be
delivered to the employee (or the beneficiary designated by the employee, in the
event of death), free of all restrictions.
Performance Awards
The Committee is authorized to grant performance awards, which are payable
in stock, cash or a combination thereof, at the discretion of the Committee. An
employee to whom a performance award is granted will be given achievement
objectives to be reached over a specified period of time, the "performance
period". A minimum level of acceptable achievement will also be established.
Achievement objectives may be described either in terms of Company-wide
performance or in terms that are related to the performance of the
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<PAGE> 71
employee or of the division, subsidiary, department or function within the
Company in which the employee is employed. The Committee has the authority to
determine the size of the award, frequency of awards, the date or dates when
awards vest, the performance periods and the specific performance objectives to
be achieved in order to receive the award. Performance objectives, however, will
be based on increases in share prices, operating income, margin, sales increases
on a Company wide, division, product line or other basis, net income before or
after taxes or before or after extraordinary charges, completions of successful
acquisitions, implementation of strategic expansions, net income or cash flow
thresholds, return on common equity or any combination of the foregoing.
If at the end of the performance period the specified objectives have been
fully attained, the employee will be deemed to have fully earned the performance
award. If such objectives have been partially attained, the employee will be
deemed to have partly earned the performance award and will become entitled to
receive a portion of the total award. If the required minimum level of
achievement has not been met, the employee will not be entitled to any part of
the performance award. If a performance award is granted after the start of a
performance period, the award will be reduced to reflect the portion of the
performance period during which the award was in effect.
An employee who, by reason of death, disability or retirement, terminates
employment before the end of the performance period will be entitled to receive,
to the extent earned, a portion of the award which is proportional to the
portion of the performance period during which the employee was employed. An
employee who terminates employment for any other reason will not be entitled to
any part of the award unless the Committee determines otherwise; however, the
Committee may in no event pay the employee more than that portion of the award
which is proportional to his or her period of actual service.
Change of Control
Upon the occurrence of a "Change of Control" (as defined below) of the
Company, all outstanding shares of restricted stock and performance awards will
immediately vest. All stock options and all SARs granted under the LTIP and held
by then-current employees will become immediately exercisable and will remain
exercisable for three years (but not beyond their expiration date) following the
employee's termination of employment for any reason other than for dishonesty,
conviction of a felony, wilful unauthorized disclosure of confidential
information or wilful refusal to perform the duties of such employee's position.
In addition, each participant in the LTIP will receive the maximum performance
award he or she could have earned for the proportionate part of the performance
period prior to the Change of Control and will retain the right to earn any
additional portion of his or her award if he or she remains in the Company's
employ.
A "Change of Control" shall be deemed to have occurred if:
(1) any Person (as defined below), other than a Designated Person (as
defined below), is or becomes the Beneficial Owner (as defined below) of
securities of the Company representing 35% or more of the Voting Power (as
defined below);
(2) there shall occur a change in the composition of a majority of the
Board of Directors within any period of four consecutive years which change
shall not have been approved by a majority of the Board of Directors as
constituted immediately prior to the commencement of such period;
(3) at any meeting of the shareholders of the Company called for the
purpose of electing directors, more than one of the persons nominated by
the Board of Directors for election as directors shall fail to be elected;
or
(4) the shareholders of the Company approve a merger, consolidation,
sale of substantially all assets or other reorganization of the Company,
other than a reincorporation, in which the Company does not survive.
For purposes of the LTIP, (i) "Person" shall have the meaning set forth in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act as in effect on August 15,
1996, (ii) "Beneficial Owner" shall have the meaning set forth in Rules 13d-3
and 13d-5 promulgated under the Exchange Act as in effect on August 15,
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<PAGE> 72
1996; (iii) "Voting Power" shall mean the voting power of the outstanding
securities of the Company having the right under ordinary circumstances to vote
at an election of the Board of Directors; and (iv) "Designated Person" shall
mean any Person who at August 12, 1996 is a Beneficial Owner of 10% or more of
the Common Stock or whose Beneficial Ownership of securities is solely the
result of such Person acquiring securities as an underwriter in an underwritten
public offering of such securities.
Grants
In anticipation of the Reorganization, the Company has granted to 24
employees of the Company options to purchase an aggregate of 456,000 shares of
Common Stock at an exercise price of $.578125 per share. The exercise price is
based on the fair market value of the stock using information from an
independent appraisal that established the value of the Sepco Common Stock at
December 31, 1995 and was used by Sepco in establishing the conversion ratio for
the Class A Common Stock and Class B Common Stock of Sepco. Such grants are
subject to the consummation of the Sepco Merger, are for a term of five years
from the effective date of the Sepco Merger and are fully vested on the date of
the grant. The options are also subject to immediate vesting in the event of a
Change of Control of the Company. Of the grants made, Gary Allcorn, Senior Vice
President/Finance of Sepco and the Company, was granted options to purchase an
aggregate of 80,000 shares of Common Stock at $.578125 per share.
Amendments
The Board of Directors may at any time and from time to time and in any
respect amend or modify the LTIP. The Committee shall have the authority to
amend any award to include any provision which, at the time of such amendment,
is authorized under the terms of the LTIP; however, no outstanding award may be
revoked or altered in a manner unfavorable to the holder without the written
consent of the holder.
Federal Income Tax Consequences
Incentive Stock Options. The grant of incentive stock options under the
LTIP to an employee does not result in any income tax consequences. The exercise
of an incentive stock option does not result in any income tax consequences to
the employee if the incentive stock option is exercised by the employee during
his employment with the Company or a subsidiary, or within a specified period
after termination of employment. However, the excess of the fair market value of
the shares of stock as of the date of exercise over the option price is a tax
preference item for purposes of determining an employee's alternative minimum
tax. An employee who sells shares acquired pursuant to the exercise of an
incentive stock option after the expiration of (i) two years from the date of
grant of the incentive stock option and (ii) one year after the transfer of the
shares to him (the "Waiting Period") will generally recognize long term capital
gain or loss on the sale.
An employee who disposes of his incentive stock option shares prior to the
expiration of the Waiting Period (an "Early Disposition") generally will
recognize ordinary income in the year of sale in an amount equal to the excess,
if any, of (a) the lesser of (i) the fair market value of the shares as of the
date of exercise or (ii) the amount realized on the sale, over (b) the option
price. Any additional amount realized on an Early Disposition should be treated
as capital gain to the employee, short or long term, depending on the employee's
holding period for the shares. If the shares are sold for less than the option
price, the employee will not recognize any ordinary income but will recognize a
capital loss, short or long term, depending on the holding period.
The Company will not be entitled to a deduction as a result of the grant of
an incentive stock option, the exercise of an incentive stock option or the sale
of incentive stock option shares after the Waiting Period. If an employee
disposes of his incentive stock option shares in an Early Disposition, the
Company will be entitled to deduct the amount of ordinary income recognized by
the employee.
Non-Qualified Stock Options. The grant of non-qualified stock options under
the LTIP will not result in the recognition of any taxable income by the
employee. An employee will recognize ordinary income on the date of exercise of
the non-qualified stock option equal to the difference between (i) the fair
market value of the shares acquired on the date such shares were acquired and
(ii) the exercise price. The tax basis of these
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<PAGE> 73
shares for the purpose of a subsequent sale includes the option price paid and
the ordinary income reported on exercise of the option. The income reportable on
exercise of the non-qualified stock option is subject to federal and state
income and employment tax withholding. Generally, the Company will be entitled
to a deduction in the amount reportable as income by the employee on the
exercise of a non-qualified stock option.
Stock Appreciation Rights. SARs granted under the LTIP do not result in
taxable income to the employee at that time. The issuance of shares of Common
Stock or the payment of cash, without other payment by the recipient, will be
treated as additional compensation for services to the Company. The employee
will recognize taxable income equal to cash received or the fair market value of
the shares on the date of receipt, which becomes the tax basis in a subsequent
sale. Generally, the Company will be entitled to a corresponding deduction in an
amount equal to the income recognized by the employee.
Restricted Stock Grants. Restricted stock granted under the LTIP generally
will not be taxed to the recipient, nor deductible by the Company, at the time
of grant. Restricted Stock Grants involve the issuance of stock to an employee
subject to specified restrictions as to sale or transferability of the stock
and/or subject to a substantial risk of forfeiture. On the date the restrictions
lapse, or the performance goals are met, and the stock becomes transferable or
not subject to a substantial risk of forfeiture, whichever is applicable, the
recipient recognizes ordinary income equal to the excess of the fair market
value of the stock on that date over the purchase price paid for the stock, if
any. The employee's tax basis for the stock includes the amount paid for the
stock, if any, and the income recognized. Generally, the Company will be
entitled to a corresponding tax deduction in an amount equal to the income
recognized by the employee.
Performance Awards. Performance awards involve the issuance of shares of
stock, cash, or a combination of both, without any payment, as compensation for
services to the Company only after satisfaction of specified performance goals
established by the Committee and certification by the Committee, prior to
payment, that the goals have been satisfied. Generally, the Company will be
entitled to a corresponding tax deduction in an amount equal to and in the year
income is recognized by the employee. See the following discussion of
"performance based" compensation.
Compensation Deduction Limitation. Under Section 162(m) of the Code, the
Company's tax deduction for certain compensation paid to designated executives
is limited to $1 million per year. These executives include the Chief Executive
Officer and the next four highest compensated officers of the Company. Section
162(m) provides an exception from this deduction limitation for certain
"performance based" compensation approved by a committee consisting solely of at
least two "outside directors". The LTIP is generally designed to be able to
satisfy these statutory requirements for stock options and SAR's, when the
exercise price is not less than fair market value on the date of grant, and for
performance awards (including restricted stock).
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of each equity security of Sepco and Newman prior to the completion of
the Reorganization and with respect to beneficial ownership of the Common Stock
and Series B Convertible Preferred Stock after giving effect to the
Reorganization by: (i) all persons known to the Company to be the beneficial
owner of 5% or more of each of the foregoing equity securities, (ii) each
director of the Company, (iii) each executive officer of the Company and (iv)
all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
PRIOR TO FOLLOWING
REORGANIZATION REORGANIZATION
--------------------- ----------------------
NAME AND ADDRESS OF NUMBER OF PERCENT NUMBER OF PERCENT
BENEFICIAL OWNER(1) SHARES(2) OF CLASS SHARES(2) OF CLASS
- ---------------------------------------------------- --------- -------- ---------- --------
<S> <C> <C> <C> <C>
Gary A. Allcorn(3)
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Sepco Class A Common Stock........................ 559,999 69.5
Sepco Class B Common Stock........................ 1,474 *
Sepco Class A Convertible Preferred Stock......... 15,000 76.9
Common Stock...................................... 8,986,698 50.6
Series B Convertible Preferred Stock.............. 15,000 76.9
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Kacey Joyce, Andrea Rae, Nicholas David Little
1988 Trusts, Gary A. Allcorn, Trustee(3)
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Sepco Class A Common Stock........................ 533,199 61.7
Sepco Class A Convertible Preferred Stock......... 15,000 76.9
Common Stock...................................... 8,531,184 43.3
Series B Convertible Preferred Stock.............. 15,000 76.9
David R. Little(4)
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Sepco Class A Common Stock........................ 259,800 27.1
Sepco Class B Common Stock........................ 8,800 5.0
Common Stock...................................... 4,316,284 22.5
Bryan H. Wimberly(5)
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Sepco Class A Common Stock........................ 102,400 13.3
Sepco Class B Common Stock........................ 1,753 *
Common Stock...................................... 1,670,170 10.3
Jerry J. Jones(6)
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Sepco Class A Common Stock........................ 89,800 10.6
Sepco Class B Common Stock........................ 8 *
Common Stock...................................... 1,436,945 8.25
SEPCO ESOP
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Sepco Class A Common Stock........................ 38,700 5.1
Sepco Class B Common Stock........................ 176,900 100.0
Common Stock...................................... 3,825,194 23.9
</TABLE>
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<PAGE> 75
<TABLE>
<CAPTION>
PRIOR TO FOLLOWING
REORGANIZATION REORGANIZATION
--------------------- ----------------------
NAME AND ADDRESS OF NUMBER OF PERCENT NUMBER OF PERCENT
BENEFICIAL OWNER(1) SHARES(2) OF CLASS SHARES(2) OF CLASS
- ---------------------------------------------------- --------- -------- ---------- --------
<S> <C> <C> <C> <C>
Thomas V. Orr(7)
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Sepco Class A Common Stock........................ 1,000 *
Common Stock...................................... 16,000 *
Kenneth H. Miller(8)
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Sepco Class A Common Stock........................ 1,000 *
Common Stock...................................... 16,000 *
Cletus Davis(9)
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Sepco Class A Common Stock........................ 1,000 *
Common Stock...................................... 16,000 *
Little & Company Investment Securities(10)
211 West Wall Street
Midland, Texas 79701
Newman Common Stock............................... 1,520,000 42.7
Common Stock...................................... 380,000 2.4
Glenn A. Little(10)(11)
211 West Wall Street
Midland, Texas 79701
Newman Common Stock............................... 1,520,000 42.7
Common Stock...................................... 380,000 2.4
Patricia de Little(10)(12)
211 West Wall Street
Midland, Texas 79701
Newman Common Stock............................... 1,520,000 42.7
Common Stock...................................... 380,000 2.4
Tim Halter(13)
Halter Financial Group
4851 LBJ Freeway, Suite 201
Dallas, Texas 75244
Newman Common Stock............................... 1,389,564 54.3
Common Stock...................................... 347,391 2.2
All executive officers and directors as a group (7
persons)(3)(4)(5)(6)(7)(8)(9)
Sepco Class A Common Stock........................ 1,014,999 86.5
Sepco Class B Common Stock........................ 12,035 6.8
Sepco Class A Convertible Preferred Stock......... 15,000 76.9
Common Stock...................................... 16,458,097 72.7
Series B Convertible Preferred Stock.............. 15,000 76.9
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise noted, the Company believes that each person named in the
table above has sole voting and investment power with respect to all shares
beneficially owned by such person.
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<PAGE> 76
(2) Each beneficial owner's percentage ownership is determined by assuming that
options, warrants and other convertible securities that are held by such
person (but not those held by any other person) and are exercisable or
convertible within 60 days have been exercised or converted. A person is
deemed to be the beneficial owner of securities that can be acquired by
such person within 60 days upon the exercise of options or warrants or
conversion or convertible securities.
(3) Includes 428,199 shares of Sepco Class A Common Stock and 15,000 shares of
Sepco Class A Convertible Preferred Stock owned by the Kacey Joyce, Andrea
Rae and Nicholas David Little 1988 Trusts (the "Trusts") for which Mr.
Allcorn serves as trustee. Because of this relationship, Mr. Allcorn may be
deemed to be the beneficial owner of such shares and the 105,000 shares of
Sepco Class A Common Stock issuable upon conversion of the shares of Sepco
Class A Convertible Preferred Stock held by the Trusts. Also includes 5,000
shares of Sepco Class A Common Stock issuable upon exercise of an option
and 1,474 shares of Sepco Class B Common Stock held of record by the Sepco
ESOP for Mr. Allcorn's account.
(4) Includes 200,000 shares of Sepco Class A Common Stock issuable to Mr.
Little upon exercise of an option and 8,800 shares of Sepco Class B Common
Stock held of record by the Sepco ESOP for Mr. Little's account.
(5) Includes 12,600 shares of Sepco Class A Common Stock owned by a trust for
which Mr. Wimberly is one-third beneficiary and 12,200 shares of Sepco
Class A Common Stock issuable upon exercise of an option granted to Mr.
Wimberly. Also includes 1,753 shares of Sepco Class B Common Stock held by
the Sepco ESOP for Mr. Wimberly's account.
(6) Includes 89,800 shares of Sepco Class A Common Stock issuable upon exercise
of an option granted to Mr. Jones and 8 shares of Sepco Class B Common
Stock held by the Sepco ESOP for Mr. Jones' account.
(7) Includes 1,000 shares of Sepco Class A Common Stock issuable upon exercise
of an option.
(8) Includes 1,000 shares of Sepco Class A Common Stock issuable upon exercise
of an option.
(9) Includes 1,000 shares of Sepco Class A Common Stock issuable upon exercise
of an option.
(10) Includes 1,000,000 shares of Newman Common Stock issuable upon exercise of
a warrant.
(11) Mr. Glenn Little is an officer, director and principal shareholder of LITCO
and, therefore, may be deemed to be the beneficial owner of the shares of
Newman Common Stock and warrants owned by LITCO.
(12) Mrs. Little is the wife of Glenn A. Little and is an officer and director
of LITCO and, therefore, may be deemed to be the beneficial owner of the
shares of Newman Common Stock and warrants owned by LITCO.
(13) Includes 1,389,564 shares of Newman Common Stock held of record by Halter.
Mr. Halter is the sole director, officer and shareholder of Halter and,
because of such relationships, may be deemed to be the beneficial owner of
such shares.
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<PAGE> 77
CERTAIN TRANSACTIONS
SEPCO
In December 1989, Sepco restructured certain loans previously made by Sepco
to David R. Little, Chairman of the Board and Chief Executive Officer of the
Company, pursuant to which Mr. Little executed two promissory notes in the
amounts of $149,910 and $58,737, respectively, each bearing interest at 9% per
annum. The notes require monthly payments of $1,349 and $528, respectively. The
outstanding balances of such loans at August 5, 1996, were $127,813 and $50,080,
respectively.
In December 1993, Sepco loaned Mr. Little approximately $210,940 to
purchase 59,080 shares of Sepco Class A Common Stock. The loan bore interest at
6% per annum and provided for annual interest payments and one principal payment
upon sale of the stock which secured such loan. The loan was repaid on August 5,
1996. Sepco from time to time also has made non-interest bearing advances to Mr.
Little that as of August 5, 1996 totaled approximately $330,100. The largest
aggregate amount of Mr. Little's indebtedness outstanding to Sepco during the
year ended December 31, 1995 was approximately $762,500.
Mr. Allcorn, Senior Vice President/Finance of the Company, is the trustee
of three trusts for the benefit of Mr. Little's children, each of which holds
142,733 shares of Sepco Class A Common Stock and 15,000 shares of Sepco Class A
Convertible Preferred Stock. Mr. Allcorn exercises sole voting and investment
power over the shares held by such trusts.
Mr. Little has personally guaranteed all of the obligations of Sepco under
the loan agreement with its principal lender. In addition, all of the shares of
Sepco Stock held in trust for Mr. Little's children have been pledged to such
lender to secure the obligations of Sepco under the loan agreement.
COMPARISON OF RIGHTS OF SHAREHOLDERS OF
SEPCO AND THE COMPANY
The rights of the shareholders of Sepco currently are governed by Sepco's
articles of incorporation, as amended, Sepco's bylaws and the laws of the State
of Texas. The rights of the shareholders of the Company will be governed by the
Company's Articles, the Company's Bylaws and the laws of the State of Texas.
Pursuant to the Sepco Merger, the shareholders of Sepco will receive securities
of the Company, which differ in certain respects from the securities of Sepco.
COMMON STOCK
The former holders of Sepco Class A Common Stock and Sepco Class B Common
Stock, as holders of Common Stock, will no longer have the right to a class vote
with respect to certain matters that under Texas law require the approval of
each class or series of stock. In addition, the holders of Sepco Common Stock
currently have the right to approve any changes in the terms of Sepco's
preferred stock. The holders of Common Stock do not have the right to approve
any changes in the terms of the Series B Convertible Preferred Stock or the
Series A Preferred Stock. The holders of Sepco Class B Common Stock currently
are entitled to receive $7.5075 per share of Sepco Class B Common Stock held
upon the liquidation of Sepco. This liquidation right is in preference to the
liquidation rights of the holders of Sepco Class A Convertible Preferred Stock.
The holders of Common Stock have no such liquidation rights. See "Description of
Company Capital Stock".
PREFERRED STOCK
The holders of Sepco Class A Convertible Preferred Stock and Sepco
Preferred Stock, except as otherwise provided by law, have no right to vote on
the election of directors or on any matters presented to the Sepco shareholders.
Each share of Series A Preferred Stock and Series B Convertible Preferred Stock
entitles the holder thereof to one-tenth of a vote on all matters to come before
a meeting of the shareholders of the Company.
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<PAGE> 78
VOTE REQUIRED ON CERTAIN MATTERS
The Company's Articles provide, as permitted under the TBCA, that with
respect to certain matters for which the affirmative vote of the holders of more
than a majority of the shares entitled to vote is required by law, the
affirmative vote of the holders of only a majority of the shares of the Company
shall be required. The Sepco articles of incorporation had no such provision
and, under the TBCA, for such matters as amendments to the articles of
incorporation, mergers and voluntary dissolution of the corporation, the
affirmative vote of the holders of two-thirds of the outstanding shares entitled
to vote on such matters is required. Under the Company's Articles, the vote of
only the holders of a majority of the outstanding shares entitled to vote on
such matters is required. If a class or series of outstanding shares of stock of
the Company is entitled to vote on such a matter, approval by the affirmative
vote of the holders of a majority of the shares within such class or series
would be required.
COMPARISON OF RIGHTS OF HOLDERS OF
NEWMAN COMMON STOCK AND COMMON STOCK
After the consummation of the Newman Merger, Newman shareholders will
become shareholders of the Company. The rights of the shareholders of the
Company will be governed by the Company's Articles, the Company's Bylaws and the
laws of the State of Texas. The Company's Articles and the Company's Bylaws are
set forth in full as Appendices E and F, respectively, to this Proxy
Statement/Prospectus.
Although it is impractical to note all of the differences between the
corporation statutes of Texas and New Mexico, the Company believes that the most
significant differences, as they impact the rights of shareholders, are
summarized below. The summary does not purport to be complete and is qualified
in its entirety by reference to the TBCA and the NMBCA.
MERGERS
Under the TBCA, shareholders have the right, subject to certain exceptions,
to vote on all mergers to which the corporation is a party. In certain
circumstances, different classes of securities may be entitled to vote
separately as classes with respect to such mergers. Under the Company's
Articles, approval of the holders of at least a majority of all outstanding
shares entitled to vote is required to approve a merger. Under the NMBCA,
approval by the holders of a majority of all outstanding shares is required,
unless the articles of incorporation provide otherwise. Newman's current
articles of incorporation do not provide otherwise.
The approval of the shareholders of the surviving corporation in a merger
is not required under Texas law if (i) the corporation is the sole surviving
corporation in the merger, (ii) there is no amendment to the surviving
corporation's articles of incorporation, (iii) each shareholder holds the same
number of shares in the surviving corporation immediately after the merger as
prior thereto, and such shares have identical designations, preferences,
limitations and relative rights, (iv) the voting power of the shares in the
surviving corporation immediately after the merger, plus the voting power of the
shares issued in the merger, does not exceed the voting power of the shares
outstanding prior to the merger by more than 20%, (v) the number of shares in
the surviving corporation outstanding immediately after the merger, plus the
shares issued in the merger, does not exceed the number of shares outstanding
prior to the merger by more than 20% and (vi) the board of directors of the
surviving corporation adopts a resolution approving the plan of merger.
Under the NMBCA, a vote of the shareholders is not required if (i) the
articles of incorporation of the surviving corporation do not differ except in
name from those of the corporation before the merger, (ii) each holder of shares
of the surviving corporation which were outstanding immediately before the
effective date of the merger is to hold the same number of shares with identical
rights immediately thereafter, (iii) the number of voting shares outstanding
immediately after the merger, plus the number of voting shares issuable on
conversion of other securities issued by virtue of the terms of the merger and
on exercise of rights and warrants so issued, will not exceed by more than 20%
the number of voting shares outstanding immediately before the merger and (iv)
the number of participating shares outstanding immediately after the merger,
plus the number of participating shares issuable on conversion of other
securities issued by virtue of the terms of the merger and on exercise of rights
and warrants so issued, will not exceed by more than 20% the number of
participating shares outstanding immediately before the merger.
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<PAGE> 79
APPRAISAL RIGHTS
Shareholders of Texas corporations are entitled to exercise certain
dissenters' rights in the event of a sale, lease, exchange or other disposition
of all, or substantially all, of the property and assets of the corporation,
and, with the exceptions discussed below, a merger or consolidation.
Shareholders of New Mexico corporations are entitled to exercise certain
dissenter's rights in the event of a merger, consolidation, sale, exchange or
certain other dispositions of all, or substantially all, of the property and
assets of the corporation, and certain amendments to articles of incorporation
which materially and adversely affect their rights appurtenant to the dissenting
shareholders' shares. See "The Reorganization -- Rights of Dissenting
Shareholders". In general, no shareholder vote is required for a sale of all or
substantially all of the assets of a Texas corporation under Texas law as long
as the corporation continues in business or applies a portion of the proceeds
received in the sale to a new business. New Mexico does not have a similar
provision.
No appraisal rights are available under Texas or New Mexico law for the
holders of any shares of a class or series of stock of a Texas or New Mexico
corporation which is a party to a merger if that corporation survives the merger
and if the merger did not require the vote of the holders of that class or
series of such corporation's stock.
Texas law also contains a provision which states that shareholders do not
have appraisal rights in connection with a merger where, on the record date
fixed to determine the shareholders entitled to vote on the merger or
consolidation, the stock of the corporation is listed on a national securities
exchange or is held of record by more than 2,000 shareholders, unless any of the
exceptions discussed below concerning consideration paid to the shareholder for
his shares is met. Under Texas law, a shareholder will be entitled to dissent
and be paid for his shares if, notwithstanding the above, the shareholder is
required to accept for his shares any consideration other than (i) shares of
stock of a corporation which, immediately after the effective date of the
merger, are listed on a national securities exchange or are held of record by
not less than 2,000 shareholders and (ii) cash in lieu of fractional shares
otherwise entitled to be received. New Mexico law does not contain any similar
provisions.
SPECIAL MEETINGS
Under the TBCA, a special meeting of shareholders of a Texas corporation
may be called by the president, the board of directors, such other persons
authorized in the articles of incorporation or shareholders. The Company's
Articles provide that the holders of at least 30% of all the votes entitled to
be cast are eligible to call a special meeting.
Under the NMBCA, a special meeting may be called by a majority of the board
of directors, or by shareholders entitled to vote at least 10% of the votes to
be cast, or such other persons as authorized by the articles of incorporation or
by the bylaws. Newman's current Bylaws do not authorize any other such persons.
SHAREHOLDER ACTION WITHOUT A MEETING
Under both the TBCA and the NMBCA, shareholders may act without a meeting
if a consent in writing to such action is signed by all shareholders entitled to
vote. In addition, Texas law permits the articles of incorporation of a Texas
corporation to provide that the shareholders may take action without a meeting
if a consent in writing to such action is signed by the shareholders having the
minimum number of votes that would be necessary to take such action at a
meeting. The Company's Articles contain such a provision. The NMBCA does not
contain any similar provision.
ELECTION OF DIRECTORS
Under the TBCA, the number of directors shall be fixed by the articles of
incorporation or the bylaws, except with regard to the number of initial
directors, which shall be fixed by the articles of incorporation. Under the
Company's Articles, no shareholders are entitled to cumulative voting in the
election of directors.
The TBCA further provides that the number of directors may be increased or
decreased from time to time by amendment to, or in the manner provided in, the
articles of incorporation or the bylaws, but no
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decrease shall have the effect of shortening the term of an incumbent director.
At the first annual meeting of the shareholders and at each annual meeting
thereafter, the holders of shares entitled to vote in the election of directors
shall elect directors to hold office until the next succeeding annual meeting.
Under the NMBCA, the number of directors shall be fixed by the articles of
incorporation or the bylaws, except with regard to the number of initial
directors, which shall be fixed by the articles of incorporation. The number of
directors may be increased or decreased from time to time by amendment to, or in
the manner provided in, the articles of incorporation or the bylaws, but no
decrease shall have the effect of shortening the term of an incumbent director.
At the first annual meeting of the shareholders and at each annual meeting
thereafter, the holders of shares entitled to vote in the election of directors
shall elect directors to hold office until the next succeeding annual meeting.
New Mexico law provides that the articles of incorporation may confer cumulative
voting upon its shareholders by an affirmative statement. Newman's articles of
incorporation do not confer any such right.
VOTING ON OTHER MATTERS
Amendments to the Articles of Incorporation. Under the Company's Articles,
an amendment to the articles of incorporation requires the approval of the
holders of a majority of the outstanding shares of the corporation entitled to
vote thereon. If a class or series of outstanding shares is entitled to vote on
an amendment, approval by the affirmative vote of the holders of a majority of
the shares within such class or series also is required.
Under New Mexico law, an amendment to the articles of incorporation
requires the approval of the holders of a majority of the outstanding shares of
the corporation entitled to vote thereon. If a class or series of outstanding
shares is entitled to vote on an amendment, approval by the affirmative vote of
the holders of a majority of the shares within such class or series is required.
Dissolution of the Corporation. Under the TBCA, the voluntary dissolution
of a corporation by an act of the corporation requires the approval of the
holders of at least two-thirds of the total outstanding shares of the
corporation, unless any class or series is entitled to vote as a class thereon,
in which event the resolution shall require the affirmative vote of two-thirds
of the shareholders of each class or series. The Company's Articles have reduced
this vote requirement to a majority of the outstanding shares entitled to vote
on the matter. See "Comparison of Rights of Shareholders of Sepco and the
Company -- Vote Required on Certain Matters".
Under the NMBCA, the voluntary dissolution of a corporation by an act of
the corporation requires the approval of the holders of a majority of the total
outstanding shares of the corporation, unless any class or series is entitled to
vote as a class thereon, in which event the resolution shall require the
affirmative vote of a majority of the shareholders of each class or series.
DISTRIBUTIONS TO SHAREHOLDERS
A Texas corporation may make distributions only out of surplus, which is
defined as the excess of net assets of a corporation over its stated capital.
Further, a Texas corporation may not make a distribution if after giving effect
to the distribution, the corporation would be insolvent.
A New Mexico corporation may make distributions as long as after giving
effect to the distribution the corporation is able to pay its debts as they come
due in the usual course of business or the corporation's total assets are
greater than the sum of its total liabilities and (unless the articles of
incorporation otherwise permit) the corporation would be able to pay the maximum
amount, in any liquidation, on shares of stock having preferential rights in
liquidation. Newman's current Articles of Incorporation do not contain such a
provision.
LIQUIDATION RIGHTS
Generally, under Texas and New Mexico law, shareholders are entitled to
share ratably in the distribution of assets upon the dissolution of their
corporation. Preferred shareholders, if any, typically do not participate in the
distribution of assets of a dissolved corporation beyond their established
contractual preferences. Once the
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rights of any preferred shareholders have been fully satisfied, common
shareholders are entitled to the distribution of any remaining assets.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Texas and New Mexico law both permit a corporation to set limits on the
extent of a director's liability. The TBCA and the NMBCA permit a corporation to
indemnify an officer, director, employee and agent who is the defendant or
respondent to a proceeding if such person (i) acted in good faith, (ii)
reasonably believed that his conduct was in the corporation's best interest if
he was acting in his official capacity, and if he was not acting in his official
capacity, that his conduct was not opposed to the best interests of the
corporation and (iii) had no reason to believe his conduct was unlawful in the
case of a criminal proceeding.
New Mexico law prohibits indemnification in any respect of a proceeding
charging the receipt of improper benefit, or if the director is found liable to
the corporation. Texas law allows a corporation to indemnify a director for the
reasonable expenses actually incurred by the person in connection with a
proceeding finding the director in receipt of improper benefit or liable to the
corporation if the director (i) acted in good faith, (ii) reasonably believed
that his conduct was in the corporation's best interest and (iii) had no reason
to believe his conduct was unlawful in the case of a criminal proceeding.
However, Texas law prohibits indemnification in any proceeding where the
director is found liable for willful or intentional misconduct in the
performance of his duty to the corporation. The Company's Articles authorize
indemnification of officers, directors and others to the fullest extent
permitted by Texas law. Under Texas law, a corporation may also provide for
indemnification of its directors and officers for liabilities not otherwise
permitted to be indemnified as long as such indemnity in excess of the
indemnification otherwise permitted is approved by shareholders.
REMOVAL OF DIRECTORS
The TBCA requires that the directors be removed in accordance with the
provisions of the bylaws or the articles of incorporation. Otherwise, each
director shall hold office for the elected term and until the successor shall
have been elected and qualified. The bylaws or the articles of incorporation may
provide that at any meeting of shareholders called expressly for the purpose of
director removal, any director or the entire board may be removed, with or
without cause, by a vote of the holders of a specified portion, not less than a
majority, of the shares entitled to vote at an election of directors, subject to
any further restrictions on removal that may be contained in the bylaws. The
Company's Bylaws contain such a provision.
The NMBCA provides that any director can be removed, with or without cause,
by a vote of the holders of not less than a majority of shares entitled to vote
at an election of directors. In the case of a corporation having cumulative
voting, if less than the entire board is to be removed, no one of the directors
may be removed if the votes cast against removal would be sufficient to elect
him if then cumulatively voted at an election of the entire board of directors,
or, if there are classes of directors, at an election of the class of directors
of which he is part.
INSPECTION OF BOOKS AND RECORDS
The TBCA and the NMBCA both provide that a corporation shall keep correct
and complete books and records of account and shall keep minutes of the
proceedings of its shareholders and board of directors. The corporation shall
keep at its registered office or principal place of business, or at the office
of its transfer agent or registrar, a record of its shareholders, giving the
names and addresses of all shareholders and the number and class of the
shareholders and the number and the class of the shares held by each.
Further, both the TBCA and the NMBCA provide that any person who has been a
shareholder for at least six months preceding his demand, or shall be the holder
of at least six months preceding his demand, or who is the holder of at least 5%
of all of the outstanding shares of a corporation, is entitled to personally, or
by agent or attorney, examine a corporation's relevant books and records for any
proper purpose. The shareholder must issue a written demand stating the purpose
of the inspection, and may examine the books and records at a reasonable time
and make extracts therefrom.
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DESCRIPTION OF COMPANY CAPITAL STOCK
GENERAL
The Company has an authorized capitalization of 110,000,000 shares of
capital stock, consisting of 100,000,000 shares of Common Stock and 10,000,000
shares of preferred stock, of which 1,000,000 shares have been designated Series
A Preferred Stock, and 1,000,000 shares of which have been designated Series B
Convertible Preferred Stock. As of August 1, 1996, there were 100 shares of
Common Stock, no shares of Series A Preferred Stock and no shares of Series B
Convertible Preferred Stock outstanding. As of such date, there was one holder
of Common Stock of record.
COMMON STOCK
Dividends. The holders of shares of Series B Convertible Preferred Stock
are entitled to dividends before the payment of any dividends to holders of
shares of Common Stock. The holders of shares of Common Stock have no right or
preference to the holders of shares of any other class of capital stock of the
Company in respect of the declaration or payment of any dividends or
distributions by the Company. The holders of shares of Common Stock shall be
entitled to equally receive any dividends or distributions, if and when declared
by the Board of Directors out of any funds legally available for that purpose.
Liquidation, Dissolution or Winding Up. Subject to the required cash
payments to the Series A Preferred Stock and the Series B Convertible Preferred
Stock, the remainder of the assets of the Company, if any, shall be divided and
distributed ratably among the holders of the Series B Convertible Preferred
Stock and the Common Stock.
Redemption. No shares of Common Stock are callable or redeemable by the
Company.
Conversion. No holder of Common Stock has the right to convert or exchange
any such shares with or into any other shares of capital stock of the Company.
Voting. Each share of Common Stock entitles the holder thereof to one vote,
in person or by proxy, at any and all meetings of the shareholders of the
Company on all propositions presented to the shareholders generally.
PREFERRED STOCK
Dividends. The holders of shares of Series A Preferred Stock shall not as a
matter of right be entitled to be paid or receive or have declared or set apart
for such Series A Preferred Stock, any dividends or distributions of the
Company. The holders of shares of Series B Convertible Preferred Stock receive
dividends out of any funds legally available for that purpose at the annual rate
of 6% per annum of the par value and no more. These dividends are payable in
cash monthly on the last day of each month. The dividends accrue from the date
the Series B Convertible Preferred Stock are issued and are considered to accrue
from day to day, whether or not earned or declared. The dividends are payable
before any dividends are paid, declared, or set apart for any other capital
stock of the Company. The dividends are cumulative so that if for any dividend
period the dividends on the outstanding Series B Convertible Preferred Stock are
not paid or declared and set apart, the deficiency shall be fully paid or
declared and set apart for payment, without interest, before any distribution
(by dividend or otherwise) is paid on, declared, or set apart for any other
capital stock of the Company. The holders of shares of Series B Convertible
Preferred Stock shall not be entitled to receive any other dividends or
distributions.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, the holders of
outstanding shares of Series A Preferred Stock shall be entitled to receive
$100.00 in cash for each share of Series A Preferred Stock, before any
distribution of the assets of the Company shall be made to the holders of the
outstanding shares of Series B Convertible Preferred Stock, unless funds
necessary for such payment shall have been set aside in trust for the account of
the holders of outstanding shares of Series A Preferred Stock so as to be and
continue to be available therefor. After the $100.00 distribution per share of
the Series A Preferred Stock, the holders of outstanding shares of Series B
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Convertible Preferred Stock shall be entitled to receive $100.00 in cash for
each share, before any distribution of the assets of the Company shall be made
to the holders of the outstanding shares of any other capital stock of the
Company, unless funds necessary for such payment shall have been set aside in
trust for the account of the holders of outstanding shares of Series B
Convertible Preferred Stock so as to be and continue to be available therefor.
Redemption. No shares of Series A Preferred Stock shall be callable or
redeemable by the Company. The Company, at the option of its Board of Directors,
may at any time five years from the date of issuance redeem the whole or any
part of the outstanding Series B Convertible Preferred Stock shares by paying in
cash $110.00 per share plus all dividends accrued, unpaid, and accumulated
through and including the redemption date. If only a part of the outstanding
Series B Convertible Preferred Stock shares is redeemed, redemption will be pro
rata. No Series B Convertible Preferred Stock shares may be redeemed unless all
accrued dividends on all Series B Convertible Preferred Stock shares have been
paid for all past dividend periods and full dividends for the current period,
except those to be redeemed, have been paid or declared and set apart for
payment.
The holders of any Series B Convertible Preferred Stock shares called for
redemption are entitled to receive 112 shares of Common Stock for each share of
Series B Convertible Preferred Stock. The holders are entitled to exercise said
conversion right at any time after redemption notice is given and before the
close of business on the fifth day before the redemption date stated in the
notice. The right to receive the converted shares is at the shareholder's option
and requires delivery to the Company of the shareholder's written notice stating
the number of shares the shareholder is electing to convert. The exercise of the
right also requires the shareholder, on or before the redemption date, to
surrender the certificate or certificates, duly endorsed to the Company, for the
Series B Convertible Preferred Stock shares at the office of the Company or its
transfer agent.
Conversion. No holder of Series A Preferred Stock shall have the right to
convert or exchange shares with or into any other shares of capital stock of the
Company. The holders of shares of Series B Convertible Preferred Stock shall
have the right to convert each share of Series B Convertible Preferred Stock
into 112 shares of Common Stock at any time. The right to receive the converted
shares requires delivery to the Company's office or its transfer agent of the
shareholder's written notice stating the number of shares the shareholder is
electing to convert. Such notice shall be accompanied by the surrender of the
Series B Convertible Preferred Stock certificate or certificates, duly endorsed
to the Company. The date of conversion shall be the date of receipt by the
Company or its transfer agent of the notice and the duly endorsed
certificate(s).
Voting. Each share of Series A Preferred Stock and each share of Series B
Convertible Preferred Stock shall entitle the holder thereof to 1/10th of a
vote, in person or by proxy, at any and all meetings of shareholders of the
Company on all propositions presented to shareholders generally.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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DESCRIPTION OF SEPCO CAPITAL STOCK
GENERAL
Sepco's authorized capital stock consists of 10,000,000 shares of Sepco
Class A Common Stock, 10,000,000 shares of Sepco Class B Common Stock, 1,000,000
shares of Sepco Preferred Stock, 1,000,000 shares of Sepco Class A Convertible
Preferred Stock and 1,000,000 shares of Sepco Class B Convertible Preferred
Stock. As of July 23, 1996, there were 758,899 shares of Sepco Class A Common
Stock, 176,900 shares of Sepco Class B Common Stock, 3,366 shares of Sepco
Preferred Stock, 19,500 shares of Sepco Class A Convertible Preferred Stock and
no shares of Class B Convertible Preferred Stock, par value $100.00 per share,
of Sepco ("Sepco Class B Convertible Preferred Stock") outstanding. As of such
date, there were approximately 17 holders of Sepco Class A Common Stock, one
holder of Sepco Class B Common Stock, six holders of Sepco Preferred Stock, five
holders of Sepco Class A Convertible Preferred Stock and no holders of Sepco
Class B Convertible Preferred Stock of record.
SEPCO COMMON STOCK
Dividends. The shareholders of Sepco Class A Convertible Preferred Stock
and Sepco Class B Convertible Preferred Stock are entitled to dividends before
the payment of any dividends to the holder of Sepco Class A Common Stock or
Sepco Class B Common Stock. The holders of shares of Sepco Class A Common Stock
and Sepco Class B Common Stock have no right or preference to the holders of
shares of any other class of capital stock of Sepco in respect of the
declaration or payment of any dividends or distributions by Sepco. The holders
of shares of Sepco Class A Common Stock and Sepco Class B Common Stock shall be
entitled to equally receive any dividends or distributions, if and when declared
by the Board of Directors out of any funds legally available for that purpose.
Liquidation, Dissolution or Winding Up. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of Sepco, the
holders of outstanding shares of Sepco Class B Common Stock shall be entitled to
receive $7.5075 in cash for each share of Sepco Class B Common Stock, before any
distribution of the assets of Sepco shall be made to the holders of the
outstanding shares of Sepco Class A Convertible Preferred Stock or Sepco Class B
Convertible Preferred Stock, unless funds necessary for such payment shall have
been set aside in trust for the account of the holders of outstanding shares of
Sepco Class B Common Stock so as to be and continue to be available therefor. At
the same time as the payment to the holders of the Sepco Class B Common Stock,
the holders of shares of Sepco Preferred Stock shall be entitled to $100.00 in
cash for each share, but no further participation in any distribution of the
assets of Sepco. If upon such liquidation, dissolution or winding up, the assets
of Sepco, distributable as aforesaid, are insufficient to permit the payment to
holders of Sepco Preferred Stock of $100.00 per share and to holders of Sepco
Class B Common Stock of $7.5075 per share, then the assets of Sepco shall be
distributed to the holders of shares of Sepco Preferred Stock and Sepco Class B
Common Stock ratably according to their respective shares. After the required
cash payments to the Sepco Preferred Stock, the Sepco Class A Convertible Stock
and the Sepco Class B Convertible Preferred Stock, the remainder of the assets,
if any, shall be divided and distributed ratably among the holders of the Sepco
Class A Convertible Preferred Stock, the Sepco Class B Convertible Stock, the
Sepco Class A Common Stock and the Sepco Class B Common Stock.
Redemption. No shares of Sepco Class A Common Stock or Sepco Class B Common
Stock, are callable or redeemable by Sepco.
Conversion. No holder of Sepco Class A Common Stock or Sepco Class B Common
Stock has the right to convert or exchange any such shares with or into any
other shares of capital stock of Sepco.
Voting. Each share of Sepco Class A Common Stock and Sepco Class B Common
Stock entitles the holder thereof to one vote, in person or by proxy, at any and
all meetings of the shareholders of Sepco on all propositions before such
meetings. Except as otherwise provided by law, the holders of shares of Sepco
Class A Common Stock and Sepco Class B Common Stock vote together, share for
share, as a single class upon the election of directors and upon each and every
other matter at any meeting of shareholders.
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SEPCO PREFERRED STOCK
Dividends. The holders of shares of Sepco Preferred Stock shall not as a
matter of right be entitled to be paid or receive or have declared or set apart
for such Sepco Preferred Stock, any dividends or distributions of Sepco. The
holders of shares of Sepco Class A Convertible Preferred Stock and Sepco Class B
Convertible Preferred Stock receive dividends out of any funds legally available
for that purpose at the annual rate of six percent (6%) per annum of the par
value and no more. These dividends are payable in cash monthly on the last day
of each month. The dividends accrue from the date the Sepco Class A Convertible
Preferred Stock and/or the Sepco Class B Convertible Preferred Stock are issued
and are considered to accrue from day to day, whether or not earned or declared.
The dividends are payable before any dividends are paid, declared, or set apart
for any other capital stock of Sepco. The dividends are cumulative so that if
for any dividend period the dividends on the outstanding Sepco Class A
Convertible Preferred Stock and/or the Sepco Class B Convertible Preferred Stock
are not paid or declared and set apart, the deficiency shall be fully paid or
declared and set apart for payment, without interest, before any distribution
(by dividend or otherwise) is paid on, declared, or set apart for any other
capital stock of Sepco. The holders of shares of Sepco Class A Convertible
Preferred Stock and Sepco Class B Convertible Preferred Stock shall not be
entitled to receive any other dividends or distributions.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of Sepco, the holders of outstanding
shares of Sepco Preferred Stock shall be entitled to receive $100.00 in cash for
each share of Sepco Preferred Stock. After the $100.00 distribution per share of
the Sepco Preferred Stock and the $7.5075 distribution per share of the Sepco
Class B Common Stock, the holders of outstanding shares of Sepco Class A
Convertible Preferred Stock and Sepco Class B Convertible Preferred Stock shall
be entitled to receive $100.00 in cash for each share, before any distribution
of the assets of Sepco shall be made to the holders of the outstanding shares of
any other capital stock of Sepco, unless funds necessary for such payment shall
have been set aside in trust for the account of the holders of outstanding
shares of Sepco Class A Convertible Preferred Stock and Sepco Class B
Convertible Preferred Stock so as to be and continue to be available therefor.
If upon such liquidation, dissolution or winding up, the assets of Sepco,
distributable as aforesaid, are insufficient to permit said full payment, then
the assets of Sepco shall be distributed to the holders of outstanding shares of
Sepco Class A Convertible Preferred Stock and Sepco Class B Convertible
Preferred Stock ratably according to their respective shares.
Redemption. No shares of Sepco Preferred Stock shall be callable or
redeemable by Sepco. Sepco, at the option of its Board of Directors, may at any
time five years from the date of issuance redeem the whole, or any part of the
outstanding Sepco Class A Convertible Preferred Stock or Sepco Class B
Convertible Preferred Stock shares by paying in cash $110.00 per share plus all
dividends accrued, unpaid, and accumulated through and including the redemption
date. If only a part of the outstanding Sepco Class A Convertible Preferred
Stock or Sepco Class B Convertible Preferred Stock shares is redeemed,
redemption will be pro rata. No Sepco Class A Convertible Preferred Stock or
Sepco Class B Convertible Preferred Stock shares may be redeemed unless all
accrued dividends on all outstanding Sepco Class A Convertible Preferred Stock
or Sepco Class B Convertible Preferred Stock shares have been paid for all past
dividend periods and full dividends for the current period, except those to be
redeemed, have been paid or declared and set apart for payment.
The holders of any Sepco Class A Convertible Preferred Stock shares called
for redemption are entitled to receive seven Sepco Class A Common Stock shares
for each share of Sepco Class A Convertible Preferred Stock. The holders of any
Sepco Class B Convertible Preferred Stock shares called for redemption are
entitled to receive three and one-half shares of Sepco Class B Common Stock for
each share of Sepco Class B Convertible Preferred Stock. The holders are
entitled to exercise said conversion right at any time after redemption notice
is given and before the close of business on the fifth day before the redemption
date stated in the notice. The right to receive the converted shares is at the
shareholder's option and requires delivery to Sepco of the shareholder's written
notice stating the number of shares the shareholder is electing to convert. The
exercise of the right also requires the shareholder, on or before the redemption
date, to surrender the certificate or certificates, duly endorsed to Sepco, for
the Sepco Class A Convertible Preferred Stock or shares of Sepco Class B
Convertible Preferred Stock, as applicable, at the office of Sepco or its
transfer agent.
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Conversion. No holder of Sepco Preferred Stock shall have the right to
convert or exchange shares with or into any other shares of capital stock of
Sepco. The holders of shares of Sepco Class A Convertible Preferred Stock shall
have the right to convert each share of Sepco Class A Convertible Preferred
Stock into seven shares of Sepco Class A Common Stock, at any time. The holders
of shares of Sepco Class B Convertible Preferred Stock shall have the right to
convert each share of Sepco Class B Convertible Preferred Stock into three and
one-half shares of Sepco Class B Common Stock, at any time. The right to receive
the converted shares requires delivery to Sepco's office or its transfer agent
of the shareholder's written notice stating the number of shares the shareholder
is electing to convert. Said notice shall be accompanied by the surrender of the
Sepco Class A Convertible Preferred Stock or Sepco Class B Convertible Preferred
Stock certificate or certificates, duly endorsed to Sepco. The date of
conversion shall be the date of receipt by Sepco or its transfer agent of the
notice and the duly endorsed certificate(s).
Voting. Except as otherwise provided by law, the holders of shares of Sepco
Preferred Stock, Sepco Class A Convertible Preferred Stock and Sepco Class B
Convertible Preferred Stock shall have no right or power to vote on the election
of directors or on any questions or in any proceedings or to be represented at
or to receive notice of any meeting of shareholders of Sepco.
DESCRIPTION OF NEWMAN CAPITAL STOCK
GENERAL
Newman's authorized capital stock consists of 8,000,000 shares of Newman
Common Stock and 2,000,000 shares of preferred stock, no par value (the "Newman
Preferred Stock"). As of August 1, 1996, there were 2,552,064 shares of Newman
Common Stock outstanding and no shares of Newman Preferred Stock outstanding. As
of such date, there were approximately 199 holders of record of Newman Common
Stock.
NEWMAN COMMON STOCK
The holders of Newman Common Stock are entitled to one vote for each share
in all matters submitted to a vote of shareholders. The holders of Newman Common
Stock do not have cumulative voting rights for the election of directors. The
holders of Newman Common Stock are entitled to receive ratably such dividends,
if any, as may be declared by Newman's Board of Directors out of legally
available funds. In the event of liquidation, dissolution or winding up of
Newman, the holders of Newman Common Stock are entitled to share ratably in all
assets of Newman remaining after provision for payment of liabilities in
satisfaction of the liquidation preference of any shares of Newman Preferred
Stock that may be outstanding. The holders of Newman Common Stock have no
preemptive, subscription, redemptive or conversion rights. The outstanding
shares of Newman Common Stock are fully paid and non-assessable. The rights,
preferences and privileges of the holders of Newman Common Stock may be subject
to those of holders of Newman Preferred Stock, if such securities should ever be
issued.
NEWMAN PREFERRED STOCK
The Board of Directors of Newman is authorized, without further shareholder
action, to issue any of the undesignated shares of Newman Preferred Stock in one
or more series and to fix the voting rights, liquidation preferences, dividend
rights, repurchase rights, conversion rights, redemption rights and terms,
including sinking fund provisions, and certain other rights and preferences of
such shares of Newman Preferred Stock.
CLASS C WARRANTS
Newman has issued and outstanding 1,650,000 Class C Warrants as a result of
its reorganization under Chapter 11 of the United States Bankruptcy Code. The
Class C Warrants were issued to unsecured creditors of Newman under the Plan.
Each Class C Warrant entitles the holder thereof to purchase one share of Newman
Common Stock at an exercise price of $2.00 per share, subject to certain
adjustments, until November 22, 1996.
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The Class C Warrants provide for the adjustment of the exercise price and
number of shares of Newman Common Stock issuable upon exercise of such Class C
Warrants upon the occurrence of certain events, such as stock dividends and
distributions, stock splits, recapitalizations, mergers and consolidations. The
Class C Warrants also contain provisions that protect the holders thereof
against dilution, by adjustment of the exercise price and number of shares of
Newman Common Stock issuable on exercise of such Class C Warrants, upon the
occurrence of certain events, such as stock dividends and distributions, stock
splits, recapitalizations, mergers, consolidations and the issuance of Newman
Common Stock, or options or rights to subscribe for, or securities convertible
into or exchangeable for Newman Common Stock, at a price below the exercise
price of any of the Class C Warrants. Holders of Class C Warrants have no rights
as shareholders of Newman unless the Class C Warrants are exercised. Since the
Newman Merger will not be consummated prior to the date of the Newman Meeting to
be held on November 25, 1996, holders of Class C Warrants will not receive any
shares of Common Stock in the Newman Merger unless such holders exercise such
Class C Warrants on or before November 22, 1996, the expiration date of the
Class C Warrants.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion summarizing all of the material
federal income tax consequences generally applicable to initial holders of
Company Stock. Shareholders of Sepco and Newman should be aware that this
discussion does not address all aspects of taxation that may be relevant to
particular shareholders in light of their personal circumstances, or to certain
types of shareholders (including dealers in securities, insurance companies,
foreign persons, financial institutions and tax-exempt entities) subject to
special treatment under the federal income tax laws.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE FOR GENERAL
INFORMATION ONLY AND ARE BASED UPON PRESENT LAW. BECAUSE INDIVIDUAL
CIRCUMSTANCES MAY DIFFER, EACH PROSPECTIVE HOLDER OF COMPANY STOCK IS STRONGLY
URGED TO CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO HIS OR HER
PARTICULAR TAX SITUATION AND THE PARTICULAR TAX EFFECTS OF ANY STATE, LOCAL,
FOREIGN, OR OTHER TAX LAWS (INCLUDING POSSIBLE CHANGES IN THE TAX LAW).
The Company, Sepco, and Newman have not requested (nor will they request) a
ruling from the IRS concerning any of the matters discussed herein. Accordingly,
Sepco and Newman shareholders should be aware that the IRS is not precluded from
adopting a contrary position. In addition, legislative or regulatory amendments
or administrative or court decisions could change the anticipated federal income
tax consequences.
The discussion below assumes that the Company Stock will be held as a
capital asset within the meaning of Section 1221 of the Code. In addition, the
discussion below refers to the Company's current or accumulated earnings and
profits for federal income tax purposes following the consummation of the
Mergers. The calculation of current and accumulated earnings and profits is
complicated and does not coincide with the determination of the Company's income
or loss and retained earnings for financial accounting purposes. The Company's
accumulated earnings and profits or its current earnings and profits, if any, in
future years will depend primarily on future profits or losses, which cannot be
accurately predicted.
DIVIDENDS ON COMPANY STOCK.
Distributions by the Company with respect to Company Stock will be
characterized as dividends taxable as ordinary income to the extent of the
Company's current or accumulated earnings and profits, if any, as determined for
federal income tax purposes. To the extent that a distribution on Company Stock
exceeds the Company's current and accumulated earnings and profits, such
distribution first will be treated as a return of
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capital that will reduce the holder's adjusted tax basis in such Company Stock,
and the excess will be taxed as a capital gain and will be long-term capital
gain if the holder's holding period for such Company Stock is more than one
year.
The availability of accumulated earnings and profits or current earnings
and profits, if any, in future years will depend primarily on future profits and
losses which cannot be accurately predicted. Thus, there can be no assurance
that all or any portion of a distribution on the Company Stock will be
characterized as a dividend for federal income tax purposes. For the remainder
of this discussion, the term "dividends" refers to a distribution paid entirely
out of the Company's current or accumulated earnings and profits, unless the
context otherwise requires.
Dividends received by corporate holders of Company Stock out of such
earnings and profits generally will qualify, subject to the limitations under
Sections 246(c) and 246A of the Code, for the 70% dividends received deduction
allowable to corporations under Section 243 of the Code (although the benefits
of such deduction may be reduced or eliminated by the corporate alternative
minimum tax). Under Section 246(c) of the Code, to be eligible for the dividends
received deduction, a corporate holder must hold its shares of Company Stock for
at least 46 days (91 days in the case of a preferred dividend attributable to a
period or periods aggregating more than 366 days). A taxpayer's holding period
for these purposes is suspended during any period in which the taxpayer has an
option to sell, is under a contractual obligation to sell, has made (and not
closed) a short sale of, or has granted an option to buy, substantially
identical stock or securities or holds one or more other positions with respect
to substantially similar or related property that diminish the risk of loss from
holding such stock. Under Section 246A of the Code, the dividends received
deduction may be reduced or eliminated if a holder's shares of Company Stock are
debt financed.
Section 1059 of the Code will require a corporate holder to reduce (but not
below zero) its basis in Company Stock by the "nontaxed portion" of any
"extraordinary dividend" if the holder has not held Company Stock for more than
two years before the date the Company declares, announces, or agrees to, the
amount or payment of such dividend, whichever is earliest. If the nontaxed
portion of all extraordinary dividends exceeds the holder's basis in Company
Stock, the excess will be treated as taxable gain at the time of disposition of
the stock. Generally, the nontaxed portion of an extraordinary dividend is the
amount excluded from income under Section 243 of the Code (relating to the
dividends received deduction). An extraordinary dividend generally is a dividend
that (i) equals or exceeds 5% in the case of preferred stock, or 10% in the case
of common stock, of the holder's adjusted tax basis in the stock (reduced for
this purpose by the nontaxed portion of any prior extraordinary dividend),
treating all dividends having ex-dividend dates within an 85-day period as one
dividend, or (ii) exceeds 20% of the holder's adjusted tax basis in the stock,
treating all dividends having ex-dividend dates within a 365-day period as one
dividend, provided that in either case fair market value on the day before the
ex-dividend date, if it can be established by the holder, may be substituted for
stock basis. An extraordinary dividend would also include any amount treated as
a dividend in the case of a redemption of any preferred stock that is either
non-pro rata as to all stockholders or in partial liquidation of the Company,
regardless of the relative size of the dividend and regardless of the corporate
holder's holding period for the preferred stock.
Under Section 1059(e)(3) of the Code, the extraordinary dividend rules may
not apply with respect to "qualified preferred dividends". A qualified preferred
dividend is any fixed dividend payable with respect to preferred stock which (i)
provides for fixed preferred dividends payable no less often than annually and
(ii) is not in arrears as to dividends when acquired, provided the actual rate
of return, as determined under Section 1059(e)(3) of the Code, on such stock
does not exceed 15%. Where a qualified preferred dividend exceeds the 5% (or
20%) threshold for extraordinary dividend status described above, (i) the
extraordinary dividend rules will not apply if the taxpayer holds the stock for
more than five years, and (ii) if the taxpayer disposes of the stock before it
has been held for more than five years, the aggregate reduction in basis cannot
exceed the excess of the qualified preferred dividends paid on such stock during
the period held by the taxpayer over the qualified preferred dividends which
would have been paid during such period on the basis of the stated rate of
return, as determined under Section 1059(e)(3) of the Code. The length of time
that a taxpayer is deemed to have held stock for purposes of Section 1059 of the
Code is determined under principles similar to those contained in Section 246(c)
of the Code discussed above.
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CONVERSION OF SERIES B CONVERTIBLE PREFERRED STOCK INTO COMMON STOCK.
Except in certain circumstances where there are dividends in arrears on the
Series B Convertible Preferred Stock, no gain or loss will be recognized upon
conversion of Series B Convertible Preferred Stock solely into shares of Common
Stock. If dividends on the Series B Convertible Preferred Stock are in arrears
at the time of conversion, however, a portion of the Common Stock received in
exchange for the Series B Convertible Preferred Stock could be viewed under
Section 305(c) of the Code as a distribution with respect to the Series B
Convertible Preferred Stock, taxable as a dividend. Except to the extent of
shares of Common Stock, if any, which are deemed to be in payment of dividends
in arrears, the adjusted tax basis for the shares of Common Stock received upon
the conversion will be equal to the adjusted tax basis of the Series B
Convertible Preferred Stock converted, and, provided the Series B Convertible
Preferred Stock is held as a capital asset, the holding period of the shares of
Common Stock will include the holding period of the Series B Convertible
Preferred Stock converted.
REDEMPTION PREMIUM.
Under Section 305 of the Code and Treasury Regulations currently in force,
if the redemption price of redeemable preferred stock exceeds its issue price,
all of such excess will be includible in ordinary gross income as a dividend (to
the extent of the issuer's current or accumulated earnings and profits) in
accordance with the economic accrual principles of Section 1272 of the Code over
the period during which the preferred stock cannot be redeemed, if a redemption
is more likely than not to occur. A redemption that satisfies the safe harbor
provision of Treasury Regulation Section 1.305-5(b)(3)(ii) is not treated as
more likely than not to occur. The safe harbor is available to a holder of
Series B Convertible Preferred Stock that is not related to the Company, within
the meaning of Section 267(b) or 707(b) applied by substituting the phrase "20
%" for the phrase "50%." If a holder is not so related to the Company, the
Company believes that any redemption should satisfy the remaining requirements
of the safe harbor.
ADJUSTMENT OF CONVERSION PRICE.
Pursuant to Section 305(c) of the Code and the Treasury Regulations
thereunder, certain adjustments to the conversion price of the Series B
Convertible Preferred Stock, such as adjustments to reflect taxable
distributions of cash or property on any of the outstanding Common Stock, will
be treated as a constructive distribution of stock and will be treated as a
dividend to the holders of the Series B Convertible Preferred Stock to the
extent of the current or accumulated earnings and profits of the Company.
Adjustments to reflect nontaxable stock splits or distributions of stock, stock
warrants or stock rights will, however, generally not be so treated. The failure
to adjust fully the conversion price for the Series B Convertible Preferred
Stock to reflect distributions of stock, stock warrants or stock rights with
respect to the Common Stock may result in a taxable dividend to holders of the
Common Stock.
REDEMPTION OF THE SERIES B CONVERTIBLE PREFERRED STOCK FOR CASH.
A redemption of Series B Convertible Preferred Stock for cash will be a
taxable event. Under Section 302 of the Code, a redemption of Series B
Convertible Preferred Stock for cash will be treated as a distribution that is
treated as a taxable dividend, nontaxable recovery of basis, or an amount
received in exchange for the Series B Convertible Preferred Stock pursuant to
the rules described under "Dividends on Company Stock", unless the redemption
(i) results in a "complete termination" of the stockholder's interest in the
Company under Section 302(b)(3) of the Code, (ii) is "substantially
disproportionate" with respect to the stockholder under Section 302(b)(2) of the
Code or (iii) is "not essentially equivalent to a dividend" under Section
302(b)(1) of the Code. In determining whether any of these tests have been met,
shares considered to be owned by the stockholder by reason of certain
constructive ownership rules in Sections 302(c) and 318 of the Code, as well as
shares actually owned, must be taken into account. If any of these tests are
met, the redemption of the Series B Convertible Preferred Stock for cash would
be treated as a sale or exchange for tax purposes.
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<PAGE> 90
A redemption will be "not essentially equivalent to a dividend" as to a
particular stockholder if it results in a "meaningful reduction" in that
stockholder's interest in the Company. If, as a result of the redemption of the
Series B Convertible Preferred Stock, a stockholder of the Company, whose
relative interest in the Company is minimal and who exercises no control over
corporate affairs, suffers a reduction in his proportionate interest in the
Company (taking into account shares owned by the stockholder under the
constructive ownership rules and, in certain events, dispositions of the stock
which occur contemporaneously with the redemption), that stockholder should be
regarded as having suffered a meaningful reduction in his interest in the
Company. In determining whether a holder's interest in the Company is actually
reduced or completely terminated, the holder is deemed, under the constructive
ownership rules of Sections 302(c) and 318 of the Code, to own any shares in the
Company owned by certain related persons and entities and any shares which the
holder or certain related persons and entities have an option to acquire.
Because the provisions of Section 302 of the Code are applied separately to
each stockholder based upon the particular facts and circumstances at the time
of the redemption (and the applicable law at such time which may be different
from that currently in effect), no assurance can be given that a redemption of
the Series B Convertible Preferred Stock for cash will be treated as a sale or
exchange rather than as a distribution. In addition, legislation has been
introduced in Congress which, if enacted in its present form, would appear to
treat a redemption of Series B Convertible Preferred Stock held by a corporation
as a sale or exchange of Series B Convertible Preferred Stock under Section
302(a), and not as a dividend.
If a redemption of Series B Convertible Preferred Stock is treated as a
distribution taxable as a dividend, then the holder's tax basis in the redeemed
Series B Convertible Preferred Stock will be transferred to any remaining stock
in the Company held by such holder. A redemption of Series B Convertible
Preferred Stock that is treated as a dividend may also be considered an
extraordinary dividend under Section 1059 of the Code. See "Dividends on Company
Stock" above. Treatment of a redemption as a dividend that is not pro rata as to
all stockholders will be treated as an extraordinary dividend without regard to
the period during which the stockholder held the Series B Convertible Preferred
Stock.
If a redemption of the Series B Convertible Preferred Stock is treated as a
sale or exchange, the redeemed holder will recognize capital gain or loss equal
to the difference between the amount of cash received by such holder from the
Company (other than cash which represents the payment of a previously declared
dividend and which will be taxed as a dividend) and the holder's tax basis in
the Series B Convertible Preferred Stock. If the holder holds such stock as a
capital asset, and if the holder's holding period exceeds one year, such capital
gain or loss will be long-term.
BACKUP WITHHOLDING AND INFORMATION REPORTING.
Under Section 3406 of the Code and applicable Treasury Regulations, a
noncorporate holder of Company Stock who is not otherwise exempt from backup
withholding may be subject to backup withholding at a rate of 31% with respect
to dividends paid on, or the proceeds of a sale or an exchange of, Company
Stock. Generally, backup withholding applies only when the IRS notifies the
payor that the taxpayer identification number furnished by the payee is
incorrect or a payee (i) fails to furnish or certify his correct taxpayer
identification number to the payor or establish an exemption from backup
withholding, (ii) is notified by the IRS that he has failed to report payments
of interest or dividends properly or (iii) under certain circumstances, fails to
certify under penalties of perjury that he is not subject to backup withholding.
Holders should consult their tax advisors regarding their qualification for
exemption from backup withholding and the procedure for establishing any
applicable exemption. Any amounts withheld under the backup withholding rules
from a payment to a holder will be allowed as a refund or a credit against the
holder's United States federal income tax liability, provided that the required
information is furnished to the IRS.
LEGAL MATTERS
The validity of the shares of Common Stock, Series B Convertible Preferred
Stock and Series A Preferred Stock to be issued in connection with the Mergers
will be passed on by Fulbright & Jaworski L.L.P., Houston, Texas.
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EXPERTS
The balance sheet of the Company and the consolidated financial statements
of Sepco included in this Proxy Statement/Prospectus, which is referred to and
made a part of this Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, to the extent indicated in their reports thereon
appearing elsewhere herein and in the Registration Statement. Such balance sheet
and consolidated financial statements have been included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Newman at December 31, 1995 and March 25, 1995,
and for each of the nine months ended December 31, 1995 and for the years ended
March 25, 1995 and March 26, 1994, included in this Proxy Statement/Prospectus,
which is referred to and made a part of this Registration Statement, have been
audited by Cheshier & Fuller, Inc., P.C., independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
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<PAGE> 92
APPENDIX A:
SEPCO MERGER AGREEMENT
<PAGE> 93
* * * * *
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
INDEX, INC.,
SEPCO ACQUISITION CORPORATION
AND
SEPCO INDUSTRIES, INC.
* * * * *
AUGUST 12, 1996
<PAGE> 94
<TABLE>
<CAPTION>
ARTICLE/SECTION PAGE
- ----------- ----
<S> <C> <C>
RECITALS ........................................................................
ARTICLE 1 THE MERGER..............................................................
1.1 The Merger..............................................................
1.2 Closing.................................................................
1.3 Effective Time of the Merger............................................
1.4 Articles of Incorporation and Bylaws....................................
1.5 Directors and Officers..................................................
ARTICLE 2 CONVERSION OF SHARES....................................................
2.1 Conversion of Company Stock.............................................
2.2 Stock Certificates......................................................
2.3 Fractional Shares.......................................................
2.4 Dissenting Shares.......................................................
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF INDEX AND THE MERGER SUB..............
3.1 Organization............................................................
3.2 Capitalization..........................................................
3.3 Certain Corporate Matters...............................................
3.4 Authority Relative to this Agreement....................................
3.5 Consents and Approvals; No Violations...................................
3.6 Information Supplied....................................................
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY...........................
4.1 Organization............................................................
4.2 Capitalization and Ownership of the Company.............................
4.3 Certain Corporate Matters...............................................
4.4 Subsidiaries............................................................
4.5 Authority Relative to this Agreement....................................
4.6 Consents and Approvals; No Violations...................................
4.7 Intentionally Deleted...................................................
4.8 Financial Statements....................................................
4.9 Events Subsequent to Financial Statements...............................
4.10 Undisclosed Liabilities.................................................
4.11 Tax Returns and Audits..................................................
4.12 Books and Records.......................................................
4.13 Questionable Payments...................................................
4.14 Environmental Matters...................................................
4.15 Intellectual Property...................................................
4.16 Insurance...............................................................
4.17 Contracts...............................................................
4.18 Litigation..............................................................
4.19 Employees...............................................................
4.20 Employee Benefit Plans..................................................
4.21 Legal Compliance........................................................
4.22 Broker's Fees...........................................................
4.23 Disclosure..............................................................
4.24 Information Supplied....................................................
ARTICLE 5 CONDUCT OF BUSINESS PENDING THE CLOSING.................................
5.1 Conduct of Business by the Company Pending the Closing..................
5.2 Other Actions...........................................................
</TABLE>
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<PAGE> 95
<TABLE>
<CAPTION>
ARTICLE/SECTION PAGE
- ----------- ----
<S> <C> <C>
ARTICLE 6 ADDITIONAL AGREEMENTS...................................................
6.1 Access and Information..................................................
6.2 Registration Statement..................................................
6.3 Meetings of Shareholders................................................
6.4 Stock Market Approval...................................................
6.5 Press Releases..........................................................
ARTICLE 7 CONDITIONS TO CLOSING...................................................
7.1 Conditions to Obligations of Each Party to Effect the Closing...........
7.2 Additional Conditions to Index's and the Merger Sub's Obligations.......
7.3 Additional Conditions to the Company's Obligations......................
ARTICLE 8 REMEDIES................................................................
8.1 General.................................................................
8.2 Waiver..................................................................
ARTICLE 9 TERMINATION.............................................................
9.1 Termination by Mutual Consent...........................................
9.2 Termination by Any Party................................................
9.3 Termination by Index....................................................
9.4 Effect of Termination and Abandonment...................................
9.5 Material Breach.........................................................
ARTICLE 10 GENERAL PROVISIONS......................................................
10.1 Notices.................................................................
10.2 Interpretation..........................................................
10.3 Severability............................................................
10.4 Miscellaneous...........................................................
10.5 Separate Counsel........................................................
10.6 Governing Law...........................................................
10.7 Counterparts............................................................
10.8 Amendment...............................................................
10.9 Parties In Interest; No Third Party Beneficiaries.......................
10.10 Captions................................................................
10.11 Expenses................................................................
10.12 Survival................................................................
</TABLE>
ii
<PAGE> 96
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of August 12, 1996 (this
"Agreement"), is made and entered into by and among Index, Inc., a Texas
corporation ("Index"), Sepco Acquisition Corporation, a Nevada corporation and a
wholly-owned subsidiary of Index (the "Merger Sub") and Sepco Industries, Inc.,
a Texas corporation (the "Company").
RECITALS
WHEREAS, the respective Boards of Directors of Index, the Merger Sub and
the Company have adopted resolutions approving and adopting the proposed merger
(the "Merger") of the Company with the Merger Sub upon the terms and conditions
hereinafter set forth in this Agreement;
WHEREAS, Index is entering into that Agreement and Plan of Merger with
Newman Communications, Inc., a New Mexico corporation ("Newman") and Newman
Acquisition, Inc., a Nevada corporation ("Newman Acquisition") simultaneously
with this Agreement (the "Newman Merger Agreement");
WHEREAS, the Merger and the merger contemplated by the Newman Merger
Agreement (the "Newman Merger") will be effected simultaneously; and
WHEREAS, the Merger and the Newman Merger are both intended to qualify as a
tax-free transaction under Section 351 and Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing premises, the
representations, warranties and agreements herein contained and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and subject to the conditions set forth herein, the parties hereto
agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3 hereof), the Merger Sub shall be
merged with and into the Company and the separate corporate existence of the
Merger Sub shall thereupon cease. The Company shall be the surviving corporation
in the Merger. The Merger shall have the effects set forth in the applicable
provisions of the Nevada General Corporation Law (the "NGCL") and the Texas
Business Corporation Act (the "TBCA").
1.2 Closing. The closing of the Merger (the "Closing") shall take place at
10:00 a.m., local time, at the offices of Fulbright & Jaworski, L.L.P. located
at 1301 McKinney, Houston, Texas 77010, on the next business day after all the
shareholder approvals set out in Section 6.3 hereof have been completed, or as
soon as the conditions set forth in Article 7 have been satisfied or waived or
as soon as practicable thereafter; provided, however, that the date of the
Closing shall not be later than December 31, 1996, unless the parties hereto
otherwise mutually agree. Such date is herein referred to as the "Closing Date."
At the Closing, the parties hereto shall deliver or cause to be delivered the
certificates and other documents set forth in Article 7.
1.3 Effective Time of the Merger. If all the conditions to the Merger set
forth in Article 7 shall have been fulfilled or waived in accordance herewith
and this Agreement shall not have been terminated as provided in Article 9, the
parties hereto shall cause Articles of Merger (the "Articles of Merger") that
meet the requirements of the applicable provisions of the NGCL and the TBCA,
respectively, to be properly executed and filed with the Secretary of State of
the States of Nevada and Texas, respectively, on the Closing Date. The Merger
shall be effective at the time of acceptance of the filing of the Articles of
Merger with the Secretary of State of the States of Nevada and Texas in
accordance with the NGCL and the TBCA, respectively, or at such later time which
the parties hereto shall have agreed upon and designated in such filing as the
effective time of the Merger (the "Effective Time").
1.4 Articles of Incorporation and By-Laws. The Articles of Incorporation
and By-Laws of the Company in effect immediately prior to the Effective Time
shall continue to be the Articles of Incorporation and By-
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<PAGE> 97
Laws of the Company subsequent to the Effective Time, subject always to the
right of the Company to amend its Articles of Incorporation and By-Laws in
accordance with the laws of the State of Texas and the provisions of its
Articles of Incorporation and By-Laws.
1.5 Directors and Officers. The directors and officers of the Company
immediately prior to the Effective Time shall continue to be the directors and
officers of the Company and shall hold such positions from the Effective Time
until their respective successors are duly elected or appointed and qualify in
the manner provided in the Articles of Incorporation and By-Laws of the Company
or as otherwise provided by law.
ARTICLE 2
CONVERSION OF SHARES
2.1 Conversion of Company Stock. At the Effective Time, by virtue of the
Merger and without any action required on the part of Index, the Company, the
Merger Sub or any holder of capital stock of any of them:
(a) Subject to the limitations contained herein, each outstanding
share of Sepco Class A Common Stock will be converted into the right to
receive 16 shares of Index Common Stock. Each outstanding share of Sepco
Class B Common Stock will be converted into the right to receive 18.1232
shares of Index Common Stock. Further, each outstanding share of Sepco
Class A Convertible Preferred Stock will be converted into the right to
receive one share of Index Series B Convertible Preferred Stock. Finally,
each outstanding share of Sepco Preferred Stock will be converted into the
right to receive one share of Index Series A Preferred Stock. The Sepco
Preferred Stock, Sepco Class A Convertible Preferred Stock, Sepco Class A
Common Stock and Sepco Class B Common Stock shall be collectively referred
to as "Company Stock"). The Index Common Stock, Index Series A Preferred
Stock and Index Series B Convertible Preferred Stock shall be collectively
referred to as "Index Stock".
(b) All shares of common stock of the Merger Sub issued and
outstanding immediately prior to the Effective Time shall be cancelled and
cease to be outstanding.
2.2 Stock Certificates. At or following the Effective Time, each holder of
an outstanding certificate or certificates representing the Company Stock shall
surrender the same to Index and Index shall, in exchange therefor, cause to be
issued to the holder of such certificate(s) a new certificate representing
shares of Index Stock in accordance with Section 2.1, less any amount required
to be withheld under applicable federal, state or local tax requirements, and
the surrendered certificate(s) shall be cancelled. Until so surrendered and
exchanged, each such certificate shall represent solely the right to receive
shares of Index Stock in accordance with Section 2.1, without interest and less
any tax withholding.
2.3 Fractional Shares. No fractional shares of Company Common Stock shall
be issued in the Merger. In lieu thereof, all fractional shares of Company
Common Stock that a holder of a Sepco Class A Common Stock would otherwise be
entitled to receive as a result of the Merger shall be automatically converted
into the right to receive an amount of cash to be determined by multiplying
$0.58 by the fraction of a share of Company Common Stock to which such holder
would otherwise have been entitled. Further, all fractional shares of Company
Common Stock that a holder of Sepco Class B Common Stock would otherwise be
entitled to receive as a result of the Merger shall be automatically converted
into the right to receive an amount of cash to be determined by multiplying
$0.58 by the fraction of a share of Company Common Stock to which such holder
would otherwise be entitled. Fractional shares of Company Convertible Preferred
Stock and Company Preferred Stock, if any, will be issued in the Merger to the
holders of Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock,
respectively.
2.4 Dissenting Shares. Each share of Company Stock issued and outstanding
immediately prior to the Effective Time not voted in favor of the Merger, the
holder of which has given written notice of the exercise of dissenter's rights
and has perfected such rights as required by the TBCA is herein called a
"Dissenting Share." Dissenting Shares shall not be converted into or represent
the right to receive shares of Index Stock pursuant to this Section 2 and shall
be entitled only to such rights as are available to such holder pursuant to the
TBCA,
2
<PAGE> 98
unless the holder thereof shall have withdrawn or forfeited his dissenter's
rights. Each holder of Dissenting Shares shall be entitled to receive the value
of such Dissenting Shares held by him in accordance with the applicable
provisions of the TBCA. Index will promptly pay to any holder of Dissenting
Shares such amount as such holder shall be entitled to receive in accordance
with the applicable provisions of the TBCA. If any holder of Dissenting Shares
shall effectively withdraw or forfeit his dissenter's rights under the TBCA,
such Dissenting Shares shall be converted into the right to receive shares of
Index Stock in accordance with this Section 2.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
INDEX AND THE MERGER SUB
Index and the Merger Sub hereby jointly and severally represent and warrant
to the Company as follows:
3.1 Organization. Each of Index and the Merger Sub has been duly
incorporated, is validly existing as a corporation and is in good standing under
the laws of its state of incorporation, and has the requisite corporate power to
carry on its business as now conducted.
3.2 Capitalization. The total number of shares of stock of all classes
which Index shall have the authority to issue is 110,000,000 shares, of which
the following designations have been made: 100,000,000 shares of common stock
par value $0.01 per share ("Index Common Stock"), 1,000,000 shares of preferred
stock, par value $1.00 per share ("Index Series A Preferred Stock") and
1,000,000 shares of convertible preferred stock, par value $100 per share
("Index Series B Convertible Preferred Stock"). As of the date of this
Agreement, 100 shares of Index Common Stock are issued and outstanding, no
shares of Index Series A Preferred Stock are issued and outstanding and no
shares of Index Series B Convertible Preferred Stock are issued and outstanding.
All of the issued and outstanding shares of Index Common Stock are validly
issued, fully paid, nonassessable and free of preemptive rights. All shares of
Index Stock issuable in accordance with this Agreement will be, when so issued,
duly authorized, validly issued, fully paid and nonassessable. The authorized
capital stock of the Merger Sub consists of 100 shares of common stock, par
value $0.10 per share, all of which are validly issued, fully paid and
nonassessable and are owned by Index.
3.3 Certain Corporate Matters. Index is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
ownership of its properties, the employment of its personnel or the conduct of
its business requires it to be so qualified, except where the failure to so
qualify would not have a material adverse effect on Index's financial condition,
results of operations or business. Index has the requisite corporate power and
authority and all authorization, licenses and permits necessary to carry on the
business in which it is engaged and to own and use the properties owned and used
by it, except such authorizations, licenses and permits, the failure of which to
possess would not have a material adverse effect on the financial condition,
results of operations of business of Index.
3.4 Authority Relative to this Agreement. Each of Index and the Merger Sub
has the requisite corporate power and authority to enter into this Agreement and
to carry out its obligations hereunder. The execution, delivery and performance
of this Agreement by Index and the Merger Sub and the consummation by Index and
the Merger Sub of the transactions contemplated hereby have been duly authorized
by the Boards of Directors of each of Index and the Merger Sub and, subject to
stockholder approval as set forth in this Agreement, no other actions on the
part of Index or the Merger Sub are necessary to authorize this Agreement or the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by each of Index and the Merger Sub and constitutes,
subject to stockholder approval as set forth in this Agreement, a valid and
binding agreement of each of Index and the Merger Sub, enforceable against Index
and the Merger Sub in accordance with its terms, except as such enforcement may
be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally or by general principles of equity.
3.5 Consents and Approvals; No Violations. Except as may be required under
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder (the "Securities Act"), the
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Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "Exchange Act"), state securities or blue sky laws,
and the filing and recordation of the Articles of Merger as required by the NGCL
and the TBCA, no filing with, and no permit, authorization, consent or approval
of, any public body or authority is necessary for the consummation by Index and
the Merger Sub of the transactions contemplated by this Agreement. Neither the
execution and delivery of this Agreement by Index or the Merger Sub nor the
consummation by Index or the Merger Sub of the transactions contemplated hereby,
nor compliance by Index or the Merger Sub with any of the provisions hereof,
will (a) conflict with or result in any breach of any provisions of the Articles
of Incorporation or By-Laws of Index or the Articles of Incorporation or By-Laws
of the Merger Sub, (b) result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default of a material nature
(or give rise to any right of termination, cancellation or acceleration) under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, contract, agreement or other instrument or obligation, of a
material nature, to which Index or any of its subsidiaries is a party or by
which any of them or their properties or assets may be bound or (c) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to
Index, any of its subsidiaries or any of their properties or assets, except in
the case of clauses (b) and (c) for violations, breaches or defaults which in
the aggregate would not have a material adverse effect on the financial
condition or results of operations of Index and its subsidiaries taken as a
whole. The parties hereto agree and acknowledge that Index was required to
obtain and has obtained the written consent of Fleet Capital Corporation.
3.6 Information Supplied. None of the information provided by Index for
use in the Registration Statement (as defined in Section 6.2 hereof) and
contained therein will, as of the date that the Registration Statement is filed
with the Securities and Exchange Commission (the "Commission"), on the date it
is declared effective or at the time of the meeting of the shareholders of the
Company to be held in connection with the Merger, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The registration
statement and prospectus contained in the Registration Statement will comply, in
all material respects, as to form with the provisions of the Exchange Act and
the Securities Act.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY
The Company hereby represents and warrants to Index and the Merger Sub as
follows:
4.1 Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation,
and has the requisite corporate power and authority to carry on its business as
now conducted in all applicable jurisdictions.
4.2 Capitalization and Ownership of the Company. The Company's entire
authorized capital stock consists of Sepco's authorized capital consists of
10,000,000 shares of Sepco Class A Common Stock, $0.01 par value per share,
10,000,000 shares of Sepco Class B Common Stock, $0.01 par value per share,
1,000,000 shares of Sepco Preferred Stock, $1.00 par value per share, 1,000,000
shares of Sepco Class A Convertible Preferred Stock, $100.00 par value per share
and 1,000,000 shares of Sepco Class B Convertible Preferred Stock, $100.00 par
value per share. As of July 23, 1996, there were 758,899 shares of Sepco Class A
Common Stock, 176,900 shares of Sepco Class B Common Stock, 3,366 shares of
Sepco Preferred Stock, 19,500 shares of Sepco Class A Convertible Preferred
Stock and no shares of Sepco Class B Convertible Preferred Stock outstanding. As
of such date, there were approximately 16 holders of Sepco Class A Common Stock,
1 holder of Sepco Class B Common Stock, 6 holders of Sepco Preferred Stock, 3
holders of Sepco Class A Convertible Preferred Stock and no holders of Sepco
Class B Convertible Preferred Stock of record. All of the shares of Company
Stock have been duly authorized and are validly issued, fully paid and
nonassessable and have not been issued in violation of any pre-emptive rights.
Except as disclosed in the Registration Statement, there are no outstanding or
authorized options, rights, warrants, calls, convertible securities, rights to
subscribe,
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conversion rights or other agreements or commitments to which the Company is a
party or which are binding upon the Company providing for the issuance by the
Company or transfer by the Company of additional shares of Company Stock and the
Company has not reserved any shares of the Company Stock for issuance, nor are
there any outstanding stock option rights, phantom equity or similar rights,
contracts, arrangements or commitments. There are no voting trusts or any other
agreements or understandings, written or oral, with respect to the voting of the
Company Stock.
4.3 Certain Corporate Matters. The Company is duly licensed or qualified
to do business and is in good standing as a foreign corporation in every
jurisdiction in which the character of the Company's properties or nature of the
Company's business requires it to be so licensed or qualified other than such
jurisdictions in which the failure to be so licensed or qualified does not, or
insofar as can reasonably be foreseen, in the future will not, have a material
adverse effect on its financial condition, results of operations or business.
The Company has full corporate power and authority and all authorizations,
licenses, variances, exemptions, orders, contracts, approvals and permits
necessary to carry on the business in which it is engaged or in which it
proposes presently to engage and to own and use the properties owned and used by
it. The Company has delivered to Index true, accurate and complete copies of its
Articles of Incorporation and By-Laws, which reflect all amendments made thereto
at any time prior to the date of this Agreement. The records of meetings of the
shareholders and Board of Directors of the Company are complete and correct in
all material respects. The stock records of the Company and the shareholder
lists of the Company that the Company has previously furnished to Index are
complete and correct in all material respects and accurately reflect the record
ownership and the beneficial ownership of all the outstanding shares of the
Company's capital stock and all other outstanding securities issued by the
Company. The Company is not in default under or in violation of any provision of
its Articles of Incorporation or By-Laws in any material respect. The Company is
not in default or in violation of any restriction, lien, encumbrance, indenture,
contract, lease, sublease, loan agreement, note or other obligation or liability
by which it is bound or to which any of its assets is subject.
4.4 Subsidiaries. American MRO, Inc., a Nevada corporation, is a wholly
owned subsidiary of the Company. The Company does not own, directly or
indirectly, any of the capital stock of any other corporation or any equity,
profit sharing, participation or other interest in any corporation, partnership,
joint venture or other entity of a material nature, except as set out in the
Registration Statement.
4.5 Authority Relative to this Agreement. The Company has the requisite
corporate power and authority to enter into this Agreement and carry out its
obligations hereunder. The execution, delivery and performance of this Agreement
by the Company and the consummation of the transactions contemplated hereby have
been duly authorized by the Boards of Directors of the Company and, subject to
shareholder approval as set forth in this Agreement, no other actions on the
part of the Company are necessary to authorize this Agreement or the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and constitutes, subject to shareholder
approval as set forth in this Agreement, a valid and binding obligation of the
Company, enforceable in accordance with its terms, except as such enforcement
may be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally or by general principles of equity.
The parties hereto agree and acknowledge that the Company was required to obtain
and has obtained the written consent of Fleet Capital Corporation required under
that Amended and Restated Loan and Security Agreement by and between the Company
and Fleet Capital Corporation.
4.6 Consents and Approvals; No Violations. Except as may be required under
the Securities Act, the Exchange Act, state securities or blue sky laws, and the
filing and recordation of the Articles of Merger as required by the NGCL and the
TBCA, no filing with, and no permit, authorization, consent or approval of, any
public body or authority is necessary for the consummation by the Company of the
transactions contemplated by this Agreement. Neither the execution and delivery
of this Agreement by the Company nor the consummation by the Company of the
transactions contemplated hereby, nor compliance by the Company with any of the
provisions hereof, will (a) conflict with or result in any breach of any
provisions of the Articles of Incorporation or By-Laws of Company, (b) result in
a violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, agreement or other instrument or
obligation to which the Company is a party or by which it or any of
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its properties or assets may be bound except as setout herein or (c) violate any
order, law, resolution, writ, injunction, decree, statute, rule or regulation
applicable to the Company, or any of its properties or assets, except in the
case of clauses (b) and (c) for violations, breaches or defaults which in the
aggregate would not have a material adverse effect on the financial condition or
results of operations of the Company taken as a whole.
4.7 Intentionally Deleted.
4.8 Financial Statements. The Company has delivered to Index the following
audited financial statements: (a) its balance sheets as of December 31, 1995;
(b) its statements of operations for the twelve months ended December 31, 1995;
(c) its statements of cash flows for the twelve months ended December 31, 1995;
(d) its statements of changes in shareholders' equity for the twelve months
ended December 31, 1995. In addition, the Company has delivered to Index the
following unaudited financial statements:(a) its balance sheet as of June 30,
1996; (b) its statement of operations for the six months ended June 30, 1996;
and (c) its statement of cash flows for the six months ended June 30, 1996. Such
financial statements are herein collectively referred to as the "Financial
Statements." The Financial Statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods covered thereby and present fairly the financial condition of the
Company as of such dates and the results of its operations and changes in cash
flows for such periods.
4.9 Events Subsequent to Financial Statements. Since June 30, 1996, except
in the ordinary course of business there has not been:
(a) Any material adverse change in the financial condition, results of
operations or business of the Company;
(b) Any sale, lease, transfer, license or assignment of any material
assets, tangible or intangible, of the Company;
(c) Any material damage, destruction or property loss, whether or not
covered by insurance, affecting adversely the properties or business of the
Company;
(d) Any declaration or setting aside or payment of any dividend or
distribution with respect to the Company Stock (except as required by the
terms of the Class A Convertible Preferred Stock) or any redemption,
purchase or other acquisition of any such shares;
(e) Any subjection to any lien on any of the assets, tangible or
intangible, of the Company;
(f) Any material incurrence of indebtedness or liability or assumption
of obligations by the Company;
(g) Any waiver or release by the Company of any right of any material
value;
(h) Any material increase in compensation or benefits to officers or
directors of the Company;
(i) Any change made or authorized in the Articles of Incorporation or
By-laws of the Company;
(j) Except as disclosed to Index, any issuance, transfer, sale or
other disposition by the Company of any shares of Company Stock or other
equity securities, or any grant of any options, warrants or other rights to
purchase or obtain (including upon conversion or exercise) shares of
Company Stock or other equity securities; or
(k) Any material loan to or other material transaction with any
officer, director or shareholder of the Company giving rise to any claim or
right of the Company against any such person or of such person against the
Company.
4.10 Undisclosed Liabilities. The Company has no material liability or
obligation of any nature whatsoever, either direct or indirect, matured or
unmatured, accrued, absolute, contingent or otherwise.
4.11 Tax Returns and Audits. The Company has duly and timely filed or
caused to be filed all returns, reports or similar statements (including any
attached schedules) required to be filed with respect to any tax including,
without limitation, all information returns, claims for refunds, amended returns
and declarations of estimated tax (collectively, the "Tax Returns"). For the
purpose of this Agreement, "tax" shall include any
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federal, state, local or foreign income, gross receipts, windfall profits,
severance, property, production, sales, use, license, excise, franchise,
employment, payroll, withholding, alternative or add-on minimum, ad valorem,
transfer, stamp or environmental tax, or any other tax or similar assessment or
charge, together with any interest or penalty, addition to tax or additional
amount imposed by any governmental authority. The Company has paid in full or
fully reserved against in the Financial Statements all taxes, interest,
penalties, assessments and deficiencies due or claimed to be due by it to
foreign, federal, state or local taxing authorities. All Tax Returns are
complete and accurate and disclose all taxes required to be paid. The income Tax
Returns filed by the Company are not being, to the knowledge of the Company,
examined by the Internal Revenue Service (the "IRS") or other applicable taxing
authorities for any period, except as set out in the Registration Statement. All
taxes or estimates thereof that are due as of December 31, 1995, or are claimed
or asserted by any taxing authority to be due as of such date, have been (a)
timely and appropriately paid so as to avoid penalties for underpayment or (b)
accrued for on the balance sheet as of December 31, 1995, as contained in the
Financial Statements. Except for amounts not yet due and payable, all tax
liabilities to which the properties of the Company may be subject have been paid
and discharged. The provisions for income and other taxes payable reflected in
the Financial Statements make adequate provision for all then accrued and unpaid
taxes of the Company. There are no tax liens on any property of the Company, nor
are there any pending or threatened examinations, actions, suits,
investigations, audits, assessments or tax claims asserted. The Company has not
been granted any extensions of limitation periods applicable to tax claims.
Except jurisdictions in which the Company filed Tax Returns, no claim has been
made by a taxing authority that the Company is or may be subject to taxation by
that jurisdiction. All copies of Tax Returns delivered to Index by the Company
are true and correct, and any and all notices from foreign, federal, state and
local taxing authorities, tax examination reports and statements of deficiencies
assessed against or agreed to by the Company have been made available to Index.
The Company is not a party to, or bound by, any tax indemnity, tax sharing or
tax allocation agreement. The Company is not a member of an "affiliated group,"
as defined in Section 1504(a) of the Code and is not the owner of an interest in
a partnership, joint venture, trust, limited liability company or other entity
or organization. All positions taken on federal Tax Returns that could give rise
to a penalty for substantial understatement pursuant to Section 6662(d) of the
Code have been disclosed on such Tax Returns. The Company has not agreed to and
is not required to make any adjustment pursuant to Section 481(a) of the Code
(or any predecessor provision) by reason of any change in any accounting method.
The Company has no application pending with any taxing authority requesting
permission for any changes in any accounting method, and the IRS has not
proposed any such adjustment or change in accounting method. The Company is not
subject to any limitation under Section 382 or Section 383 of the Code.
Index shall have sole control over any contest relating to federal, state,
local, or foreign tax assessments or proposed assessments against the Company.
Index shall promptly notify the Company of any audit or examination of the books
and records of the Company undertaken by the tax authorities, any tax
assessments or proposed assessments or any extension of the statute of
limitations applicable to any Tax Returns of the Company relating to any taxable
year or periods ending on or prior to the Closing Date and shall provide the
Company with periodic reports regarding the status of such audit or examination.
The Company shall be entitled to participate in (but not control) any such
contest at its sole cost. Index shall not settle or otherwise compromise any
such contest in a manner which results in liability to the Company under this
Agreement without the written consent of the Company, which consent shall not be
unreasonably withheld.
4.12 Books and Records. The books and records of the Company fairly
reflect the transactions to which the Company is a party or by which its
properties are bound.
4.13 Questionable Payments. The Company nor any employee, agent or
representative of either of them has, directly or indirectly, made any bribes,
kickbacks, illegal payments or illegal political contributions using Company
funds or made any payments from the Company's funds to governmental officials
for improper purposes or made any illegal payments from the Company's funds to
obtain or retain business.
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4.14. Environmental Matters.
(a) Definitions. For the purpose of this Agreement, the following
terms shall have the meaning herein specified:
(i) "Governmental Authority" shall mean the United States, each
state, each county, each city and each other political subdivision in
which the Company's business is located, and any court, political
subdivision, agency or instrumentality with jurisdiction over the
Company's business.
(ii) "Environmental Laws" shall mean (A) the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Act of 1986, 42
U.S.C.A. 9601 et seq. ("CERCLA"), (B) the Resource Conservation and
Recovery Act, as amended by the Hazardous and Solid Waste Amendment of
1984, 42 U.S.C.A. 6901 et seq. ("RCRA"), (C) the Clean Air Act, 42
U.S.C.A. 7401 et seq., (D) the Federal Water Pollution Control Act, as
amended, 33 U.S.C.A. 1251 et seq., (E) the Toxic Substances Control Act,
15 U.S.C.A. 2601 et seq., (F) all applicable state laws, and (G) all
other laws and ordinances relating to municipal waste, solid waste, air
pollution, water pollution and/or the handling, discharge, disposal or
recovery of on-site or off-site hazardous substances or materials, as
each of the foregoing has been or may hereafter be amended from time to
time.
(iii) "Hazardous Materials" shall mean, among others, (A) any
"hazardous waste" as defined by the RCRA, and regulations promulgated
thereunder; (B) any "hazardous substance" as defined by CERCLA, and
regulations promulgated thereunder; (C) any "toxic pollutant" as defined
in the Federal Water Pollution Prevention and Control Act, as amended,
33 U.S.C. 1251 et seq., (commonly known as "CWA" for "Clear Water Act"),
and any regulations thereunder; (D) any "hazardous air pollutant" as
defined in the Air Pollution Prevention and Control Act, as amended, 42
U.S.C. 7401 et seq. (commonly known as "CAA" for "Clear Air Act") and
any regulations thereunder; (E) asbestos; (F) polychlorinated biphenyls;
(G) underground storage tanks, whether empty, filled or partially filled
with any substance; (H) any substance the presence of which on the
Business Location (as hereinafter defined) is prohibited by any
Environmental Laws; and (I) any other substance which is regulated by
any Environmental Laws.
(iv) "Hazardous Materials Contamination" shall mean the
contamination (whether presently existing or hereafter occurring) of the
improvements, facilities, soil, groundwater, air or other elements on or
at the location of the Company at 6500 Brittmoore Road, Houston, Texas
77041, or at any other location where the Company conducts or has
conducted business (collectively, the "Business Location") by Hazardous
Materials, or the contamination of the buildings, facilities, soil,
groundwater, air or other elements on or any other specific property or
general area, as a result of Hazardous Materials emanating from the
operations of the Company's business.
Notwithstanding the foregoing, if any Environmental Law is amended so
as to broaden the meaning of any term defined in it, such broader meaning
shall apply subsequent to the effective date of such amendment. Where a
defined term in this Agreement derives its meaning from a statutory
reference, for the purposes of this Agreement any regulatory definition
promulgated pursuant to the applicable statute shall be deemed to be
applicable to the extent its definition is broader than the statutory
reference and any reference or citation to a statute or regulation shall be
deemed to include any amendments to that statute or regulation and judicial
and administrative interpretations of it. To the extent that any state laws
or regulations establish a meaning for a term defined in this Agreement
through reference to a federal Environmental Law that is broader than the
meaning specified in such federal Environmental Law, such broader meaning
set forth in the state Environmental Law shall apply. Any specific
references to a law shall include any amendments to it promulgated from
time to time.
(b) Representations and Warranties. Based on the foregoing, the
Company represents and warrants that, to its best knowledge and belief:
(i) There has been no failure by the Company to comply with all
applicable requirements of Environmental Laws relating to the Company,
the Company's operations, and the Company's
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manufacture, processing, distribution, use, treatment, generation,
recycling, reuses, sale, storage, handling, transportation or disposal
of any Hazardous Material and the Company is not aware of any facts or
circumstances which could materially impair such compliance with all
applicable Environmental Laws.
(ii) The Company has not, through the Closing Date, received notice
from any Governmental Authority or any other person of any actual or
alleged violation of any Environmental Laws, nor is any such notice
anticipated.
(iii) The Company will not do or permit anything that will cause
the Company to be in violation of any requirements of Environmental
Laws, or do or permit anything to be done that would materially and
adversely affect the financial condition of the Company or subject the
Company to any enforcement actions under any Environmental Laws.
(iv) The Company has not obtained and is not required to obtain any
permits, licenses or similar authorizations to construct, occupy,
operate or use any buildings, improvements, fixtures and equipment owned
or leased by the Company by reason of any Environmental Laws.
(v) No Hazardous Materials are now located at the Business
Location, and the Company has not ever caused or permitted any Hazardous
Materials to be generated, placed, stored, held, handled, located or
used at the Business Location, any part thereof or at any other site
controlled or utilized by the Company in its operation of its business,
except in compliance with applicable Environmental Laws.
(vi) Hazardous Materials Contamination does not now and has never
existed on, in, under or at the location of the Company or at any other
site controlled or utilized by the Company in the operation of its
business. No part of the Business Location or any other site controlled
or utilized by the Company in the operation of its business is being
used has ever been used by others for the release, disposal or long-term
storage of Hazardous Materials, nor is any part of the Business Location
or any other site controlled or utilized by the Company in the operation
of its business otherwise affected by Hazardous Materials Contamination.
(vii) No investigation, administrative order, consent order or
agreement, litigation or settlement with respect to Hazardous Materials
or Hazardous Materials Contamination is proposed, threatened,
anticipated, pending or otherwise in existence with respect to the
Business Location or with respect to any other site controlled or
utilized by the Company in the operation of its business. The Business
Location is not currently on, and has never been on, any federal or
state "Superfund" or "Superlien" list.
4.15 Intellectual Property. There are no material patents, patent
applications, trade names, trademark or service mark registrations or
applications, registered trade dress rights, common law trademarks or copyright
registrations or applications owned by the Company or which the Company is
licensed to use. To the best knowledge and belief of the Company, there are no
claims that any product, activity or operation of the Company infringes upon or
involves, or has resulted in the infringement of, any patents, patent
applications, trade names, trademark or service mark registrations or
applications, registered trade dress rights, common law trademarks or copyright
registrations or applications or any other proprietary right of any other
person, corporation or other entity; and no proceedings have been instituted,
are pending or are threatened with respect thereto.
4.16 Insurance. The Company has provided Index a list of all material
insurance policies and binders in effect, insuring the Company, including,
without limitation, fire and extended coverage, public liability, property
damage, vehicle, product liability insurance, environmental impairment
insurance, worker's compensation coverage, medical and dental insurance held by
or on behalf of the Company. All such insurance is in full force and effect and
no notice of cancellation has been received.
4.17 Contracts. Except as set forth in the Registration Statement, the
Company has no material contracts, leases, arrangements and commitments (whether
oral or written). Except in the ordinary course and
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as set forth in the Registration Statement, the Company is not a party to or
bound by or affected by any material contract, lease, arrangement or commitment
(whether oral or written) relating to: (a) the employment of any person; (b)
collective bargaining with, or any representation of any employees by, any labor
union or association; (c) the acquisition of services, supplies, equipment or
other personal property; (d) the purchase or sale of real property; (e)
distribution, agency or construction; (f) lease of real or personal property as
lessor or lessee or sublessor or sublessee; (g) lending or advancing of funds;
(h) borrowing of funds or receipt of credit; (i) incurring of any obligation or
liability; or (j) the sale of personal property.
4.18 Litigation. The Company is not subject to any judgment or order of
any court or quasi-judicial or administrative agency of any jurisdiction,
domestic or foreign, nor is there any charge, complaint, lawsuit or governmental
investigation pending or, to the best knowledge of the Company, threatened
against the Company. The Company is not a plaintiff in any action, domestic or
foreign, judicial or administrative. There are no existing actions, suits,
proceedings or investigations of the Company, and the Company does not know of
any basis for such actions, suits, proceedings or investigations. There are no
unsatisfied judgments, orders, writs, injunctions, decrees or stipulations
affecting the Company or to which the Company is a party.
4.19 Employees. Except in the ordinary course, the Company does not owe
any material compensation, bonuses, profit sharing, pension, retirement, stock
options or related appreciation rights, deferred or otherwise, to any current or
previous employees. The Company is not a party to or bound by any collective
bargaining agreement. There are no material loans or other material obligations
payable or owing by the Company to any shareholder, officer, director or
employee of the Company, except as set out in the Registration Statement.
4.20 Employee Benefit Plans. Except as set out in the Registration
Statement, the Company has no material (a) nonqualified deferred or incentive
compensation or retirement plans or arrangements, (b) qualified retirement plans
or arrangements, (c) other employee compensation, severance or termination pay
or welfare benefit plans, programs or arrangements or (d) any related trusts,
insurance contracts or other funding arrangements maintained, established or
contributed to by the Company within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). The Company does
not have any liability under Title IV of ERISA as a result of actions or events
occurring prior to the Closing.
4.21 Legal Compliance. No claim has been filed against the Company
alleging a violation of any applicable laws and regulations of foreign, federal,
state and local governments and all agencies thereof. The Company holds all of
the material permits, licenses, certificates or other authorizations of foreign,
federal, state or local governmental agencies required for the conduct of its
business as presently conducted.
4.22 Broker's Fees. The Company or anyone on its behalf does not have any
liability to any broker, finder, investment banker or agent, or has agreed to
pay any brokerage fees, finder's fees or commissions, or to reimburse any
expenses of any broker, finder, investment banker or agent in connection with
the Merger or any similar transaction.
4.23 Disclosure. The representations and warranties and statements of fact
made by the Company in this Agreement and in any Schedule hereto are, as
applicable, accurate, correct and complete and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements and information contained herein or therein not
misleading.
4.24 Information Supplied. None of the information supplied by the Company
for use in the Registration Statement and contained therein will, as of the date
that the Registration Statement is filed with the Commission, on the date it is
declared effective or at the time of the meeting of the shareholders of the
Company to be held in connection with the Merger, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The proxy statement
contained in the Registration Statement will comply, in all material respects,
as to form with the provisions of the Exchange Act.
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ARTICLE 5
CONDUCT OF BUSINESS PENDING THE CLOSING
5.1 Conduct of Business by the Company Pending the Closing. The Company
covenants and agrees that prior to the Closing Date, except in the ordinary
course of business or with the approval of Index:
(a) The Company shall conduct its business and operations only in the
usual and ordinary course of business and consistent with past custom and
practice;
(b) The Company shall not directly or indirectly do any of the
following, except in the ordinary course of business: (i) sell, pledge,
dispose of or encumber any of its material assets, (ii) amend or propose to
amend its Articles of Incorporation or By-Laws; (iii) split, combine or
reclassify any outstanding shares of its capital stock, or declare, set
aside or pay any dividend or other distribution payable in cash, stock,
property or otherwise with respect to shares of its capital stock except as
required for the Class A Convertible Preferred Stock; (iv) redeem, purchase
or acquire or offer to acquire any shares of Company Stock; or (v) enter
into or modify any material contract, agreement, commitment or arrangement
with respect to any of the foregoing;
(c) The Company shall not, (i) issue, sell, pledge or dispose of, or
agree to issue, sell, pledge or dispose of, any additional shares of, or
any options, warrants, conversion privileges or rights of any kind to
acquire any shares of, its capital stock; (ii) acquire (by merger,
consolidation, acquisition of stock or assets or otherwise) any
corporation, partnership or other business organization or division or the
material assets thereof; (iii) incur any indebtedness for borrowed money,
issue any debt securities or guarantee any indebtedness to others; or (iv)
enter into or modify any contract, agreement, commitment or arrangement
with respect to any of the foregoing;
(d) The Company shall not enter into any employment, severance or
similar agreements or arrangements with, or grant any bonus, salary
increase, severance or termination pay to, any officers or directors;
(e) The Company shall not adopt any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employee;
(f) Except as otherwise required by its Articles of Incorporation or
By-Laws, by this Agreement or by applicable law, the Company shall not call
any meeting of shareholders;
(g) The Company shall (i) use its best efforts not to take any action
which would render, or which reasonably may be expected to render, any
representation or warranty made by it in this Agreement untrue at any time
prior to the Closing Date as if then made; and (ii) notify Index of any
emergency or other change in the normal course of its business or in the
operation of its properties and of any tax audits, tax claims, governmental
or third party complaints, investigations or hearings (or communications
indicating that the same may be contemplated) if such emergency, change,
audit, claim, complaint, investigation or hearing would be material,
individually or in the aggregate, to the financial condition, results of
operations or business of the Company, or to the ability of any of the
parties hereto to consummate the transactions contemplated by this
Agreement;
(h) The Company shall notify Index promptly of any material adverse
event or circumstance affecting the Company (including the filing of any
material litigation against the Company or the existence of any dispute
with any person or entity which involves a reasonable likelihood of such
litigation being commenced); and
(i) The Company shall comply with all legal requirements and
contractual obligations applicable to its operations and business and pay
all applicable taxes.
5.2 Other Actions. Unless approved by Index, the Company shall not take
any action or permit any action to occur that might reasonably be expected to
result in any of the representations and warranties of the
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<PAGE> 107
Company contained in this Agreement becoming untrue after the date hereof or any
of the conditions to the Closing set forth in Article 7 of this Agreement not
being satisfied.
ARTICLE 6
ADDITIONAL AGREEMENTS
6.1 Access and Information. Except for information relating to any claims
any party may have against the other, the Company and Index shall each afford to
the other and to the other's financial advisors, legal counsel, accountants,
consultants and other representatives full access during normal business hours
throughout the period prior to the Effective Time to all of its books, records,
properties and personnel and, during such period, each shall furnish promptly to
the other (a) a copy of each report, schedule and other document filed or
received by it pursuant to the requirements of federal or state securities laws,
and (b) all other information as such other party may reasonably request. Each
party shall hold in confidence all non-public information until such time as
such information is otherwise publicly available and, if this Agreement is
terminated, each party will upon written request deliver to the other all
documents, work papers and other material obtained by such party or on its
behalf from the other party as a result of this Agreement or in connection
herewith, whether so obtained before or after the execution hereof. As soon as
practicable following the Closing, the Company shall deliver to Index all of the
books and records of the Company.
6.2 Registration Statement. Index and the Company shall cooperate in
preparing a registration statement on Form S-4 and combined prospectus and proxy
statement, any amendments or supplements thereto and any notices, reports,
letters, proxies or other materials required to be filed with the Commission in
connection with the Merger and the Newman Merger (collectively, the registration
statement and combined prospectus and proxy statement, any amendments or
supplements thereto and any notices, reports, letters, proxies or other
materials required to be filed with the Commission in connection with the Merger
and the Newman Merger are herein referred to as the "Registration Statement").
The parties shall cooperate with each other in providing any information that
the other party may reasonably request to aid in the preparation of the
Registration Statement. The parties will use their commercially reasonable
efforts to respond to the comments of the Commission with respect to the
Registration Statement and will make any further filing (including amendments
and supplements) in connection therewith that may be necessary, proper and
advisable. Index will provide the Company, and the Company will provide Index,
with whatever information and assistance in connection with the foregoing
filings that the filing party reasonably may request. Index will take all
actions that may be necessary, proper or advisable under state securities laws
in connection with the offering and issuance of Index Common Stock as
contemplated herein.
6.3 Meetings of Shareholders.
(a) The Company shall call a special meeting of its shareholders prior
to the Effective Time (at a date agreed upon with Index) to be held in
accordance with the laws of the State of Texas to consider and vote upon
the Merger.
(b) The Merger Sub shall call a special meeting of its sole
stockholder prior to the Effective Time to be held in accordance with the
laws of the State of Nevada to consider and vote upon the Merger. The
parties hereto acknowledge and agree that the Merger Sub's sole stockholder
may approve the Merger by written consent in lieu of holding such a
meeting.
(c) Index shall call a special meeting of its shareholder prior to the
Effective Time to be held in accordance with the laws of the State of Texas
to consider and vote upon the Newman Merger.
6.4 Intentionally Left Blank.
6.5 Press Releases. The Company and Index shall consult with each other as
to the form and substance of any press release or other public disclosure of
matters related to this Agreement or any of the transactions contemplated
hereby; provided, however, that nothing in this Section 6.5 shall be deemed to
prohibit any party
12
<PAGE> 108
hereto from making any disclosure that is required to fulfill such party's
disclosure obligations imposed by law, including, without limitation, federal
securities laws.
ARTICLE 7
CONDITIONS TO CLOSING
7.1 Conditions to Obligations of Each Party to Effect the Closing. The
respective obligations of each party to effect the Closing shall be subject to
the fulfillment on or prior to the Closing Date of the following conditions:
(a) The Registration Statement shall have been declared effective by
the Commission and no stop order with respect thereto shall be in effect;
(b) The Merger shall have been approved by the shareholders of Index,
the Company and the Merger Sub, in accordance with the laws of the States
of Texas and Nevada;
(c) The Newman Merger shall have been approved by the shareholders of
Index, Newman Acquisition and Newman, in accordance with the laws of the
States of Nevada and New Mexico, respectively;
(d) Intentionally left blank;
(e) No order, injunction or decree shall have been entered and remain
in effect in any action or proceeding before any foreign, federal or state
court or governmental agency or other foreign, federal or state regulatory
or administrative agency or commission that would prevent or make illegal
the consummation of the transactions contemplated hereby.
7.2 Additional Conditions to Index's and the Merger Sub's Obligations. The
obligations of each of Index and the Merger Sub to effect the Closing are
subject to the satisfaction of the following additional conditions on or before
the Closing Date:
(a) The representations and warranties set forth in Article 4 of this
Agreement will be true and correct in all material respects as of the date
hereof and at and as of the Closing Date as though then made;
(b) The Company shall have performed, in all material respects, each
obligation and agreement and complied with each covenant to be performed
and complied with by it under Articles 5 and 6 of this Agreement prior to
the Closing Date;
(c) All consents by governmental or regulatory agencies or otherwise
that are required for the consummation of the transactions contemplated
hereby or that are required for Index to own, operate or control the
Company or any portion of the assets of the Company to prevent a breach of
or a default under or a termination of any agreement material to the
Company to which the Company is a party or to which any material portion of
the assets of the Company is subject, will have been obtained;
(d) No action or proceeding before any court or governmental body will
be pending or threatened wherein a judgment, decree or order would prevent
or restrain any of the transactions contemplated hereby or cause such
transactions to be declared unlawful, nullified or rescinded or which might
adversely affect the right of Index to own, operate or control the Company;
(e) Index and its financial and legal advisors shall have completed a
due diligence review of the business, operations and financial statements
of the Company, the results of which shall be satisfactory to Index in its
sole discretion;
(f) Index will have received from Fulbright & Jaworski, L.L.P.,
counsel to the Company, an opinion addressed to Index, dated the Closing
Date;
13
<PAGE> 109
(g) No event shall have occurred prior to the Closing which in the
reasonable judgment of Index or the Merger Sub, would materially affect the
purpose of the Merger; and
(h) At the Closing, the Company shall have delivered or caused to be
delivered to Index the following:
(i) a certificate executed by the President and Secretary of the
Company stating that the conditions set forth in Sections 7.2(a) through
(d) of this Agreement have been satisfied;
(ii) certified copies of the resolutions duly adopted by the
Company's Board of Directors authorizing and approving the Merger and
the execution, delivery and performance of this Agreement;
(iii) certified copies of resolutions duly adopted by the Company's
shareholders authorizing and approving the Merger and the execution,
delivery and performance of this Agreement;
(iv) certificates of good standing or comparable certificates for
the Company from the jurisdiction of its incorporation and from every
jurisdiction where a failure to be qualified or licensed would have a
material adverse effect on its financial condition, results of
operations or business, dated not earlier than five days prior to the
Closing Date;
(v) a copy of the Company's Articles of Incorporation certified as
of a recent date by the Secretary of State of the State of Texas;
(vi) an incumbency certificate of the officers of the Company; and
(vii) such other documents as Index may reasonably request in
connection with the transactions contemplated hereby.
7.3 Additional Conditions to the Company's Obligations. The obligations of
the Company to effect the Closing are subject to the satisfaction of the
following conditions on or before the Closing Date:
(a) The representations and warranties set forth in Article 3 of this
Agreement will be true and correct in all material respects as of the date
hereof and at and as of the Closing Date as though then made;
(b) Index shall have performed, in all material respects, each
obligation and agreement and complied with each covenant required to be
performed and complied with by it under Article 6 of this Agreement prior
to the Closing Date;
(c) No action or proceeding before any court or governmental body will
be pending or threatened wherein a judgment, decree or order would prevent
any of the transactions contemplated hereby or cause such transactions to
be declared unlawful or rescinded;
(d) The Company shall have received from Fouts & Moore, L.L.P.,
counsel to Index, an opinion addressed to the Company, dated the Closing
Date; and
(e) On the Closing Date, Index shall have delivered to the Company the
following:
(i) a certificate executed on behalf of Index and the Merger Sub
stating that the conditions set forth in Sections 7.3(a) through (c) of
this Agreement have been satisfied;
(ii) certified copies of resolutions duly adopted by Index's and
the Merger Sub's Boards of Directors authorizing and approving the
Merger and the execution, delivery and performance of this Agreement;
(iii) certified copies of the resolutions duly adopted by the
shareholder of the Merger Sub authorizing and approving the Merger and
the execution, delivery and performance this Agreement;
(iv) certified copies of resolutions duly adopted by Index's Board
of Directors authorizing and approving the Newman Merger and the
execution, delivery and performance of the Newman Merger Agreement;
14
<PAGE> 110
(v) certified copies of resolutions duly adopted by the
shareholders of Index authorizing and approving the Newman Merger and
the execution, delivery and performance of the Newman Merger Agreement;
(vi) a certificate of existence for Index from the Secretary of
State of the State of Texas and for Merger Sub from the Secretary of
State of the State of Nevada, dated not earlier than five days prior to
the Closing Date;
(vii) a copy of Index's Articles of Incorporation certified by the
Secretary of State of the State of Texas;
(viii) a certificate of good standing for Index from the Secretary
of State of the State of Texas and for the Merger Sub from the Secretary
of State of the State of Nevada, dated not earlier than five days prior
to the Closing Date;
(ix) a copy of the Merger Sub's Articles of Incorporation certified
by the Secretary of State of the State of Nevada;
(x) an incumbency certificate of the officers of Index and the
Merger Sub; and
(xi) such other material documents as the Company may reasonably
request in connection with the transactions contemplated hereby.
ARTICLE 8
REMEDIES
8.1 General. In the event of any breach of this Agreement, the parties
shall have all remedies at law or in equity.
8.2 Waiver. No waiver by any party of any default or breach by another
party of any representation, warranty, covenant or condition contained in this
Agreement shall be deemed to be a waiver of any subsequent default or breach by
such party of the same or any other representation, warranty, covenant or
condition. No act, delay, omission or course of dealing on the part of any party
in exercising any right, power or remedy under this Agreement or at law or in
equity shall operate as a waiver thereof or otherwise prejudice any of such
party's rights, powers and remedies. All remedies, whether at law or in equity,
shall be cumulative and the election of any one or more shall not constitute a
waiver of the right to pursue other available remedies.
ARTICLE 9
TERMINATION
9.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time by the
mutual consent of the parties hereto.
9.2 Termination by Any Party. This Agreement may be terminated and the
Merger may be abandoned by action of the Board of Directors of any party hereto
if a United States federal or state court of competent jurisdiction or United
States federal or state governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and non-appealable; provided, that the
party seeking to terminate this Agreement pursuant to this clause shall have
used all reasonable efforts to remove such injunction, order or decree.
9.3 Termination by Index. This Agreement may be terminated by Index upon
written notice if the Closing has not occurred by December 31, 1996.
15
<PAGE> 111
9.4 Effect of Termination and Abandonment. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article 9, all
obligations of the parties hereto shall terminate, except the obligations of the
parties pursuant to Section 6.1.
9.5 Material Breach. This Agreement may be terminated if a material breach
of this Agreement has occurred and such breach has not been cured by the
breaching party within ten (10) business days of receipt of written notice from
a non-breaching party detailing such breach.
ARTICLE 10
GENERAL PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally,
sent by overnight courier or mailed by registered or certified mail (postage
prepaid and return receipt requested) to the party to whom the same is so
delivered, sent or mailed at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to Index or the Merger Sub:
David R. Little, President
580 Westlake Park Boulevard
Suite 1100
Houston, Texas 77079
Phone: (713) 558-4448
Fax: (713) 558-4448
with a copy to:
Gary A. Messersmith, Esq.
Fouts & Moore, L.L.P.
5555 San Felipe, 17th Floor
Houston, Texas 77066-2726
Phone: (713) 622-9966
Fax: (713) 622-1045
(b) if to the Company:
Mr. Bryan Wimberly, President
6500 Brittmoore
Houston, Texas 77041
Phone: (713) 937-0330
Fax: (713) 937-0574
with a copy to:
Mr. Curtis Huff
Fulbright & Jaworski, L.L.P.
1301 McKinney
Houston, Texas 77010
Phone: (713) 651-5657
Fax: (713) 651-5246
10.2 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. References to Sections and Articles refer to
sections and articles of this Agreement unless otherwise stated.
10.3 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected,
16
<PAGE> 112
impaired or invalidated and the parties shall negotiate in good faith to modify
this Agreement to preserve each party's anticipated benefits under this
Agreement.
10.4 Miscellaneous. This Agreement (together with all other documents and
instruments referred to herein): (a) constitutes the entire agreement and
supersedes all other prior agreements and undertakings, both written and oral,
among the parties with respect to the subject matter hereof; (b) except as
expressly set forth herein, is not intended to confer upon any other person any
rights or remedies hereunder and (c) shall not be assigned by operation of law
or otherwise, except that Index may assign all or any portion of its rights
under this Agreement to any wholly-owned subsidiary but no such assignment shall
relieve Index of its obligations hereunder, and except that this Agreement may
be assigned by operation of law to any corporation with or into which Index may
be merged.
10.5 Separate Counsel. Each party hereby expressly acknowledges that it
has been advised and urged to seek its own separate legal counsel for advice
with respect to this Agreement.
10.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS,
INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF
TEXAS, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF.
10.7 Counterparts. This Agreement may be executed in two or more
counterparts which together shall constitute a single agreement.
10.8 Amendment. This Agreement may be amended, modified or supplemented
only by an instrument in writing executed by all parties hereto.
10.9 Parties In Interest: No Third Party Beneficiaries. Except as
otherwise provided herein, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective heirs, legal
representatives, successors and assigns of the parties hereto. This Agreement
shall not be deemed to confer upon any person not a party hereto any rights or
remedies hereunder.
10.10 Captions. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
10.11 Expenses. The parties hereto shall pay all of their own expenses
relating to the transactions contemplated by this Agreement, including, without
limitation, the fees and expenses of their respective counsel and financial
advisers.
10.12 Survival. The representations, warranties and covenants contained
herein shall not survive the Closing.
17
<PAGE> 113
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
INDEX, INC.
By: /s/ DAVID R. LITTLE
- ------------------------------------
DAVID R. LITTLE, President
SEPCO ACQUISITION CORPORATION
By: /s/ DAVID R. LITTLE
- ------------------------------------
DAVID R. LITTLE, President
SEPCO INDUSTRIES, INC.
By: /s/ BRYAN WIMBERLY
- ------------------------------------
BRYAN WIMBERLY, President
18
<PAGE> 114
APPENDIX B:
NEWMAN MERGER AGREEMENT
<PAGE> 115
* * * * *
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
INDEX, INC.,
NEWMAN ACQUISITION CORPORATION,
NEWMAN COMMUNICATIONS CORPORATION
AND
LITTLE & COMPANY INVESTMENT SECURITIES
* * * * *
AUGUST 12, 1996
<PAGE> 116
<TABLE>
<CAPTION>
ARTICLE/SECTION PAGE
- ------- ----
<S> <C> <C>
RECITALS................................................................................ 1
ARTICLE 1 THE MERGER................................................................... 1
1.1 The Merger..................................................................... 1
1.2 Closing........................................................................ 2
1.3 Effective Time of the Merger................................................... 2
1.4 Articles of Incorporation and Bylaws........................................... 2
1.5 Directors and Officers......................................................... 2
ARTICLE 2 CONVERSION OF SHARES......................................................... 2
2.1 Conversion of Company Common Stock............................................. 2
2.2 Class C Warrants............................................................... 3
2.3 Stock Certificates............................................................. 3
2.4 Fractional Shares.............................................................. 3
2.5 Dissenting Shares.............................................................. 3
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF INDEX AND THE MERGER SUB................... 4
3.1 Organization................................................................... 4
3.2 Capitalization................................................................. 4
3.3 Certain Corporate Matters...................................................... 4
3.4 Authority Relative to this Agreement........................................... 4
3.5 Consents and Approvals; No Violations.......................................... 5
3.6 Information Supplied........................................................... 5
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND LITCO...................... 6
4.1 Organization................................................................... 6
4.2 Capitalization and Ownership of the Company.................................... 6
4.3 Certain Corporate Matters...................................................... 6
4.4 Subsidiaries................................................................... 7
4.5 Authority Relative to this Agreement........................................... 7
4.6 Consents and Approvals; No Violations.......................................... 7
4.7 Reports........................................................................ 7
4.8 Financial Statements........................................................... 8
4.9 Events Subsequent to Financial Statements...................................... 8
4.10 Undisclosed Liabilities........................................................ 9
4.11 Tax Returns and Audits......................................................... 9
4.12 Property....................................................................... 10
4.13 Books and Records.............................................................. 10
4.14 Questionable Payments.......................................................... 10
4.15 Environmental Matters.......................................................... 10
4.16 Intellectual Property.......................................................... 13
4.17 Insurance...................................................................... 13
4.18 Contracts...................................................................... 13
4.19 Litigation..................................................................... 14
4.20 Employees...................................................................... 14
4.21 Employee Benefit Plans......................................................... 14
4.22 Legal Compliance............................................................... 14
4.23 Broker's Fees.................................................................. 14
4.24 Disclosure..................................................................... 14
4.25 Bank Accounts.................................................................. 15
4.26 Information Supplied........................................................... 15
</TABLE>
i
<PAGE> 117
<TABLE>
<CAPTION>
ARTICLE/SECTION PAGE
- ------- ----
<S> <C> <C>
ARTICLE 5 CONDUCT OF BUSINESS PENDING THE CLOSING...................................... 15
5.1 Conduct of Business by the Company Pending the Closing......................... 15
5.2 Other Actions.................................................................. 16
ARTICLE 6 ADDITIONAL AGREEMENTS........................................................ 17
6.1 Access and Information......................................................... 17
6.2 Registration Statement......................................................... 17
6.3 Meetings of Shareholders....................................................... 17
6.4 Press Releases................................................................. 18
6.5 Reimbursement of LITCO......................................................... 18
ARTICLE 7 CONDITIONS TO CLOSING........................................................ 18
7.1 Conditions to Obligations of Each Party to Effect the Closing.................. 19
7.2 Additional Conditions to Index's and the Merger Sub's Obligations.............. 19
7.3 Additional Conditions to the Company's and LITCO's Obligations................. 21
ARTICLE 8 REMEDIES..................................................................... 22
8.1 Indemnification by LITCO....................................................... 22
8.2 Indemnification by Index....................................................... 23
8.3 Conditions of Indemnification.................................................. 23
8.4 Waiver......................................................................... 24
8.5 Remedies Not Exclusive......................................................... 24
ARTICLE 9 TERMINATION.................................................................. 24
9.1 Termination by Mutual Consent.................................................. 24
9.2 Termination by Any Party....................................................... 24
9.3 Termination by Index........................................................... 25
9.4 Effect of Termination and Abandonment.......................................... 25
9.5 Material Breach................................................................ 25
ARTICLE 10 GENERAL PROVISIONS.......................................................... 25
10.1 Notices........................................................................ 25
10.2 Interpretation................................................................. 26
10.3 Severability................................................................... 26
10.4 Miscellaneous.................................................................. 26
10.5 Separate Counsel............................................................... 26
10.6 Governing Law.................................................................. 26
10.7 Counterparts................................................................... 26
10.8 Amendment...................................................................... 26
10.9 Parties In Interest; No Third Party Beneficiaries.............................. 26
10.10 Captions....................................................................... 27
10.11 Expenses....................................................................... 27
10.12 Survival....................................................................... 27
SCHEDULES
Schedule 4.2
Schedule 4.9
Schedule 4.20
Schedule 4.25
EXHIBITS
Exhibit A
Exhibit B
</TABLE>
ii
<PAGE> 118
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of August 12, 1996 (this
"Agreement"), is made and entered into by and among Index, Inc., a Texas
corporation ("Index"), Newman Acquisition Corporation, a Nevada corporation and
a wholly-owned subsidiary of Index (the "Merger Sub"), Newman Communications
Corporation, a New Mexico corporation (the "Company") and Little & Company
Investment Securities, a Texas corporation ("LITCO").
RECITALS
WHEREAS, the respective Boards of Directors of Index, the Merger Sub, the
Company and LITCO have adopted resolutions approving and adopting the proposed
merger (the "Merger") of the Company with the Merger Sub upon the terms and
conditions hereinafter set forth in this Agreement;
WHEREAS, LITCO, which holds approximately 61% of the issued and outstanding
common stock of the Company, will enter into this Agreement for the purpose of
making certain representations, warranties, covenants and agreements;
WHEREAS, Index is entering into that Agreement and Plan of Merger with
Sepco Industries, Inc., a Texas corporation and Sepco Acquisition Corporation, a
Nevada corporation (the "Sepco Merger Agreement") simultaneously with this
Agreement;
WHEREAS, the Merger and the merger contemplated by the Sepco Merger
Agreement (the "Sepco Merger") will be effected simultaneously; and
WHEREAS, the Merger and the Sepco Merger are both intended to qualify as a
tax-free transaction under Sections 351 and 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing premises, the
representations, warranties and agreements herein contained and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and subject to the conditions set forth herein, the parties hereto
agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3 hereof), the Merger Sub shall be
merged with and into the Company and the separate corporate existence of the
Merger Sub shall thereupon cease. The Company shall be the surviving corporation
in the Merger. The Merger shall have the effects set forth in the applicable
provisions of the Nevada General Corporation Law (the "NGCL") and the New Mexico
Business Corporation Act (the "NMBCA").
1.2 Closing. The closing of the Merger (the "Closing") shall take place at
10:00 a.m., local time, at the offices of Fulbright & Jaworski L.L.P., located
at 1301 McKinney, Houston, Texas 77010 on the next business day after the
shareholder approvals set forth in Section 6.3 hereof have been completed, or as
soon as the conditions set forth in Article 7 have been satisfied or waived or
as soon as practicable thereafter; provided, however, that the date of the
Closing shall not be later than December 31, 1996, unless the parties hereto
otherwise mutually agree in writing. Such date is herein referred to as the
"Closing Date." At the Closing, the parties hereto shall deliver or cause to be
delivered the certificates and other documents set forth in Article 7.
1.3 Effective Time of the Merger. If all the conditions to the Merger set
forth in Article 7 shall have been fulfilled or waived in accordance herewith
and this Agreement shall not have been terminated as provided in Article 9, the
parties hereto shall cause Articles of Merger (the "Articles of Merger") that
meet the requirements of the applicable provisions of the NGCL and the NMBCA,
respectively, to be properly executed and filed with the Secretary of State of
the States of Nevada and New Mexico, respectively, on the Closing Date. The
Merger shall be effective at the time of acceptance of the filing of the
Articles of Merger with the Secretary of State of the States of Nevada and New
Mexico in accordance with the NGCL and the
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NMBCA, respectively, or at such later time which the parties hereto shall have
agreed upon and designated in such filing as the effective time of the Merger
(the "Effective Time").
1.4 Articles of Incorporation and By-Laws. The Articles of Incorporation
and By-Laws of the Company in effect immediately prior to the Effective Time
shall continue to be the Articles of Incorporation and By-Laws of the Company
subsequent to the Effective Time, subject always to the right of the Company to
amend its Articles of Incorporation and By-Laws in accordance with the laws of
the State of New Mexico and the provisions of its Articles of Incorporation and
By-Laws.
1.5 Directors and Officers. The directors and officers of the Merger Sub
immediately prior to the Effective Time shall be the directors and officers of
the Company and shall hold such positions from the Effective Time until their
respective successors are duly elected or appointed and qualify in the manner
provided in the Articles of Incorporation and By-Laws of the Company or as
otherwise provided by law.
ARTICLE 2
CONVERSION OF SHARES
2.1 Conversion of Company Common Stock. At the Effective Time, by virtue
of the Merger and without any action required on the part of Index, the Company,
the Merger Sub or any holder of capital stock of any of them:
(a) Subject to the limitations contained herein, each share of common
stock of the Company, no par value (the "Company Common Stock"), issued and
outstanding immediately prior to the Effective Time shall be automatically
converted into the right to receive one-fourth of one share of common stock
of Index, par value $.01 per share (the "Index Common Stock").
(b) All shares of common stock of the Merger Sub issued and
outstanding immediately prior to the Effective Time shall be cancelled and
cease to be outstanding.
2.2 Class C Warrants. The Company's Class C Warrants shall be adjusted as
provided in Section 7 of that Warrant Agreement by and between the Company and
General Securities Transfer Agency, Inc. dated September 13, 1993.
2.3 Stock Certificates. At or following the Effective Time, each holder of
an outstanding certificate or certificates representing the Company Common Stock
shall surrender the same to Index and Index shall, in exchange therefor, cause
to be issued to the holder of such certificate(s) a new certificate representing
shares of Index Common Stock in accordance with Section 2.1, less any amount
required to be withheld under applicable federal, state or local tax
requirements, and the surrendered certificate(s) shall be cancelled. Until so
surrendered and exchanged, each such certificate shall represent solely the
right to receive shares of Index Common Stock in accordance with Section 2.1,
without interest and less any tax withholding.
2.4 Fractional Shares. No fractional shares of Index Common Stock shall be
issued in the Merger. In the event that a holder of the Company Common Stock
would otherwise be entitled to receive any fractional shares of Index Common
Stock as a result of the Merger, such holder shall be entitled to receive, in
lieu thereof, an amount of cash to be determined by multiplying $1.00 by the
fraction of a share of Index Common Stock to which such holder would otherwise
have been entitled.
2.5 Dissenting Shares. Each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time not voted in favor of the
Merger, the holder of which has given written notice of the exercise of
dissenter's rights and has perfected such rights as required by the NMBCA is
herein called a "Dissenting Share." Dissenting Shares shall not be converted
into or represent the right to receive shares of Index Common Stock pursuant to
this Section 2 and shall be entitled only to such rights as are available to
such holder pursuant to the NMBCA, unless the holder thereof shall have
withdrawn or forfeited his dissenter's rights. Each holder of Dissenting Shares
shall be entitled to receive the value of such Dissenting Shares held by him in
accordance with the applicable provisions of the NMBCA. Index will promptly pay
to any holder of Dissenting Shares such amount as such holder shall be entitled
to receive in accordance with the
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applicable provisions of the NMBCA. If any holder of Dissenting Shares shall
effectively withdraw or forfeit his dissenter's rights under the NMBCA, such
Dissenting Shares shall be converted into the right to receive shares of Index
Common Stock in accordance with this Section 2.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
INDEX AND THE MERGER SUB
Index and the Merger Sub hereby jointly and severally represent and warrant
to the Company and LITCO as follows:
3.1 Organization. Each of Index and the Merger Sub has been duly
incorporated, is validly existing as a corporation and is in good standing under
the laws of its state of incorporation, and has the requisite corporate power to
carry on its business in such state as now conducted.
3.2 Capitalization. The total number of shares of stock of all classes
which Index shall have the authority to issue is 110,000,000 shares, of which
the following designations have been made: 100,000,000 shares of common stock,
1,000,000 shares of preferred stock, par value $1.00 per share and 1,000,000
shares of convertible preferred stock, par value $100 per share. As of the date
of this Agreement, (a) 100 shares of common stock of Index are issued and
outstanding, (b) no shares of preferred stock are issued and outstanding, and
(c) no shares of convertible preferred stock are issued and outstanding. All of
the issued and outstanding shares of common stock of Index are validly issued,
fully paid, nonassessable and free of preemptive rights. All shares of Index
Common Stock issuable in accordance with this Agreement will be, when so issued,
duly authorized, validly issued, fully paid and nonassessable. The authorized
capital stock of the Merger Sub consists of 100,000 shares of common stock, par
value $.10 per share, of which 100 shares are outstanding and are validly
issued, fully paid and nonassessable and are owned by Index.
3.3 Certain Corporate Matters. Index is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
ownership of its properties, the employment of its personnel or the conduct of
its business requires it to be so qualified, except where the failure to so
qualify would not have a material adverse effect on Index's financial condition,
results of operations or business. Index has the requisite corporate power and
authority and all authorizations, licenses and permits necessary to carry on the
business in which it is engaged and to own and use the properties owned and used
by it except such authorization, licenses and permits the failure of which to
possess would not have a material adverse effect on the financial condition,
results of operations or business of Index.
3.4 Authority Relative to this Agreement. Each of Index and the Merger Sub
has the requisite corporate power and authority to enter into this Agreement and
to carry out its obligations hereunder. The execution, delivery and performance
of this Agreement by Index and the Merger Sub and the consummation by Index and
the Merger Sub of the transactions contemplated hereby have been duly authorized
by the Boards of Directors of each of Index and the Merger Sub and, subject to
stockholder approval as set forth in this Agreement, no other actions on the
part of Index or the Merger Sub are necessary to authorize this Agreement or the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by each of Index and the Merger Sub and constitutes,
subject to stockholder approval as set forth in this Agreement, a valid and
binding agreement of each of Index and the Merger Sub, enforceable against Index
and the Merger Sub in accordance with its terms, except as such enforcement may
be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally or by general principles of equity.
3.5 Consents and Approvals; No Violations. Except as may be required under
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder (the "Securities Act"), the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder (the
"Exchange Act"), state securities or blue sky laws, and the filing and
recordation of the Articles of Merger as required by the NGCL and the NMBCA, no
filing with, and no permit, authorization, consent or approval of, any public
body or authority is necessary for the consummation by Index and the Merger Sub
of the
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transactions contemplated by this Agreement. Neither the execution and delivery
of this Agreement by Index or the Merger Sub nor the consummation by Index or
the Merger Sub of the transactions contemplated hereby, nor compliance by Index
or the Merger Sub with any of the provisions hereof, will (a) conflict with or
result in any breach of any provisions of the Articles of Incorporation or
By-Laws of Index or the Articles of Incorporation or By-Laws of the Merger Sub,
(b) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default of a material nature (or give rise to
any right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
contract, agreement or other instrument or obligation, of a material nature, to
which Index or any of its subsidiaries is a party or by which any of them or
their properties or assets may be bound or (c) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Index, any of its
subsidiaries or any of their properties or assets, except in the case of clauses
(b) and (c) for violations, breaches or defaults which in the aggregate would
not have a material adverse effect on the financial condition or results of
operations of Index and its subsidiaries taken as a whole. The parties hereto
agree and acknowledge that Sepco Industries, Inc. was required to obtain and has
obtained the written consent of Fleet Capital Corporation as required under that
Second Amended and Restated Loan and Security Agreement by and between Sepco
Industries, Inc. and Fleet Capital Corporation dated April 1, 1994, as amended.
3.6 Information Supplied. None of the information provided by Index for
use in the Registration Statement (as defined in Section 6.2 hereof) and
contained therein will, as of the date that the Registration Statement is filed
with the Securities and Exchange Commission (the "Commission"), on the date it
is declared effective or at the time of the meeting of the shareholders of the
Company to be held in connection with the Merger, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The registration
statement and prospectus contained in the Registration Statement will comply, in
all material respects, as to form with the provisions of the Exchange Act and
the Securities Act.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND LITCO
The Company and LITCO hereby jointly and severally represent and warrant to
Index and the Merger Sub as follows:
4.1 Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation,
and has the requisite corporate power and authority to carry on its business as
now conducted in all applicable jurisdictions.
4.2 Capitalization and Ownership of the Company. The Company's entire
authorized capital stock consists of 10,000,000 shares of common stock, of which
2,552,064 shares are outstanding and 2,000,000 shares of preferred stock, no par
value, of which none are outstanding. All of the shares of Company Common Stock
have been duly authorized and are validly issued, fully paid and nonassessable
and have not been issued in violation of any pre-emptive rights. Except as set
forth on Schedule 4.2 hereto, there are no outstanding or authorized options,
rights, warrants, calls, convertible securities, rights to subscribe, conversion
rights or other agreements or commitments to which the Company or LITCO are
parties or which are binding upon the Company or LITCO providing for the
issuance by the Company or transfer by the Company or LITCO of additional shares
of the Company's capital stock and the Company has not reserved any shares of
its capital stock for issuance, nor are there any outstanding stock option
rights, phantom equity or similar rights, contracts, arrangements or
commitments. There are no voting trusts or any other agreements or
understandings, written or oral, with respect to the voting of the Company's
capital stock.
4.3 Certain Corporate Matters. The Company is duly licensed or qualified
to do business and is in good standing as a foreign corporation in every
jurisdiction in which the character of the Company's properties or nature of the
Company's business requires it to be so licensed or qualified other than such
jurisdictions in
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which the failure to be so licensed or qualified does not, or insofar as can
reasonably be foreseen, in the future will not, have a material adverse effect
on its financial condition, results of operations or business. The Company has
full corporate power and authority and all authorizations, licenses, variances,
exemptions, orders, contracts, approvals and permits necessary to carry on the
business in which it is engaged or in which it proposes presently to engage and
to own and use the properties owned and used by it. The Company has delivered to
Index true, accurate and complete copies of its Articles of Incorporation and
By-Laws, which reflect all amendments made thereto at any time prior to the date
of this Agreement. The records of meetings of the shareholders and Board of
Directors of the Company are complete and correct in all material respects. The
stock records of the Company and the shareholder lists of the Company that the
Company has previously furnished to Index are complete and correct in all
material respects and accurately reflect the record ownership and the beneficial
ownership of all the outstanding shares of the Company's capital stock and all
other outstanding securities issued by the Company. The Company is not in
default under or in violation of any provision of its Articles of Incorporation
or By-Laws in any material respect. The Company is not in default or in
violation of any restriction, lien, encumbrance, indenture, contract, lease,
sublease, loan agreement, note or other obligation or liability by which it is
bound or to which any of its assets is subject.
4.4 Subsidiaries. The Company does not own, directly or indirectly, any of
the capital stock of any other corporation or any equity, profit sharing,
participation or other interest in any corporation, partnership, joint venture
or other entity.
4.5 Authority Relative to this Agreement. Each of the Company and LITCO
has the requisite corporate power and authority to enter into this Agreement and
carry out its obligations hereunder. The execution, delivery and performance of
this Agreement by both the Company and LITCO and the consummation of the
transactions contemplated hereby have been duly authorized by the Boards of
Directors of each of the Company and LITCO and, subject to shareholder approval
as set forth in this Agreement, no other actions on the part of the Company or
LITCO are necessary to authorize this Agreement or the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by each
of the Company and LITCO and constitutes, subject to shareholder approval as set
forth in this Agreement, a valid and binding obligation of the Company and
LITCO, enforceable in accordance with its terms, except as such enforcement may
be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally or by general principles of equity.
4.6 Consents and Approvals; No Violations. Except as may be required under
the Securities Act, the Exchange Act, state securities or blue sky laws, and the
filing and recordation of the Articles of Merger as required by the NGCL and the
NMBCA, no filing with, and no permit, authorization, consent or approval of, any
public body or authority is necessary for the consummation by the Company of the
transactions contemplated by this Agreement. Neither the execution and delivery
of this Agreement by the Company nor the consummation by the Company of the
transactions contemplated hereby, nor compliance by the Company with any of the
provisions hereof, will (a) conflict with or result in any breach of any
provisions of the Articles of Incorporation or By-Laws of Company, (b) result in
a violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, agreement or other instrument or
obligation to which the Company is a party or by which it or any of its
properties or assets may be bound or (c) violate any order, law, resolution,
writ, injunction, decree, statute, rule or regulation applicable to the Company,
or any of its properties or assets, except in the case of clauses (b) and (c)
for violations, breaches or defaults which in the aggregate would not have a
material adverse effect on the financial condition or results of operations of
the Company taken as a whole.
4.7 Reports. The Company has filed all reports required to be filed with
the Securities and Exchange Commission (the "Commission") pursuant to the
Exchange Act (collectively, the "Reports"). The Company has delivered to Index
copies of all Reports filed with Commission since March 26, 1994. None of the
Reports, as of their respective dates, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
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4.8 Financial Statements. The Company has delivered to Index the following
audited financial statements: (a) its balance sheets as of December 31, 1995 and
March 25, 1995; (b) its statements of operations for the nine months ended
December 31, 1995 and 1994 and for the years ended March 25, 1995 and March 26,
1994; (c) its statements of cash flows for the nine months ended December 31,
1995 and 1994 and for the years ended March 25, 1995 and March 26, 1994; (d) its
statements of changes in shareholders' equity for the nine months ended December
31, 1995 and 1994; and (e) its statements of changes in shareholders' equity for
the years ended March 25, 1995 and March 26, 1994. In addition, the Company has
delivered to Index the following unaudited financial statements: (a) its balance
sheet as of March 31, 1996; (b) its statement of operations for the three months
ended March 31, 1996; and (c) its statement of cash flows for the three months
ended March 31, 1996. Such financial statements are herein collectively referred
to as the "Financial Statements." The Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods covered thereby and present fairly the financial
condition of the Company as of such dates and the results of its operations and
changes in cash flows for such periods.
4.9 Events Subsequent to Financial Statements. Since March 31, 1996, there
has not been:
(a) Any adverse change in the financial condition, results of
operations or business of the Company;
(b) Any sale, lease, transfer, license or assignment of any assets,
tangible or intangible, of the Company;
(c) Any damage, destruction or property loss, whether or not covered
by insurance, affecting adversely the properties or business of the
Company;
(d) Any declaration or setting aside or payment of any dividend or
distribution with respect to the shares of capital stock of the Company or
any redemption, purchase or other acquisition of any such shares;
(e) Any subjection to any lien on any of the assets, tangible or
intangible, of the Company;
(f) Any incurrence of indebtedness or liability or assumption of
obligations by the Company;
(g) Any waiver or release by the Company of any right of any material
value;
(h) Any increase in compensation or benefits to officers or directors
of the Company;
(i) Any change made or authorized in the Articles of Incorporation or
By-laws of the Company;
(j) Except as set forth on Schedule 4.9 hereto, any issuance,
transfer, sale or other disposition by the Company of any shares of its
capital stock or other equity securities, or any grant of any options,
warrants or other rights to purchase or obtain (including upon conversion
or exercise) shares of its capital stock or other equity securities; or
(k) Any loan to or other transaction with any officer, director or
shareholder of the Company giving rise to any claim or right of the Company
against any such person or of such person against the Company.
4.10 Undisclosed Liabilities. The Company has no material liability or
obligation of any nature whatsoever, either direct or indirect, matured or
unmatured, accrued, absolute, contingent or otherwise.
4.11 Tax Returns and Audits. The Company has duly and timely filed or
caused to be filed all returns, reports or similar statements (including any
attached schedules) required to be filed with respect to any tax including,
without limitation, all information returns, claims for refunds, amended returns
and declarations of estimated tax (collectively, the "Tax Returns"). For the
purpose of this Agreement, "tax" shall include any federal, state, local or
foreign income, gross receipts, windfall profits, severance, property,
production, sales, use, license, excise, franchise, employment, payroll,
withholding, alternative or add-on minimum, ad valorem, transfer, stamp or
environmental tax, or any other tax or similar assessment or charge, together
with any interest or penalty, addition to tax or additional amount imposed by
any governmental authority. The Company has paid in full or fully reserved
against in the Financial Statements all taxes, interest, penalties, assessments
and deficiencies due or claimed to be due by it to foreign, federal, state or
local taxing authorities.
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All Tax Returns are complete and accurate and disclose all taxes required to be
paid. The income Tax Returns filed by the Company are not being, to the
knowledge of the Company, examined by the Internal Revenue Service (the "IRS")
or other applicable taxing authorities for any period. All taxes or estimates
thereof that are due as of December 31, 1995, or are claimed or asserted by any
taxing authority to be due as of such date, have been (a) timely and
appropriately paid so as to avoid penalties for underpayment or (b) accrued for
on the balance sheet as of December 31, 1995, as contained in the Financial
Statements. Except for amounts not yet due and payable, all tax liabilities to
which the properties of the Company may be subject have been paid and
discharged. The provisions for income and other taxes payable reflected in the
Financial Statements make adequate provision for all then accrued and unpaid
taxes of the Company. There are no tax liens on any property of the Company, nor
are there any pending or threatened examinations, actions, suits,
investigations, audits, assessments or tax claims asserted. The Company has not
been granted any extensions of limitation periods applicable to tax claims.
Since May 1991, except jurisdictions in which the Company filed Tax Returns, no
claim has been made by a taxing authority that the Company is or may be subject
to taxation by that jurisdiction. All copies of Tax Returns delivered to Index
by the Company are true and correct, and any and all notices from foreign,
federal, state and local taxing authorities, tax examination reports and
statements of deficiencies assessed against or agreed to by the Company since
May 1991 have been made available to Index. The Company is not a party to, or
bound by, any tax indemnity, tax sharing or tax allocation agreement. The
Company is not a member of an "affiliated group," as defined in Section 1504(a)
of the Code and is not the owner of an interest in a partnership, joint venture,
trust, limited liability company or other entity or organization. All positions
taken on federal Tax Returns that could give rise to a penalty for substantial
understatement pursuant to Section 6662(d) of the Code have been disclosed on
such Tax Returns. The Company has not agreed to and is not required to make any
adjustment pursuant to Section 481(a) of the Code (or any predecessor provision)
by reason of any change in any accounting method. The Company has no application
pending with any taxing authority requesting permission for any changes in any
accounting method, and the IRS has not proposed any such adjustment or change in
accounting method. The Company is not subject to any limitation under Section
382 or Section 383 of the Code.
Index shall have sole control over any contest relating to federal, state,
local, or foreign tax assessments or proposed assessments against the Company.
Index shall promptly notify LITCO of any audit or examination of the books and
records of the Company undertaken by the tax authorities, any tax assessments or
proposed assessments or any extension of the statute of limitations applicable
to any Tax Returns of the Company relating to any taxable year or periods ending
on or prior to the Closing Date and shall provide LITCO with periodic reports
regarding the status of such audit or examination. LITCO shall be entitled to
participate in (but not control) any such contest at its sole cost. Index shall
not settle or otherwise compromise any such contest in a manner which results in
liability to LITCO under this Agreement without the written consent of LITCO,
which consent shall not be unreasonably withheld.
4.12 Property. The Company does not own or lease any real or personal
property.
4.13 Books and Records. The books and records of the Company fairly
reflect the transactions to which the Company is a party or by which its
properties are bound.
4.14 Questionable Payments. Neither the Company nor LITCO nor any
employee, agent or representative of either of them has, directly or indirectly,
made any bribes, kickbacks, illegal payments or illegal political contributions
using Company funds or made any payments from the Company's funds to
governmental officials for improper purposes or made any illegal payments from
the Company's funds to obtain or retain business.
4.15 Environmental Matters.
(a) Definitions. For the purpose of this Agreement, the following
terms shall have the meaning herein specified:
(i) "Governmental Authority" shall mean the United States, each
state, each county, each city and each other political subdivision in
which the Company's business is located, and any court, political
subdivision, agency or instrumentality with jurisdiction over the
Company's business.
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(ii) "Environmental Laws" shall mean (A) the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Act of 1986, 42
U.S.C.A. 9601 et seq. ("CERCLA"), (B) the Resource Conservation and
Recovery Act, as amended by the Hazardous and Solid Waste Amendment of
1984, 42 U.S.C.A. 6901 et seq. ("RCRA"), (C) the Clean Air Act, 42
U.S.C.A. 7401 et seq., (D) the Federal Water Pollution Control Act, as
amended, 33 U.S.C.A. 1251 et seq., (E) the Toxic Substances Control Act,
15 U.S.C.A. 2601 et seq., (F) all applicable state laws, and (G) all
other laws and ordinances relating to municipal waste, solid waste, air
pollution, water pollution and/or the handling, discharge, disposal or
recovery of on-site or off-site hazardous substances or materials, as
each of the foregoing has been or may hereafter be amended from time to
time.
(iii) "Hazardous Materials" shall mean, among others, (A) any
"hazardous waste" as defined by the RCRA, and regulations promulgated
thereunder; (B) any "hazardous substance" as defined by CERCLA, and
regulations promulgated thereunder; (C) any "toxic pollutant" as defined
in the Federal Water Pollution Prevention and Control Act, as amended,
33 U.S.C. 1251 et seq., (commonly known as "CWA" for "Clear Water Act"),
and any regulations thereunder; (D) any "hazardous air pollutant" as
defined in the Air Pollution Prevention and Control Act, as amended, 42
U.S.C. 7401 et seq. (commonly known as "CAA" for "Clear Air Act") and
any regulations thereunder; (E) asbestos; (F) polychlorinated biphenyls;
(G) underground storage tanks, whether empty, filled or partially filled
with any substance; (H) any substance the presence of which on the
Business Location (as hereinafter defined) is prohibited by any
Environmental Laws; and (I) any other substance which is regulated by
any Environmental Laws.
(iv) "Hazardous Materials Contamination" shall mean the
contamination (whether presently existing or hereafter occurring) of the
improvements, facilities, soil, groundwater, air or other elements on or
at the location of the Company at 211 West Wall Street, Midland, Texas
79701, or at any other location where the Company conducts or has
conducted business (collectively, the "Business Location") by Hazardous
Materials, or the contamination of the buildings, facilities, soil,
groundwater, air or other elements on or any other specific property or
general area, as a result of Hazardous Materials emanating from the
operations of the Company's business.
Notwithstanding the foregoing, if any Environmental Law is amended so
as to broaden the meaning of any term defined in it, such broader meaning
shall apply subsequent to the effective date of such amendment. Where a
defined term in this Agreement derives its meaning from a statutory
reference, for the purposes of this Agreement any regulatory definition
promulgated pursuant to the applicable statute shall be deemed to be
applicable to the extent its definition is broader than the statutory
reference and any reference or citation to a statute or regulation shall be
deemed to include any amendments to that statute or regulation and judicial
and administrative interpretations of it. To the extent that any state laws
or regulations establish a meaning for a term defined in this Agreement
through reference to a federal Environmental Law that is broader than the
meaning specified in such federal Environmental Law, such broader meaning
set forth in the state Environmental Law shall apply. Any specific
references to a law shall include any amendments to it promulgated from
time to time.
(b) Representations and Warranties. Based on the foregoing, the
Company and LITCO jointly and severally represent and warrant that, to
their best knowledge and belief:
(i) There has been no failure by the Company to comply with all
applicable requirements of Environmental Laws relating to the Company,
the Company's operations, and the Company's manufacture, processing,
distribution, use, treatment, generation, recycling, reuses, sale,
storage, handling, transportation or disposal of any Hazardous Material
and neither the Company nor LITCO is aware of any facts or circumstances
which could materially impair such compliance with all applicable
Environmental Laws.
(ii) Neither LITCO nor the Company has, through the Closing Date,
received notice from any Governmental Authority or any other person of
any actual or alleged violation of any Environmental Laws, nor is any
such notice anticipated.
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(iii) Neither the Company nor LITCO will do or permit anything that
will cause the Company to be in violation of any requirements of
Environmental Laws, or do or permit anything to be done that would
materially and adversely affect the financial condition of the Company
or subject the Company to any enforcement actions under any
Environmental Laws.
(iv) The Company has not obtained and is not required to obtain any
permits, licenses or similar authorizations to construct, occupy,
operate or use any buildings, improvements, fixtures and equipment owned
or leased by the Company by reason of any Environmental Laws.
(v) No Hazardous Materials are now located at the Business
Location, and neither LITCO nor the Company has ever caused or permitted
any Hazardous Materials to be generated, placed, stored, held, handled,
located or used at the Business Location, any part thereof or at any
other site controlled or utilized by the Company in its operation of its
business.
(vi) Hazardous Materials Contamination does not now and has never
existed on, in, under or at the location of the Company or at any other
site controlled or utilized by the Company in the operation of its
business. No part of the Business Location or any other site controlled
or utilized by the Company in the operation of its business is being
used has ever been used by others for the release, disposal or long-term
storage of Hazardous Materials, nor is any part of the Business Location
or any other site controlled or utilized by the Company in the operation
of its business otherwise affected by Hazardous Materials Contamination.
(vii) No investigation, administrative order, consent order or
agreement, litigation or settlement with respect to Hazardous Materials
or Hazardous Materials Contamination is proposed, threatened,
anticipated, pending or otherwise in existence with respect to the
Business Location or with respect to any other site controlled or
utilized by the Company in the operation of its business. The Business
Location is not currently on, and has never been on, any federal or
state "Superfund" or "Superlien" list.
4.16 Intellectual Property. There are no patents, patent applications,
trade names, trademark or service mark registrations or applications, registered
trade dress rights, common law trademarks or copyright registrations or
applications owned by the Company or which the Company is licensed to use. To
the best knowledge and belief of the Company and LITCO, there are no claims that
any product, activity or operation of the Company infringes upon or involves, or
has resulted in the infringement of, any patents, patent applications, trade
names, trademark or service mark registrations or applications, registered trade
dress rights, common law trademarks or copyright registrations or applications
or any other proprietary right of any other person, corporation or other entity;
and no proceedings have been instituted, are pending or are threatened with
respect thereto.
4.17 Insurance. The Company has no insurance policies in effect.
4.18 Contracts. Except as set forth herein, the Company has no material
contracts, leases, arrangements and commitments (whether oral or written). The
Company is not a party to or bound by or affected by any contract, lease,
arrangement or commitment (whether oral or written) relating to: (a) the
employment of any person; (b) collective bargaining with, or any representation
of any employees by, any labor union or association; (c) the acquisition of
services, supplies, equipment or other personal property; (d) the purchase or
sale of real property; (e) distribution, agency or construction; (f) lease of
real or personal property as lessor or lessee or sublessor or sublessee; (g)
lending or advancing of funds; (h) borrowing of funds or receipt of credit; (i)
incurring of any obligation or liability; or (j) the sale of personal property.
4.19 Litigation. The Company is not subject to any judgment or order of
any court or quasijudicial or administrative agency of any jurisdiction,
domestic or foreign, nor is there any charge, complaint, lawsuit or governmental
investigation pending or, to the best knowledge of the Company and LITCO,
threatened against the Company. The Company is not a plaintiff in any action,
domestic or foreign, judicial or administrative. There are no existing actions,
suits, proceedings or investigations of the Company, and neither the Company nor
LITCO know of any basis for such actions, suits, proceedings or investigations.
There are no unsatisfied
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judgments, orders, writs, injunctions, decrees or stipulations affecting the
Company or to which the Company is a party.
4.20 Employees. Except as set forth on Schedule 4.20 hereto, the Company
does not have any employees. The Company does not owe any compensation, bonuses,
profit sharing, pension, retirement, stock options or related appreciation
rights, deferred or otherwise, to any current or previous employees. The Company
has no written or oral employment agreements with any officer or director of the
Company. The Company is not a party to or bound by any collective bargaining
agreement. There are no loans or other obligations payable or owing by the
Company to any shareholder, officer, director or employee of the Company, nor
are there any loans or debts payable or owing by any of such persons to the
Company or any guarantees by the Company of any loan or obligation of any nature
to which any such person is a party.
4.21 Employee Benefit Plans. The Company has no (a) non-qualified deferred
or incentive compensation or retirement plans or arrangements, (b) qualified
retirement plans or arrangements, (c) other employee compensation, severance or
termination pay or welfare benefit plans, programs or arrangements or (d) any
related trusts, insurance contracts or other funding arrangements maintained,
established or contributed to by the Company within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The Company does not have any liability under Title IV of ERISA as a result of
actions or events occurring prior to the Closing.
4.22 Legal Compliance. No claim has been filed against the Company
alleging a violation of any applicable laws and regulations of foreign, federal,
state and local governments and all agencies thereof. The Company holds all of
the material permits, licenses, certificates or other authorizations of foreign,
federal, state or local governmental agencies required for the conduct of its
business as presently conducted.
4.23 Broker's Fees. Neither the Company, LITCO nor anyone on their behalf
has any liability to any broker, finder, investment banker or agent, or has
agreed to pay any brokerage fees, finder's fees or commissions, or to reimburse
any expenses of any broker, finder, investment banker or agent in connection
with the Merger or any similar transaction.
4.24 Disclosure. The representations and warranties and statements of fact
made by the Company and LITCO in this Agreement and in any Schedule hereto are,
as applicable, accurate, correct and complete and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements and information contained herein or therein not
misleading.
4.25 Bank Accounts. Except as set forth on Schedule 4.25 hereto, the
Company does not have any account, instrument of deposit or safe deposit box.
4.26 Information Supplied. None of the information supplied by the Company
or LITCO for use in the Registration Statement and contained therein will, as of
the date that the Registration Statement is filed with the Commission, on the
date it is declared effective or at the time of the meeting of the shareholders
of the Company to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The proxy
statement contained in the Registration Statement will comply, in all material
respects, as to form with the provisions of the Exchange Act.
ARTICLE 5
CONDUCT OF BUSINESS PENDING THE CLOSING
5.1 Conduct of Business by the Company Pending the Closing. The Company
and LITCO jointly and severally covenant and agree that prior to the Closing
Date:
(a) The Company shall conduct its business and operations only in the
usual and ordinary course of business and consistent with past custom and
practice;
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(b) The Company shall not directly or indirectly do any of the
following: (i) sell, pledge, dispose of or encumber any of its assets,
except for the repayment of indebtedness owed to LITCO in the amount of
$6,040.00; (ii) amend or propose to amend its Articles of Incorporation or
By-Laws; (iii) split, combine or reclassify any outstanding shares of its
capital stock, or declare, set aside or pay any dividend or other
distribution payable in cash, stock, property or otherwise with respect to
shares of its capital stock; (iv) redeem, purchase or acquire or offer to
acquire any shares of its capital stock or other securities; (v) create any
subsidiaries; or (vi) enter into or modify any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(c) The Company shall not, and with respect to the applicable matters
set forth in this Section 5.1(c)(i) and (iv), LITCO shall not, (i) issue,
sell, pledge or dispose of, or agree to issue, sell, pledge or dispose of,
any additional shares of, or any options, warrants, conversion privileges
or rights of any kind to acquire any shares of, its capital stock; (ii)
acquire (by merger, consolidation, acquisition of stock or assets or
otherwise) any corporation, partnership or other business organization or
division or the material assets thereof; (iii) incur any indebtedness for
borrowed money, issue any debt securities or guarantee any indebtedness to
others; or (iv) enter into or modify any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
(d) The Company shall not enter into any employment, severance or
similar agreements or arrangements with, or grant any bonus, salary
increase, severance or termination pay to, any officers or directors;
(e) The Company shall not adopt any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employee;
(f) Except as otherwise required by its Articles of Incorporation or
By-Laws, by this Agreement or by applicable law, neither the Company nor
LITCO shall call any meeting of shareholders;
(g) The Company and LITCO shall (i) use their best efforts not to take
any action which would render, or which reasonably may be expected to
render, any representation or warranty made by them in this Agreement
untrue at any time prior to the Closing Date as if then made; and (ii)
notify Index of any emergency or other change in the normal course of its
business or in the operation of its properties and of any tax audits, tax
claims, governmental or third party complaints, investigations or hearings
(or communications indicating that the same may be contemplated) if such
emergency, change, audit, claim, complaint, investigation or hearing would
be material, individually or in the aggregate, to the financial condition,
results of operations or business of the Company, or to the ability of any
of the parties hereto to consummate the transactions contemplated by this
Agreement;
(h) The Company and LITCO shall notify Index promptly of any material
adverse event or circumstance affecting the Company (including the filing
of any material litigation against the Company or the existence of any
dispute with any person or entity which involves a reasonable likelihood of
such litigation being commenced); and
(i) The Company shall comply with all legal requirements and
contractual obligations applicable to its operations and business and pay
all applicable taxes.
5.2 Other Actions. Unless approved in writing by Index, the Company and
LITCO shall not take any action or permit any action to occur that might
reasonably be expected to result in any of the representations and warranties of
the Company and LITCO contained in this Agreement becoming untrue after the date
hereof or any of the conditions to the Closing set forth in Article 7 of this
Agreement not being satisfied.
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ARTICLE 6
ADDITIONAL AGREEMENTS
6.1 Access and Information. Except for information relating to any claims
any party may have against the other, the Company and Index shall each afford to
the other and to the other's financial advisors, legal counsel, accountants,
consultants and other representatives full access during normal business hours
throughout the period prior to the Effective Time to all of its books, records,
properties and personnel and, during such period, each shall furnish promptly to
the other (a) a copy of each report, schedule and other document filed or
received by it pursuant to the requirements of federal or state securities laws,
and (b) all other information as such other party may reasonably request. Each
party shall hold in confidence all non-public information until such time as
such information is otherwise publicly available and, if this Agreement is
terminated, each party will upon written request deliver to the other all
documents, work papers and other material obtained by such party or on its
behalf from the other party as a result of this Agreement or in connection
herewith, whether so obtained before or after the execution hereof. As soon as
practicable following the Closing, the Company shall deliver to Index all of the
books and records of the Company.
6.2 Registration Statement. Index and the Company shall cooperate in
preparing a registration statement on Form S-4 and combined prospectus and proxy
statement, any amendments or supplements thereto and any notices, reports,
letters, proxies or other materials required to be filed with the Commission in
connection with the Merger and the Sepco Merger (collectively, the registration
statement and combined prospectus and proxy statement, any amendments or
supplements thereto and any notices, reports, letters, proxies or other
materials required to be filed with the Commission in connection with the Merger
and the Sepco Merger are herein referred to as the "Registration Statement").
The parties shall cooperate with each other in providing any information that
the other party may reasonably request to aid in the preparation of the
Registration Statement. The parties will use their commercially reasonable
efforts to respond to the comments of the Commission with respect to the
Registration Statement and will make any further filing (including amendments
and supplements) in connection therewith that may be necessary, proper or
advisable. Index will provide the Company, and the Company will provide Index,
with whatever information and assistance in connection with the foregoing
filings that the filing party reasonably may request. Index will take all
actions that may be necessary, proper or advisable under state securities laws
in connection with the offering and issuance of Index Common Stock as
contemplated herein.
6.3 Meetings of Shareholders.
(a) The Company shall promptly take all action reasonably necessary in
accordance with the NMBCA and its Articles of Incorporation and By-Laws to
convene a meeting of its shareholders to consider and vote upon the
adoption and approval of the Merger and this Agreement. The Company (i)
shall recommend at such meeting, through its Board of Directors, that the
shareholders of the Company vote to adopt and approve the Merger and this
Agreement, (ii) shall use its reasonable efforts to solicit from
shareholders of the Company proxies in favor of such adoption and approval
and (iii) shall take all other action reasonably necessary to secure a vote
of its shareholders in favor of the adoption and approval of the Merger and
this Agreement.
(b) The Merger Sub shall call a special meeting of its sole
stockholder prior to the Effective Time to be held in accordance with the
laws of the State of Nevada to consider and vote upon the Merger. The
parties hereto acknowledge and agree that the Merger Sub's sole stockholder
may approve the Merger by written consent in lieu of holding such a
meeting.
(c) Index shall call a special meeting of its shareholders prior to
the Effective Time to be held in accordance with the laws of the State of
Texas to consider and vote upon the Sepco Merger.
6.4 Press Releases. The Company and Index shall consult with each other as
to the form and substance of any press release or other public disclosure of
matters related to this Agreement or any of the transactions contemplated
hereby; provided, however, that nothing in this Section 6.4 shall be deemed to
prohibit any party
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hereto from making any disclosure that is required to fulfill such party's
disclosure obligations imposed by law, including, without limitation, federal
securities laws.
6.5 Reimbursement of LITCO. On or before the Closing Date, the Company
shall pay to LITCO the amount of $6,040.00 in order to reimburse LITCO for
expenses incurred for the benefit of the Company, which payment is not objected
to by Index.
ARTICLE 7
CONDITIONS TO CLOSING
7.1 Conditions to Obligations of Each Party to Effect the Closing. The
respective obligations of each party to effect the Closing shall be subject to
the fulfillment on or prior to the Closing Date of the following conditions:
(a) The Registration Statement shall have been declared effective by
the Commission and no stop order with respect thereto shall be in effect;
(b) The Merger shall have been approved by the shareholders of Index
and the Company and the stockholder of the Merger Sub, respectively, in
accordance with the laws of the States of Texas, New Mexico and Nevada,
respectively;
(c) The Sepco Merger shall have been approved by the shareholders and
stockholders of Index and Sepco and the stockholder of Sepco Acquisition
Corporation, respectively in accordance with the laws of the States of
Texas and Nevada, respectively; and
(d) No order, injunction or decree shall have been entered and remain
in effect in any action or proceeding before any foreign, federal or state
court or governmental agency or other foreign, federal or state regulatory
or administrative agency or commission that would prevent or make illegal
the consummation of the transactions contemplated hereby.
7.2 Additional Conditions to Index's and the Merger Sub's Obligations. The
obligations of each of Index and the Merger Sub to effect the Closing are
subject to the satisfaction of the following additional conditions on or before
the Closing Date:
(a) The representations and warranties set forth in Article 4 of this
Agreement will be true and correct in all material respects as of the date
hereof and at and as of the Closing Date as though then made;
(b) The Company and LITCO shall have performed, in all material
respects, each obligation and agreement and complied with each covenant to
be performed and complied with by them under Articles 5 and 6 of this
Agreement prior to the Closing Date;
(c) All consents by governmental or regulatory agencies or otherwise
that are required for the consummation of the transactions contemplated
hereby or that are required for Index to own, operate or control the
Company or any portion of the assets of the Company to prevent a breach of
or a default under or a termination of any agreement material to the
Company to which the Company is a party or to which any material portion of
the assets of the Company is subject, will have been obtained;
(d) No action or proceeding before any court or governmental body will
be pending or threatened wherein a judgment, decree or order would prevent
or restrain any of the transactions contemplated hereby or cause such
transactions to be declared unlawful, nullified or rescinded or which might
adversely affect the right of Index to own, operate or control the Company;
(e) Index and its financial and legal advisors shall have completed a
due diligence review of the business, operations and financial statements
of the Company, the results of which shall be satisfactory to Index in its
sole discretion;
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(f) Index will have received from Matthew Blair, Esq., counsel to the
Company, an opinion addressed to Index, dated the Closing Date and
substantially in the form attached hereto as Exhibit A;
(g) No event shall have occurred prior to the Closing which in the
reasonable judgment of Index or the Merger Sub, would materially affect the
purpose of the Merger; and
(h) At the Closing, the Company shall have delivered or caused to be
delivered to Index the following:
(i) a certificate executed by the President and Secretary of both
the Company and LITCO stating that the conditions set forth in Sections
7.2(a) through (d) of this Agreement have been satisfied;
(ii) certified copies of the resolutions duly adopted by the
Company's and LITCO's Boards of Directors authorizing and approving the
Merger and the execution, delivery and performance of this Agreement;
(iii) certified copies of resolutions duly adopted by the Company's
and LITCO's shareholders authorizing and approving the Merger and the
execution, delivery and performance of this Agreement;
(iv) certificates of good standing or comparable certificates for
the Company from the Secretary of State of the State of New Mexico and
for LITCO from the Secretary of State of the State of Texas and from
every jurisdiction where a failure to be qualified or licensed would
have a material adverse effect on its financial condition, results of
operations or business, dated not earlier than five days prior to the
Closing Date;
(v) a certificate of existence or comparable certificates for LITCO
from the Secretary of State of the State of Texas and for the Company
from the Secretary of State of the State New Mexico, dated not earlier
than five days prior to the Closing Date;
(vi) a copy of each of the Company's and LITCO's Articles of
Incorporation certified as of a recent date by the Secretary of State of
the States of New Mexico and Texas, respectively;
(vii) an incumbency certificate of the officers of the Company and
LITCO;
(viii) resignations from the officers and directors of the Company,
dated as of the Effective Time; and
(ix) such other documents as Index may reasonably request in
connection with the transactions contemplated hereby.
7.3 Additional Conditions to the Company's and LITCO's Obligations. The
obligations of each of the Company and LITCO to effect the Closing are subject
to the satisfaction of the following conditions on or before the Closing Date:
(a) The representations and warranties set forth in Article 3 of this
Agreement will be true and correct in all material respects as of the date
hereof and at and as of the Closing Date as though then made;
(b) Index shall have performed, in all material respects, each
obligation and agreement and complied with each covenant required to be
performed and complied with by it under Article 6 of this Agreement prior
to the Closing Date;
(c) No action or proceeding before any court or governmental body will
be pending or threatened wherein a judgment, decree or order would prevent
any of the transactions contemplated hereby or cause such transactions to
be declared unlawful or rescinded;
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(d) The Company shall have received from Fouts & Moore, L.L.P.,
counsel to Index, an opinion addressed to the Company and LITCO, dated the
Closing Date and substantially in the form attached hereto as Exhibit B;
and
(e) On the Closing Date, Index shall have delivered to the Company the
following:
(i) a certificate executed on behalf of Index and the Merger Sub
stating that the conditions set forth in Sections 7.3(a) through (c) of
this Agreement have been satisfied;
(ii) certified copies of resolutions duly adopted by Index's and
the Merger Sub's Boards of Directors authorizing and approving the
Merger and the execution, delivery and performance of this Agreement;
(iii) certified copies of the resolutions duly adopted by the
shareholder of the Merger Sub authorizing and approving the Merger and
the execution, delivery and performance this Agreement;
(iv) certified copies of resolutions duly adopted by Index's Board
of Directors authorizing and approving the Sepco Merger and the
execution, delivery and performance of the Sepco Merger Agreement;
(v) certified copies of resolutions duly adopted by the
shareholders of Index authorizing and approving the Sepco Merger and the
execution, delivery and performance of the Sepco Merger Agreement;
(vi) certificate of existence for Index from the Secretary of State
of the State of Texas and certificate of existence for the Merger Sub
from the Secretary of State of Nevada, dated not earlier than five days
prior to the Closing Date;
(vii) a copy of Index's Articles of Incorporation certified by the
Secretary of State of the State of Texas;
(viii) a certificate of good standing for the Merger Sub from the
Secretary of State of the State of Nevada and a certificate of good
standing for Index from the Secretary of State of Texas, dated not
earlier than five days prior to the Closing Date;
(ix) a copy of the Merger Sub's Articles of Incorporation certified
by the Secretary of State of the State of Nevada;
(x) an incumbency certificate of the officers of Index and the
Merger Sub; and
(xi) such other material documents as the Company may reasonably
request in connection with the transactions contemplated hereby.
ARTICLE 8
REMEDIES
8.1 Indemnification by LITCO. Subject to the terms and conditions of this
Article 8, LITCO agrees to indemnify, defend and hold Index and its directors,
officers, agents, attorneys and affiliates harmless from and against all losses,
claims, actions, causes of action, fines, obligations, demands, assessments,
penalties, liabilities, costs, damages, attorneys' fees and expenses
(collectively, "Damages"), asserted against or incurred by any such person or
entity (i) by reason of or resulting from a breach of any representation,
warranty, non-fulfillment of any agreement or covenant of the Company or LITCO
contained in this Agreement or in any written statement, certificate or other
document to be delivered in connection herewith or (ii) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any part of the Registration Statement when such part became
effective, or in the Registration Statement or the prospectus contained therein,
as of its date, or any amendment or supplement thereto relating to information
furnished by the Company or LITCO to Index, or arise out of or are based upon
any omission or alleged omission to state
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therein a material fact required to be stated therein or necessary to make the
statements therein not misleading relating to information furnished by the
Company or LITCO to Index.
8.2 Indemnification by Index. Subject to the terms and conditions of this
Article 8, Index hereby agrees to indemnify, defend and hold the Company and its
directors, officers, agents, attorneys and affiliates harmless from and against
all Damages asserted against or incurred by any such person or entity (i) by
reason of or resulting from a breach of any representation, warranty or covenant
of Index contained in this Agreement or (ii) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
part of the Registration Statement when such part became effective, or in the
Registration Statement or the prospectus contained therein, as of its date, or
any amendment or supplement thereto, or arise out of or are based upon any
omission or alleged omission to state therein not misleading; provided, however,
that Index shall not be liable to the Company or any of its directors, officers,
agents, attorneys or affiliates in any such case to the extent that any Damages
arise out of or are based upon an untrue statement or alleged untrue statement
or omission or alleged omission relating to information furnished by the Company
or LITCO to Index for inclusion in the Registration Statement.
8.3 Conditions of Indemnification. The respective obligations and
liabilities of LITCO and Index (the "indemnifying party") to the other (the
"party to be indemnified") under Sections 8.1 and 8.2 with respect to claims
resulting from the assertion of liability by third parties shall be subject to
the following terms and conditions:
(a) Within 20 days (or such earlier time as might be required to avoid
prejudicing the indemnifying party's position) after receipt of notice of
commencement of any action evidenced by service of process or other legal
pleading, the party to be indemnified shall give the indemnifying party
written notice thereof together with a copy of such claim, process or other
legal pleading, and the indemnifying party shall have the right to
undertake the defense thereof by representatives of its own choosing and at
its own expense; provided that the party to be indemnified may participate
in the defense with counsel of its own choice, the fees and expenses of
which counsel shall be paid by the party to be indemnified unless (i) the
indemnifying party has agreed to pay such fees and expenses, (ii) the
indemnifying party has failed to assume the defense of such action or (iii)
the named parties to any such action (including any impleaded parties)
include both the indemnifying party and the party to be indemnified and the
party to be indemnified has been advised by counsel that there may be one
or more legal defenses available to it that are different from or
additional to those available to the indemnifying party (in which case, if
the party to be indemnified informs the indemnifying party in writing that
it elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the
defense of such action on behalf of the party to be indemnified, it being
understood, however, that the indemnifying party shall not, in connection
with any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys at any time for the
party to be indemnified, which firm shall be designated in writing by the
party to be indemnified).
(b) In the event that the indemnifying party, by the 30th day after
receipt of notice of any such claim (or, if earlier, by the 10th day
preceding the day on which an answer or other pleading must be served in
order to prevent judgment by default in favor of the person asserting such
claim), does not elect to defend against such claim, the party to be
indemnified will (upon further notice to the indemnifying party) have the
right to undertake the defense, compromise or settlement of such claim on
behalf of and for the account and risk of the indemnifying party and at the
indemnifying party's expense, subject to the right of the indemnifying
party to assume the defense of such claims at any time prior to settlement,
compromise or final determination thereof.
(c) Notwithstanding the foregoing, the indemnifying party shall not
settle any claim without the consent of the party to be indemnified unless
such settlement involves only the payment of money and the claimant
provides to the party to be indemnified a release from all liability in
respect of such claim. If the settlement of the claim involves more than
the payment of money, the indemnifying party shall not settle the claim
without the prior consent of the party to be indemnified.
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(d) The party to be indemnified and the indemnifying party will each
cooperate with all reasonable requests of the other.
8.4 Waiver. No waiver by any party of any default or breach by another
party of any representation, warranty, covenant or condition contained in this
Agreement shall be deemed to be a waiver of any subsequent default or breach by
such party of the same or any other representation, warranty, covenant or
condition. No act, delay, omission or course of dealing on the part of any party
in exercising any right, power or remedy under this Agreement or at law or in
equity shall operate as a waiver thereof or otherwise prejudice any of such
party's rights, powers and remedies. All remedies, whether at law or in equity,
shall be cumulative and the election of any one or more shall not constitute a
waiver of the right to pursue other available remedies.
8.5 Remedies Not Exclusive. The remedies provided in this Article 8 shall
not be exclusive of any other rights or remedies available to one party against
the other, either at law or in equity.
ARTICLE 9
TERMINATION
9.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time by the
mutual consent of the parties hereto.
9.2 Termination by Any Party. This Agreement may be terminated and the
Merger may be abandoned by action of the Board of Directors of any party hereto
if a United States federal or state court of competent jurisdiction or United
States federal or state governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and non-appealable; provided, that the
party seeking to terminate this Agreement pursuant to this clause shall have
used all reasonable efforts to remove such injunction, order or decree.
9.3 Termination by Index. This Agreement may be terminated by Index upon
written notice if the Closing has not occurred by December 31, 1996.
9.4 Effect of Termination and Abandonment. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article 9, all
obligations of the parties hereto shall terminate, except the obligations of the
parties pursuant to Section 6.1.
9.5 Material Breach. This Agreement may be terminated if a material breach
of this Agreement has occurred and such breach has not been cured by the
breaching party within ten business days of receipt of written notice from a
non-breaching party detailing such breach.
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ARTICLE 10
GENERAL PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally,
sent by overnight courier or mailed by registered or certified mail (postage
prepaid and return receipt requested) to the party to whom the same is so
delivered, sent or mailed at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to Index or the Merger Sub:
David R. Little, President
580 Westlake Park Boulevard
Suite 1100
Houston, Texas 77079
Phone: (713) 558-4448
Fax: (713) 558-4448
with a copy to:
Gary A. Messersmith, Esq.
Fouts & Moore, L.L.P.
5555 San Felipe, 17th Floor
Houston, Texas 77066-2726
(b) if to the Company or LITCO:
Glenn A. Little, President
211 West Wall Street
Midland, Texas 79701-4506
Phone: (800) 351-4515
Fax: (915) 682-2560
with a copy to:
Matthew Blair, Esq.
4419 Tanforan
Midland, Texas 79701
10.2 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. References to Sections and Articles refer to
sections and articles of this Agreement unless otherwise stated.
10.3 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated and the parties shall negotiate
in good faith to modify this Agreement to preserve each party's anticipated
benefits under this Agreement.
10.4 Miscellaneous. This Agreement (together with all other documents and
instruments referred to herein): (a) constitutes the entire agreement and
supersedes all other prior agreements and undertakings, both written and oral,
among the parties with respect to the subject matter hereof; (b) except as
expressly set forth herein, is not intended to confer upon any other person any
rights or remedies hereunder and (c) shall not be assigned by operation of law
or otherwise, except that Index may assign all or any portion of its rights
under this Agreement to any wholly-owned subsidiary but no such assignment shall
relieve Index of its obligations hereunder, and except that this Agreement may
be assigned by operation of law to any corporation with or into which Index may
be merged.
10.5 Separate Counsel. Each party hereby expressly acknowledges that it
has been advised and urged to seek its own separate legal counsel for advice
with respect to this Agreement.
18
<PAGE> 136
10.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS,
INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF
TEXAS, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF.
10.7 Counterparts. This Agreement may be executed in two or more
counterparts which together shall constitute a single agreement.
10.8 Amendment. This Agreement may be amended, modified or supplemented
only by an instrument in writing executed by all parties hereto.
10.9 Parties In Interest: No Third Party Beneficiaries. Except as
otherwise provided herein, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective heirs, legal
representatives, successors and assigns of the parties hereto. This Agreement
shall not be deemed to confer upon any person not a party hereto any rights or
remedies hereunder.
10.10 Captions. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
10.11 Expenses. The parties hereto shall pay all of their own expenses
relating to the transactions contemplated by this Agreement, including, without
limitation, the fees and expenses of their respective counsel and financial
advisers.
10.12 Survival. The representations, warranties and covenants contained
herein shall survive the Closing.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
INDEX, INC.
By: /s/ DAVID R. LITTLE
- ------------------------------------
David R. Little, President
NEWMAN ACQUISITION CORPORATION
By: /s/ DAVID R. LITTLE
- ------------------------------------
David R. Little, President
NEWMAN COMMUNICATIONS
CORPORATION
By: /s/ GLENN A. LITTLE
- ------------------------------------
Glenn A. Little, President
LITTLE & COMPANY INVESTMENT
SECURITIES
By: /s/ GLENN A. LITTLE
- ------------------------------------
Glenn A. Little, President
19
<PAGE> 137
SCHEDULE 4.2
The Company currently has 1,650,000 Class C Warrants outstanding. Each
Class C Warrant allows the holder to purchase one share of Company Common Stock
at $2.00 per share until November 22, 1996. The form of the Class C Warrant
certificate is attached as Exhibit A hereto.
<PAGE> 138
SCHEDULE 4.9
The Company will issue 1,693,564 shares of Company Common Stock to Halter
Financial Group, Inc., a Texas corporation subsequent to the date of this
Agreement.
<PAGE> 139
SCHEDULE 4.20
<TABLE>
<CAPTION>
NAME OF EMPLOYEE: POSITIONS:
- ------------------------------------------------ --------------------------------------------------
<S> <C>
Glenn A. Little................................. Chairman of the Board and President
Patricia de Little.............................. Director, Vice President, Secretary and Treasurer
</TABLE>
<PAGE> 140
SCHEDULE 4.25
BANK ACCOUNTS
<TABLE>
<S> <C>
NationsBank of Texas, N.A. Sunwest Bank of Albuquerque, N.A.
Post Office Box 831547 Post Office Box 25500
Dallas, Texas 75283-1547 Albuquerque, New Mexico 87125-0500
(800) 462-6289 (505) 765-2600
Business Economy Checking Funds Checking
Account Number 423-003953-7 Account Number 00-0109-652297
</TABLE>
<PAGE> 141
APPENDIX C:
ARTICLES 5.12 AND 5.13 OF THE TEXAS
BUSINESS CORPORATION ACT
<PAGE> 142
ARTICLES 5.12 AND 5.13 OF THE TEXAS BUSINESS CORPORATION ACT
ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1) (a) With respect to proposed corporate action that is submitted to
a vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if
the action is effective and giving the shareholder's address, to which
notice thereof shall be delivered or mailed in that event. If the action is
effected and the shareholder shall not have voted in favor of the action,
the corporation, in the case of action other than a merger, or the
surviving or new corporation (foreign or domestic) or other entity that is
liable to discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the action is effected, deliver
or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery
or mailing of the notice, make written demand on the existing, surviving or
new corporation (foreign or domestic) or other entity, as the case may be,
for payment of the fair value of the shareholder's shares. The fair value
of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the
shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the
case of action other than a merger, and the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the date the action is effected, mail to each shareholder
of record as of the effective date of the action notice of the fact and
date of the action and that the shareholder may exercise the shareholder's
right to dissent from the action. The notice shall be accompanied by a copy
of this Article and any articles or documents filed by the corporation with
the Secretary of State to effect the action. If the shareholder shall not
have consented to the taking of the action, the shareholder may, within
twenty (20) days after the mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the
shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was
delivered to the corporation pursuant to Section A of Article 9.10 of this
Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty (20)
day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, of a demand for payment made by a dissenting shareholder in accordance
with Subsection (1) of this Section, the corporation (foreign or domestic)
or other entity shall deliver or mail to the shareholder a written notice
that shall either set out that the corporation (foreign or domestic) or
other entity accepts the amount claimed in the demand and agrees to pay
that amount within ninety (90) days after the date on which the action was
effected, and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed, or shall contain an estimate
by the corporation (foreign or domestic) or other entity of the fair value
of the shares, together with an offer to pay the amount of that estimate
within ninety (90) days after the date on which the action was effected,
upon receipt of notice within sixty (60) days after that date from the
shareholder that the shareholder agrees to accept that amount and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed.
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(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall
be made within ninety (90) days after the date on which the action was
effected and, in the case of shares represented by certificates, upon
surrender of the certificates duly endorsed. Upon payment of the agreed
value, the shareholder shall cease to have any interest in the shares or in
the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be
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<PAGE> 144
treated as provided in the plan of merger and, in all other cases, may be held
and disposed of by the corporation as in the case of other treasury shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
C-3
<PAGE> 145
APPENDIX D:
SECTIONS 53-15-3 AND 53-15-4 OF THE
NEW MEXICO BUSINESS CORPORATION ACT
<PAGE> 146
SECTIONS 53-15-3 AND 53-15-4 OF THE NEW MEXICO BUSINESS CORPORATION ACT
53-15-3 RIGHT OF SHAREHOLDERS TO DISSENT AND OBTAIN PAYMENT FOR SHARES.
A. Any shareholder of a corporation may dissent from, and obtain payment
for the shareholder's shares in the event of, any of the following corporate
actions:
(1) any plan of merger or consolidation to which the corporation is a
party, except as provided in Subsection C of this section;
(2) any sale or exchange of all or substantially all of the property
and assets of the corporation not made in the usual and regular course of
its business, including a sale in dissolution, but not including a sale
pursuant to an order of a court having jurisdiction in the premises or a
sale for cash on terms requiring that all or substantially all of the net
proceeds of sale be distributed to the shareholders in accordance with
their respective interests within one year after the date of sale;
(3) any plan of exchange to which the corporation is a party as the
corporation the shares of which are to be acquired;
(4) any amendment of the articles of incorporation which materially
and adversely affects the rights appurtenant to the shares of the
dissenting shareholder in that it:
(a) alters or abolishes a preferential right of such shares;
(b) creates, alters or abolishes a right in respect of the
redemption of such shares, including a provision respecting a sinking
fund for the redemption or repurchase of such shares;
(c) alters or abolishes an existing preemptive right of the holder
of such shares to acquire shares or other securities; or
(d) excludes or limits the right of the holder of such shares to
vote on any matter, or to cumulate his votes, except as such right may
be limited by dilution through the issuance of shares or other
securities with similar voting rights; or
(5) any other corporate action taken pursuant to a shareholder vote
with respect to which the articles of incorporation, the bylaws or a
resolution of the board of directors directs that dissenting shareholders
shall have a right to obtain payment for their shares.
(1) A record holder of shares may assert dissenters' rights as to
less than all of the shares registered in his name only if the holder
dissents with respect to all the shares beneficially owned by any one
person and discloses the name and address of the person or persons on
whose behalf the holder dissents. In that event, his rights shall be
determined as if the shares as to which he has dissented and his other
shares were registered in the names of different shareholders.
(2) A beneficial owner of shares who is not the record holder may
assert dissenters' rights with respect to shares held on his behalf, and
shall be treated as a dissenting shareholder under the terms of this
section and Section 53-15-4 NMSA 1978 if he submits to the corporation
at the time of or before the assertion of these rights a written consent
of the record holder.
C. The right to obtain payment under this section shall not apply to the
shareholders of the surviving corporation in a merger if a vote of the
shareholders of such corporation is not necessary to authorize such merger.
D. A shareholder of a corporation who has a right under this section to
obtain payment for his shares shall have no right at law or in equity to attack
the validity of the corporate action that gives rise to his right to obtain
payment, nor to have the action set aside or rescinded, except when the
corporate action is unlawful or fraudulent with regard to the complaining
shareholder or to the corporation.
D-1
<PAGE> 147
53-15-4 RIGHTS OF DISSENTING SHAREHOLDERS.
A. Any shareholder electing to exercise his right of dissent shall file
with the corporation, prior to or at
the meeting of shareholders at which the proposed corporate action is submitted
to a vote, a written objection to the proposed corporate action. If the proposed
corporate action is approved by the required vote and the shareholder has not
voted in favor thereof, the shareholder may, within ten days after the date on
which the vote was taken or if a corporation is to be merged without a vote of
its shareholders into another corporation any of its shareholders may, within
twenty-five days after the plan of the merger has been mailed to the
shareholders, make written demand on the corporation, or, in the case of a
merger or consolidation, on the surviving or new corporation, domestic or
foreign, for payment of the fair value of the share holder's shares, and, if the
proposed corporate action is effected, the corporation shall pay to the
shareholder, upon the determination of the fair value, by agreement or judgment
as provided herein, and, in the case of shares represented by certificates, the
surrender of such certificates the fair value thereof as of the day prior to the
date on which the vote was taken approving the proposed corporate action,
excluding any appreciation or depreciation in anticipation of the corporate
action. Any shareholder failing to make demand within the prescribed ten-day or
twenty-five-day period shall be bound by the terms of the proposed corporate
action. Any shareholder making such demand shall thereafter be entitled only to
payment as in this section provided and shall not be entitled to vote or to
exercise any other rights of a shareholder.
B. No such demand may be withdrawn unless the corporation consents thereto.
If, however, the demand is withdrawn upon consent, or if the proposed corporate
action is abandoned or rescinded or the shareholders revoke the authority to
effect the action, or if, in the case of a merger, on the date of the filing of
the articles of merger the surviving corporation is the owner of all the
outstanding shares of the other corporation, domestic and foreign, that are
parties to the merger, or if no demand or petition for the determination of
their value by a court has been made or filed within the time provided in this
section, or if a court of competent jurisdiction determines that the shareholder
is not entitled to the relief provided by this section, then the right of the
shareholder to be paid the fair value of his shares ceases and his status as a
shareholder shall be restored, without prejudice, to any corporate proceedings
which may have been taken during the interim.
C. Within ten days after such corporate action is effected, the
corporation, or, in the case of a merger or consolidation, the surviving or new
corporation, domestic or foreign, shall give written notice thereof to each
dissenting shareholder who has made demand as provided in this section and shall
make a written offer to each such shareholder to pay for such shares at a
specified price deemed by the corporation to be the fair value thereof. The
notice and offer shall be accompanied by a balance sheet of the corporation, the
shares of which the dissenting shareholder holds, as of the latest available
date and not more than twelve months prior to the making of the offer, and a
profit and loss statement of the corporation for the twelve-months' period ended
on the date of the balance sheet.
D. If within thirty days after the date on which the corporate action was
effected the fair value of the shares is agreed upon between any dissenting
shareholder and the corporation, payment therefor shall be made within ninety
days after the date on which the corporate action was effected, and, in the case
of shares represented by certificates, upon surrender of the certificates. Upon
payment of the agreed value, the dissenting shareholder shall cease to have any
interest in the share.
E. If, within the period of thirty days, a dissenting shareholder and the
corporation do not so agree, then the corporation, within thirty days after
receipt of written demand from any dissenting shareholder, given within sixty
days after the date on which corporate action was effected, shall, or at its
election at any time within the period of sixty days may, file a petition in any
court of competent jurisdiction in the county in this state where the registered
office of the corporation is located praying that the fair value of the shares
be found and determined. If, in the case of a merger or consolidation, the
surviving or new corporation is a foreign corporation without a registered
office in this state, the petition shall be filed in the county where the
registered office of the domestic corporation was last located. If the
corporation fails to institute the proceeding as provided in this section, any
dissenting shareholder may do so in the name of the corporation. All dissenting
shareholders, wherever residing, shall be made parties to the proceeding as an
action against their shares quasi in rem. A copy of the petition shall be served
on each dissenting shareholder who is a resident of this state and
D-2
<PAGE> 148
shall be served by registered or certified mail on each dissenting shareholder
who is a nonresident. Service on nonresidents shall also be made by publication
as provided by law. The jurisdiction of the court shall be plenary and
exclusive. All shareholders who are parties to the proceeding shall be entitled
to judgment against the corporation for the amount of the fair value of their
shares. The court may, if it so elects, appoint one or more persons as
appraisers to receive evidence and recommend a decision on the question of fair
value. The appraisers shall have such power and authority as specified in the
order of their appointment or on an amendment thereof. The judgment shall be
payable to the holders of uncertificated shares immediately, but to the holders
of shares represented by certificates only upon and concurrently with the
surrender to the corporation of certificates. Upon payment of the judgment, the
dissenting shareholder ceases to have any interest in the shares.
F. The judgment shall include an allowance for interest at such rate as the
court may find to be fair and equitable, in all the circumstances, from the date
on which the vote was taken on the proposed corporate action to the date of
payment.
G. The costs and expenses of any such proceeding shall be determined by the
court and shall be assessed against the corporation, but all or any part of the
costs and expenses may be apportioned and assessed as the court deems equitable
against any or all of the dissenting shareholders who are parties to the
proceeding to whom the corporation made an offer to pay for the shares if the
court finds that the action of the shareholders in failing to accept the offer
was arbitrary or vexatious or not in good faith. Such expenses include
reasonable compensation for and reasonable expenses of the appraisers, but
exclude the fees and expenses of counsel for and experts employed by any party;
but if the fair value of the shares as determined materially exceeds the amount
which the corporation offered to pay therefor, or if no offer was made, the
court in its discretion may award to any shareholder who is a party to the
proceeding such sum as the court determines to be reasonable compensation to any
expert employed by the shareholder in the proceeding, together with reasonable
fees of legal counsel.
H. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty days after demanding payment for his shares, each holder
of shares represented by certificates demanding payment shall submit the
certificates to the corporation for notation thereon that such demand has been
made. His failure to do so shall, at the option of the corporation, terminate
his rights under this section unless a court of competent jurisdiction, for good
and sufficient cause shown, otherwise directs. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made is [are] transferred, any new certificate issued
therefor shall bear similar notation, together with the name of the original
dissenting holder of the shares, and a transferee of the shares acquires by such
transfer no rights in the corporation other than those which the original
dissenting shareholder had after making demand for payment of the fair value
thereof.
I. Shares acquired by a corporation pursuant to payment of the agreed value
therefor or to payment of the judgment entered therefor, as in this section
provided, may be held and disposed of by the corporation as in the case of other
treasury shares, except that, in the case of a merger or consolidation, they may
be held and disposed of as the plan of merger or consolidation may otherwise
provide.
D-3
<PAGE> 149
APPENDIX E:
ARTICLES OF INCORPORATION OF THE COMPANY
<PAGE> 150
ARTICLES OF CORRECTION
Pursuant to Article 1302-7.01 of the Texas Revised Civil Statutes, the
undersigned corporation hereby submits the following Articles of Correction:
1. The name of the corporation is Index, Inc.
2. The instrument to be corrected is the Restated Articles of
Incorporation (the "Restated Articles") filed with the Secretary of State
of the State of Texas on August 12, 1996.
3. Sections B(3)(d) (entitled "Voting"), B(3)(e) and B(3)(f) of
Article IV of the Restated Articles are erroneously numbered; such Sections
should be numbered B(3)(e), B(3)(f) and B(3)(g), respectively.
Additionally, Sections B(3)(d) (entitled "Voting") and B(3)(e) of Article
IV of the Restated Articles contain erroneous references to Series A
Preferred Stock; such references should be to Series B Preferred Stock.
4. Sections B(3)(d) (entitled "Voting"), B(3)(e) and B(3)(f) of
Article IV of the Restated Articles are hereby corrected to read as
follows:
"(e) Voting. Each share of Series B Preferred Stock shall entitle
the holder thereof to one-tenth ( 1/10) of one vote on each matter
presented to the shareholders generally voting as a single class with
the Common Stock and any other class or series of stock having similar
voting rights. The holders of the Series B Preferred Stock shall not be
entitled to vote as a class on any matter except as required by law."
"(f) Exclusion of Other Rights. Unless otherwise required by law,
the shares of Series B Preferred Stock shall not have any powers,
preferences, or relative, participating, option or other special rights
other than those specifically set forth herein."
"(g) Stated Value. The stated value of the Series B Preferred Stock
is $100 per share, all of which shall be allocated to the stated capital
of the Corporation."
INDEX, INC.
By: /s/ DAVID R. LITTLE
David R. Little
Chairman and Chief Executive Officer
Date: September 17, 1996
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<PAGE> 151
RESTATED ARTICLES OF INCORPORATION
OF
INDEX, INC.
ARTICLE ONE
Index, Inc., pursuant to the provisions of Article 4.07 of the Texas
Business Corporation Act, hereby adopts restated articles of incorporation which
accurately copy the articles of incorporation and all amendments thereto that
are in effect to date and as further amended by such restated articles of
incorporation as hereinafter set forth and which contain no other change in any
provision thereof.
ARTICLE TWO
The articles of incorporation of the corporation are amended by the
restated articles of incorporation as follows:
The total number of shares of stock of all classes which the
Corporation shall have authority to issue has been increased from
102,000,000 shares to 110,000,000 shares. Further, the designated Common
Stock, Preferred Stock and Convertible Preferred Stock have each been
designated as a series.
ARTICLE THREE
Each such amendment made by the restated articles of incorporation has been
effected in conformity with the provisions of the Texas Business Corporation Act
and such restated articles of incorporation and each such amendment made by the
restated articles of incorporation were duly adopted by the shareholders of the
corporation on the 2nd day of August, 1996.
ARTICLE FOUR
The number of shares outstanding was 100, and the number of shares entitled
to vote on the restated articles of incorporation as so amended was 100. All of
the shareholders have signed a written consent to the adoption of such restated
articles of incorporation as so amended pursuant to Article 9.10 and any written
notice required by Article 9.10 has been given.
ARTICLE FIVE
The articles of incorporation and all amendments and supplements thereto
are hereby superseded by the following restated articles of incorporation which
accurately copy the entire text thereof and as amended as above set forth:
ARTICLE I
NAME
The name of the Corporation is Index, Inc. (the "Corporation").
ARTICLE II
DURATION
The period of its duration is perpetual.
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ARTICLE III
PURPOSE
The purpose or purposes for which the Corporation is organized is the
transaction of any or all lawful business for which corporations may be
incorporated under the Act.
ARTICLE IV
CAPITAL STOCK
The total number of shares of stock of all classes which the Corporation
shall have the authority to issue is 110,000,000, of which 100,000,000 shares of
the par value of $.01 each shall be designated common stock ("Common Stock") and
10,000,000 shares of the par value of $1.00 each shall be designated serial
preferred stock ("Preferred Stock"). A statement of all of the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof in respect of the Common Stock and the Preferred Stock is as follows:
A. Common Stock.
1. Dividends. Subject to any rights of the Preferred Stock or any series
thereof and the conditions set forth in paragraph B of this Article IV or in any
resolution of the Board of Directors of the Corporation providing for the
issuance of any series of Preferred Stock, the holders of the Common Stock shall
be entitled to receive, when, as and if declared by the Board of Directors, out
of funds legally available therefor, dividends payable in cash, stock or
otherwise.
2. Voting Rights. Each holder of Common Stock shall be entitled to one vote
for each share held on each matter presented to shareholders generally.
Notwithstanding the foregoing, the Corporation may, without the approval or
consent of any holder of the Common Stock, amend these Articles of Incorporation
in any manner that would solely effect changes in the preferences, limitations
and relative rights of one or more series of stock of the corporation which has
been established pursuant to the authority granted the Board of Directors of the
corporation pursuant to paragraph B of this Section 2 if (x) such amendment is
approved by the holders of a majority of the outstanding shares of the series of
stock so affected and (y) the preferences, limitations and relative rights of
such series after giving effect to such amendment and of any new series that may
be established as a result of a reclassification of such series are, in each
case, no greater than those preferences, limitations and rights permitted to be
fixed and determined by the Board of Directors of the corporation with respect
to the establishment of any new series of shares pursuant to the authority
granted the Board of Directors of the corporation in these Articles of
Incorporation.
B. Preferred Stock.
1. Authorized Shares. The Preferred Stock may be divided into and issued in
one or more series. Of the 10,000,000 authorized shares of Preferred Stock, (i)
1,000,000 shares have been designated as Series A Preferred Stock (the "Series A
Preferred Stock"), (ii) 1,000,000 shares have been designated as Series B
Convertible Preferred Stock (the "Series B Preferred Stock") and (iii) 8,000,000
shares are available for future designation as provided herein.
2. Series A Preferred Stock
The holders of the Series A Preferred Stock shall have the following rights
and preferences:
(a) Dividends. The holders of Series A Preferred Stock shall not as a
matter of right be entitled to be paid or receive or have declared or set
apart for such Series A Preferred Stock, any dividends or distributions of
the Corporation in respect thereof.
(b) Liquidation, Dissolution and Winding Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, the holders of the Series A Preferred Stock
shall be entitled to receive $100.00 in cash and no more for each share of
Series A Preferred Stock held by them, before any distribution of the
assets of the Corporation shall be made to the holders of any other
outstanding shares of the Corporation, unless funds necessary for such
payment
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shall have been set aside in trust for the account of the holders of
outstanding shares of Series A Preferred Stock so as to be and continue to
be available therefor. The holders of shares of Series A Preferred Stock
shall be entitled to no further participation in any distribution of the
assets of the Corporation. If upon such liquidation, dissolution or winding
up, the assets of the Corporation distributable as aforesaid among the
holders of shares of Series A Preferred Stock are insufficient to permit
the payment to holders of Series A Preferred Stock of $100.00 per share
then the assets of the Corporation shall be distributed to the holders of
shares of Preferred Stock ratably according to their respective shares
until they shall have received the full amount to which they would
otherwise be so entitled.
(c) Redemption. No shares of Series A Preferred Stock shall be
callable or redeemable by the Corporation. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation shall have the
status of treasury shares of Preferred Stock until such time as such shares
are cancelled pursuant to the provisions of the Act.
(d) Voting. Each share of Series A Preferred Stock shall entitle the
holder thereof to one-tenth ( 1/10) of one vote on each matter presented to
shareholders generally voting as a single class with the Common Stock and
any other class or series of stock having similar voting rights. The
holders of the Series A Preferred Stock shall not be entitled to vote as a
class on any matter except as required by law.
(e) Exclusion of Other Rights. Unless otherwise required by law, the
shares of Series A Preferred Stock shall not have any powers, preferences,
or relative, participating, option or other special rights other than those
specifically set forth herein.
3. Series B Preferred Stock
The holders of the Series B Preferred Stock shall have the following rights
and preferences:
(a) Dividends. The holders of the Series B Preferred Stock shall be
entitled to receive dividends out of any funds legally available for that
purpose at the annual rate of six percent (6%) per annum of the stated
value and no more. These dividends are payable in cash monthly on the last
day of each month. The first dividend, after the issuance of such shares,
shall be payable on the last day of the month of issuance. Dividends will
accrue from the date the shares of Series B Preferred Stock are issued and
are considered to accrue from day to day, whether or not earned or
declared. The dividends will be payable before any dividends are paid,
declared, or set apart for any other capital stock of the Corporation.
Dividends are cumulative so that if for any dividend period the dividends
on the outstanding Series B Preferred Stock are not paid or declared and
set apart, the deficiency shall be fully paid or declared and set apart for
payment, without interest, before any distribution (by dividend or
otherwise) is paid on, declared, or set apart for any other capital stock
of the Corporation. The holders of shares of Series B Preferred Stock shall
not be entitled to receive any other dividends or distributions.
(b) Liquidation, Dissolution and Winding Up. Subject to the rights of
the holders of the Series A Preferred Stock, in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the holders of outstanding shares of Series B Preferred Stock
shall be entitled to receive $100.00 in cash for each share, before any
distribution of the assets of the Corporation shall be made to the holders
of any other class or series of shares of the Corporation unless funds
necessary for such payment shall have been set aside in trust for the
account of the holders of outstanding shares of Series B Preferred Stock so
as to be and continue to be available therefor. If upon such liquidation,
dissolution or winding up, the assets of the Corporation distributable as
aforesaid among the holders of shares of Series B Preferred Stock are
insufficient to permit the payment to the holders of outstanding shares of
Series B Preferred Stock of $100.00 per share, then the assets of the
Corporation shall be distributed to the holders of outstanding shares of
Series B Preferred Stock ratably according to their respective shares until
they shall have received the full amount to which they would otherwise be
so entitled. The holders of the Series B Preferred Stock shall also be
entitled to participate on a pro rata basis (based on the outstanding
number of shares) in any distributions made to the holders of the Common
Stock or other class or series of stock that is entitled to distributions
upon satisfaction of all shares entitled to preferred distribution.
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(c) Redemption.
(i) The Corporation, at the option of the Board of Directors, may
at any time five (5) years from the date of initial issuance redeem the
whole, or any part, of the outstanding shares of Series B Preferred
Stock by paying $100.00 per share plus all dividends accrued, unpaid,
and accumulated as provided in this Article through and including the
redemption date and by giving to each record holder of Series B
Preferred Stock, at his or her last known address as shown in the
Corporation's records, at least twenty but not more than sixty days'
notice. This redemption notice may be delivered either in person or in
writing, by mail, postage prepaid and must state the shares to be
redeemed, along with the date and plan of redemption, the redemption
price, and the place where the shareholders may obtain payment of the
redemption price on surrendering their share certificates. If only a
part of the outstanding shares of Series B Preferred Stock shares are
redeemed, redemption will be pro rata. No shares of Series B Preferred
Stock may be redeemed unless all accrued dividends on all outstanding
shares of Series B Preferred Stock shares have been paid for all past
dividend periods and full dividends for the current period, except those
to be redeemed, have been paid or declared and set apart for payment. On
or after the date fixed for redemption, each holder of shares called for
redemption must, unless the shareholder has previously exercised the
option to convert the holder's shares of Series B Preferred Stock as
provided herein, surrender to the Corporation the certificate for the
shares at the place designated in the redemption notice and will then be
entitled to receive payment of the redemption price. If fewer than all
the shares represented by any surrendered certificate are redeemed, a
new certificate for the unredeemed shares will be issued. If the
redemption notice is duly given and sufficient funds are available to
pay all monies herein required on the date fixed for redemption, then,
whether or not the certificates representing the shares to be redeemed
are surrendered, all rights with respect to the shares shall terminate
on the date fixed for redemption, except for the holders' right to
receive the redemption price, without interest, on surrendering their
certificates.
(ii) Shares are considered redeemed, and dividends on them cease to
accrue after the date fixed for redemption, if, on or before any date
fixed for redemption of the shares of Series B Preferred Stock as
provided herein, the Corporation deposits as a trust fund with any bank
or trust company a sum sufficient to redeem, on the date fixed for
redemption, with irrevocable instructions and authority to the bank or
trust company (a) to publish the redemption notice (or to complete
publication already begun), and (b) to pay, on and after the date fixed
for redemption or before that date, the redemption price of the shares
to their holders when they surrender their certificates. The deposit is
considered to constitute full payment of the shares to their holders,
and from the date of the deposit the shares will no longer be considered
outstanding. Moreover, the holders of the shares will cease to be
shareholders with respect to the shares and will have no rights with
respect to the shares, except to receive from the bank or trust company
payment of the redemption price of the shares (without interest) on
surrendering of the certificates unless the shares are converted to
Common Stock, as provided herein. Any money so deposited on account of
the redemption price of Series B Preferred Stock share which are
converted after the deposit is made must be repaid immediately to the
Corporation on conversion of the Series B Preferred Stock.
(iii) Share of Series B Preferred Stock redeemed by the Corporation
shall be restored to the status of authorized but unissued shares.
(d) Conversion.
(i) At any time prior to the redemption of any share of Series B
Preferred Stock, the holder of such shares of Series B Preferred Stock
shall have the right to convert such share into 112 shares of Common
Stock. The right to receive the converted shares requires delivery to
the office of the Corporation or its transfer agent of the shareholder's
written notice stating the number of shares the shareholder is electing
to convert. Said notice shall be accompanied by the surrender of the
Series B Preferred Stock certificate or certificates, duly endorsed to
the Corporation. The date of conversion
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shall be the date of receipt by the Company or its transfer agent of the
notice and the duly endorsed certificate(s).
(ii) Neither fractional shares nor scrip or other certificates
representing the shares may be issued by the Corporation on conversion
of shares of Series B Preferred Stock, but the Corporation must pay in
lieu thereof the full value in cash to the holders who would be entitled
to receive the fractional shares but for this provision.
(iii) The Corporation must at all time reserve out of its
authorized but unissued shares of Common Stock the full number of shares
deliverable on conversion of all shares hereunder from time to time
outstanding. Said shares are reserved solely for the purpose of
satisfying the conversion requirements.
(iv) The number of shares and securities or other property issuable
upon the conversion of the Series Preferred Stock shall be subject to
adjustment from time to time in the event of any reclassification of the
Common Stock, the issuance of any stock dividend or stock split in
respect of the Common Stock, share exchange involving the Common Stock
or other similar transaction so that the holders of the Series B
Preferred Stock shall be entitle to receive on conversion of the shares
of Series B Preferred Stock that number of shares and other securities
or property that a holder of a share of Common Stock received in such
reclassification, stock dividend, stock split, share exchange or similar
transaction. Such adjustments shall be determined by the Board of
Directors of the Corporation, whose determination shall be final and
conclusive. Such adjustments shall be made for successive transactions.
(d) Voting. Each share of Series A Preferred Stock shall entitle the
holder thereof to one-tenth (1/10) of one vote on each matter presented to
shareholders generally voting as a single class with the Common Stock and
any other class or series of stock having similar voting rights. The
holders of the Series A Preferred Stock shall not be entitled to vote as a
class on any matter except as required by law.
(e) Exclusion of Other Rights. Unless otherwise required by law, the
shares of Series A Preferred Stock shall not have any powers, preferences,
or relative, participating, option or other special rights other than those
specifically set forth herein.
(f) Stated Value. The stated value of the Series B Preferred Stock is
$100 per share, all of which shall be allocated to the stated capital of
the Corporation.
4. Future Designations
Subject to the provisions of paragraph A of this Article IV, the Board of
Directors of the Corporation is hereby vested with authority from time to time
to establish and designate such series of Preferred Stock from the authorized
but unissued shares of Preferred Stock as it may deem desirable, and within the
limitations prescribed by law or set forth herein, to fix and determine the
relative rights and preferences of the shares of any series so established. The
Board of Directors shall exercise such authority by the adoption of a resolution
or resolutions as prescribed by law, setting forth the designation of the series
and fixing and determining the relative rights and preferences thereof or so
much thereof as shall not be fixed and determined herein. The Board of Directors
may increase or decrease the number of shares of a series by adopting a
resolution fixing and determining the new number of shares of each series in
which the number of shares is increased or decreased; provided, however, no
decrease may reduce the number of shares within a series to less than the number
of shares within such series that are then issued.
C. Provisions Applicable to All Stock.
1. Voting Rights. The holders of a majority of the shares of the
Corporation's stock of any class entitled to vote, represented in person or by
proxy, shall constitute a quorum at a meeting of shareholders. Subject to the
provisions of paragraph A of this Article IV, the vote of the holders of a
majority of the shares entitled to vote and represented at a meeting at which a
quorum is present shall be the act of the shareholders' meeting, except with
respect to certain actions, which require the affirmative vote of the holders of
a majority of the outstanding shares of the Corporation unless any class of
stock of the Corporation is entitled to vote as a class
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thereon, in which event the action shall be approved upon the affirmative vote
of the holders of a majority of the outstanding shares within each class
entitled to vote as a class thereon as well as a majority of the outstanding
shares. No shareholder of the Corporation shall have the right of cumulative
voting at any election of directors or upon any other matter.
2. Preemptive Rights. No holder of securities of the Corporation shall be
entitled as a matter of right, preemptive or otherwise, to subscribe for or
purchase any securities of the Corporation now or hereafter authorized to be
issued, or securities held in the treasury of the Corporation, whether issued or
sold for cash or other consideration or as a share dividend or otherwise. Any
such securities may be issued or disposed of by the Board of Directors to such
persons and on such terms as in its discretion it shall deem advisable.
ARTICLE V
MAJORITY VOTE FOR APPROVAL OF CERTAIN ACTIONS
If, with respect to any matter for which the affirmative vote or
concurrence of the shareholders of the Corporation is required, any provision of
the Texas Business Corporation Act, as the same may be amended from time to
time, would, but for this Article V, require the affirmative vote or concurrence
of the holders of shares having more than a majority of the votes entitled to
vote on such matter, or of any class or series thereof, the affirmative vote or
concurrence of the holders of shares having only a majority of the votes
entitled to vote on such matter, or of any class or series thereof, shall be
required with respect to any such matter.
ARTICLE VI
WRITTEN CONSENTS
Except for the election of directors of the Corporation, who when elected
by shareholders shall be elected at either an annual or special meeting of
shareholders called for such purpose, any action required to, or which may, be
taken at any annual or special meeting of shareholders may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holder or
holders of shares having not less than the minimum number of votes that would be
necessary to take such action at a meeting at which the holders of all shares
entitled to vote on the action were present and voted.
ARTICLE VII
COMMENCEMENT OF BUSINESS
The Corporation will not commence business until it has received for the
issuance of its shares consideration of the value of One Thousand ($1,000.00)
Dollars consisting of money, labor done, or property actually received.
ARTICLE VIII
REGISTERED OFFICE AND AGENT
The street address of its initial registered office is 5555 San Felipe,
17th Floor, Houston, Texas 77056 and the name of its initial registered agent at
such address is Gary A. Messersmith.
ARTICLE IX
DIRECTORS
(A) Number of Directors. The business and affairs of the Corporation shall
be managed by or be under the direction of the Board of Directors of the
Corporation. The number of Directors constituting the initial
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Board of Directors is one (1). The number of Directors of the Corporation may
from time to time be changed in accordance with the Bylaws of the Corporation
and the Act.
(B) Name and Address of Director. The name of the person who is to serve
as Director until the first annual meeting of the shareholders, or until his
successor is elected and qualified is DAVID R. LITTLE and his address is 580
Westlake Park Blvd., Suite 1100, Houston, Texas 77079
(C) Directors Liability. No director of the Corporation shall be liable to
the Corporation or any of its shareholders for monetary damages for an act or
omission in the director's capacity as a director, except that this Article IX
shall not authorize the elimination or limitation of liability of a director of
the Corporation to the extent the director is found liable for: (i) a breach of
such director's duty of loyalty to the Corporation or its shareholders; (ii) an
act or omission not in good faith that constitutes a breach of duty of such
director to the Corporation or an act or omission that involves intentional
misconduct or a knowing violation of the law; (iii) a transaction from which
such director received an improper benefit, whether or not the benefit resulted
from an action taken within the scope of the director's office; or (iv) an act
or omission for which the liability of a director is expressly provided by an
applicable statute.
ARTICLE X
LIMITATION OF LIABILITY OF DIRECTORS
A. No director of the Corporation shall be liable to the Corporation or any
of its shareholders for monetary damages for an act or omission in the
director's capacity as a director, except that this Article VIII shall not
authorize the elimination or limitation of liability of a director of the
Corporation to the extent the director is found liable for: (i) a breach of such
director's duty of loyalty to the Corporation or its shareholders; (ii) an act
or omission not in good faith that constitutes a breach of duty of such director
to the Corporation or an act or omission that involves intentional misconduct or
a knowing violation of the law; (iii) a transaction from which such director
received an improper benefit, whether or not the benefit resulted from an action
taken within the scope of the director's office; or (iv) an act or omission for
which the liability of a director is expressly provided by an applicable
statute.
B. If the Texas Business Corporation Act, the Texas Miscellaneous
Corporation Laws Act or any other applicable Texas statute hereafter is amended
to authorize the further elimination or limitation of the liability of directors
of the Corporation, then the liability of a director of the Corporation shall be
limited to the fullest extent permitted by the Texas Business Corporation Act,
the Texas Miscellaneous Corporation Laws Act and such other applicable Texas
statute, as so amended, and such limitation of liability shall be in addition
to, and not in lieu of, the limitation on the liability of a director of the
Corporation provided by the foregoing provisions of this Article VIII.
C. Any repeal of or amendment to this Article VIII shall be prospective
only and shall not adversely affect any limitation on the liability of a
director of the Corporation existing at the time of such repeal or amendment.
ARTICLE XI
INDEMNIFICATION OF OFFICERS AND DIRECTORS
(A) Indemnification of Directors. To the fullest extent permitted by
Section B and Section E of Article 2.02-1 of the Act, the Corporation shall
indemnify each person who was, is, or is threatened to be made a named defendant
or respondent in a proceeding because the person is or was a director of the
Corporation, and this provision for indemnification shall be deemed to
constitute authorization of such indemnification in the manner required by
Section G of said Article 2.02-1 of the Act.
(B) Expenses of a Defendant. To the fullest extent permitted by Section K
of Article 2.02-1 of the Act, reasonable expenses incurred by a director of the
Corporation who was, is, or is threatened to be made a named defendant or
respondent in a proceeding shall be paid or reimbursed by the Corporation, in
advance of
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the final disposition of such proceeding, after the Corporation receives a
written affirmation by the director of his good faith belief that he has met the
standard of conduct necessary for indemnification by the Corporation and the
Corporation receives a written undertaking by or behalf of the director to repay
the amount paid or reimbursed if it is ultimately determined that he has not met
that standard or if it is ultimately determined that indemnification of the
director against expenses incurred by him in connection with that proceeding is
otherwise prohibited by said Article 2.02-1 of the Act. This provision for
payment or reimbursement shall be deemed to constitute authorization of such
payment or reimbursement as provided by said Section K of Article 2.02-1 of the
Act.
(C) Officers. Pursuant to Section O of Article 2.02-1 of the Act, the
Corporation shall indemnify and advance expenses to an officer of the
Corporation to the same extent that the Corporation shall indemnify and pay or
reimburse expenses to directors of the Corporation as set forth in subsections
(A) and (B) hereinabove.
(D) Expenses of a Witness. To the fullest extent permitted by Section N of
Article 2.02-1 of the Act, the Corporation shall pay or reimburse expenses
incurred by a director or officer in connection with his appearance as a witness
or other participation, only in his capacity as a director or officer of the
Corporation, in a proceeding at a time when he is not a named defendant or
respondent in the proceeding as set out therein.
(E) Other. In addition to the foregoing, the Corporation hereby adopts all
other terms, provisions and authorizations of Article 2.02-1 of the Act, not in
conflict with subsections (A), (B), (C) and (d) hereinabove, including but not
limited to Sections H, I, J and O of said Article 2.02-1 of the Act. It is the
intention of the Corporation to provide the maximum indemnification allowed by
law to its directors and officers and to make mandatory in all instances any
permissive provisions of Article 2.02-1 of the Act for the benefit of the
Corporation's directors and officers.
(F) Insurance. The Corporation shall have power to purchase and maintain
insurance or another arrangement on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article or the Act.
(G) Amendment of this Article. No amendment or repeal of this Article shall
apply to or have any affect on the indemnification or reimbursement of any
director or officer of the Corporation for or with respect to any such
indemnification or reimbursement on the part of such director or officer for
events covered by such indemnification or reimbursement occurring prior to such
amendment or repeal.
(H) Amendment of the Act. In the event any provision of the Act set out in
this Article is amended, altered or repealed in any way, then any such
amendment, alteration or repeal shall be incorporated herein without the
necessity of any further action by the corporation upon the effective date of
such action.
ARTICLE XII
AMENDMENT OF BYLAWS
The shareholders of the Corporation hereby delegate to the Board of
Directors the power to adopt, alter, amend or repeal the Bylaws of the
Corporation. Such power shall be vested exclusively in the Board of Directors
and shall not be exercised by the shareholders.
ARTICLE XIII
POWER TO CALL SPECIAL SHAREHOLDERS' MEETINGS
Special meetings of the shareholders of the Corporation may be called by
the President of the Corporation, the Board of Directors or holders of not less
than thirty (30%) percent of all the shares entitled to vote at the proposed
special meeting of the shareholders.
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ARTICLE XIV
AMENDMENTS
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation or in its Bylaws in the
manner now or hereafter prescribed by the Act or these Articles of
Incorporation, and all rights conferred on shareholders herein are granted
subject to this reservation.
Executed this the 12th day of August, 1996.
INDEX, INC.
By: /s/ DAVID R. LITTLE
Name: David R. Little
Title: Chairman & CEO
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APPENDIX F:
BYLAWS OF THE COMPANY
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CORPORATE BYLAWS OF
INDEX, INC.
(A TEXAS CORPORATION)
<PAGE> 162
TABLE OF CONTENTS
<TABLE>
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SECTION SUBJECT MATTER PAGE
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<S> <C> <C> <C>
ARTICLE I.
NAME AND OFFICES
1.1 Name............................................................................
1.2 Registered Office and Agent.....................................................
(a) Registered Office.........................................................
(b) Registered Agent..........................................................
(c) Change of Registered Office or Agent......................................
1.3 Other Offices...................................................................
ARTICLE II.
SHAREHOLDERS
2.1 Place of Meetings...............................................................
2.2 Annual Meetings.................................................................
2.3 Special Meetings................................................................
2.4 Notice..........................................................................
2.5 Voting List.....................................................................
2.6 Quorum..........................................................................
2.7 Requisite Vote..................................................................
2.8 Withdrawal of Quorum............................................................
2.9 Voting at Meeting...............................................................
(a) Voting Power..............................................................
(b) Exercise of Voting Power; Proxies.........................................
(c) Election of Directors.....................................................
2.10 Record Date for Meetings; Closing Transfer Records..............................
2.11 Action Without Meetings.........................................................
2.12 Record Date for Action Without Meetings.........................................
2.13 Preemptive Rights...............................................................
ARTICLE III.
DIRECTORS
3.1 Management Powers...............................................................
3.2 Number and Qualification........................................................
3.3 Election and Term...............................................................
3.4 Voting on Directors.............................................................
3.5 Vacancies.......................................................................
3.6 New Directorships...............................................................
3.7 Removal.........................................................................
3.8 Meetings........................................................................
(a) Place.....................................................................
(b) Annual Meeting............................................................
(c) Regular Meetings..........................................................
(d) Special Meetings..........................................................
(e) Notice and Waiver of Notice...............................................
(f) Quorum....................................................................
(g) Requisite Vote............................................................
3.9 Action Without Meetings.........................................................
3.10 Committees......................................................................
(a) Designation and Appointment...............................................
</TABLE>
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<TABLE>
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SECTION SUBJECT MATTER PAGE
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<S> <C> <C> <C>
(b) Members; Alternate Members; Terms.........................................
(c) Authority.................................................................
(d) Records...................................................................
(e) Change in Number..........................................................
(f) Vacancies.................................................................
(g) Removal...................................................................
(h) Meeting...................................................................
(i) Quorum; Requisite Vote....................................................
(j) Compensation..............................................................
(k) Action Without Meetings...................................................
(l) Responsibility............................................................
3.11 Compensation....................................................................
3.12 Maintenance of Records..........................................................
ARTICLE IV.
NOTICES
4.1 Method of Notice................................................................
4.2 Waiver..........................................................................
ARTICLE V.
OFFICERS AND AGENTS
5.1 Designation.....................................................................
5.2 Election of Officers............................................................
5.3 Qualifications..................................................................
5.4 Term of Office..................................................................
5.5 Authority.......................................................................
5.6 Removal.........................................................................
5.7 Vacancies.......................................................................
5.8 Compensation....................................................................
5.9 Chairman of the Board...........................................................
5.10 President.......................................................................
5.11 Vice Presidents.................................................................
5.12 Secretary.......................................................................
5.13 Assistant Secretaries...........................................................
5.14 Treasurer.......................................................................
5.15 Assistant Treasurers............................................................
ARTICLE VI.
INDEMNIFICATION
6.1 Indemnification of Directors....................................................
6.2 Expenses of a Defendant.........................................................
6.3 Officers........................................................................
6.4 Expenses of a Witness...........................................................
6.5 Other...........................................................................
6.6 Insurance.......................................................................
6.7 Amendment of this Article.......................................................
6.8 Amendment of the Act............................................................
</TABLE>
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<TABLE>
<CAPTION>
SECTION SUBJECT MATTER PAGE
- ------- -------------------------------------------------------------------------- ----
<S> <C> <C> <C>
ARTICLE VII.
STOCK CERTIFICATES AND TRANSFER REGULATIONS
7.1 Description of Certificates.....................................................
7.2 Delivery........................................................................
7.3 Signatures......................................................................
7.4 Issuance of Certificates........................................................
7.5 Payment for Shares..............................................................
(a) Consideration.............................................................
(b) Valuation.................................................................
(c) Effect....................................................................
(d) Allocation of Consideration...............................................
7.6 Subscriptions...................................................................
7.7 Closing of Transfer Records; Record Date for Action With Meeting................
7.8 Registered Owners...............................................................
7.9 Lost, Stolen or Destroyed Certificates..........................................
(a) Proof of Loss.............................................................
(b) Timely Request............................................................
(c) Bond......................................................................
(d) Other Requirements........................................................
7.10 Registration of Transfers.......................................................
(a) Endorsement...............................................................
(b) Guaranty and Effectiveness of Signature...................................
(c) Adverse Claims............................................................
(d) Collection of Taxes.......................................................
(e) Additional Requirements Satisfied.........................................
7.11 Restrictions on Transfer and Legends on Certificates............................
(a) Shares in Classes or Series...............................................
(b) Restriction on Transfer...................................................
(c) Preemptive Rights.........................................................
(d) Unregistered Securities...................................................
ARTICLE VIII.
GENERAL PROVISIONS
8.1 Distributions...................................................................
(a) Declaration and Payment...................................................
(b) Record Date...............................................................
8.2 Reserves........................................................................
8.3 Books and Records...............................................................
8.4 Annual Statement................................................................
8.5 Contracts and Negotiable Instruments............................................
8.6 Fiscal Year.....................................................................
8.7 Corporate Seal..................................................................
8.8 Resignations....................................................................
8.9 Amendment of Bylaws.............................................................
8.10 Construction....................................................................
8.11 Telephone Meetings..............................................................
8.12 Table of Contents; Captions..................................................... 18
</TABLE>
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BYLAWS OF
INDEX, INC.
(A TEXAS CORPORATION)
ARTICLE I.
NAME AND OFFICES
1.1 Name. The name of the Corporation is INDEX, INC. hereinafter referred
to as the "Corporation."
1.2 Registered Office and Agent. The Corporation shall establish,
designate and continuously maintain a registered office and agent in the State
of Texas, subject to the following provisions:
(a) Registered Office. The Corporation shall establish and
continuously maintain in the State of Texas a registered office which may
be, but need not be, the same as its place of business.
(b) Registered Agent. The Corporation shall designate and continuously
maintain in the State of Texas a registered agent, which agent may be
either an individual resident of the State of Texas whose business office
is identical with such registered office, or a domestic corporation or a
foreign corporation authorized to transact business in the State of Texas,
having a business office identical with such registered office.
(c) Change of Registered Office or Agent. The Corporation may change
its registered office or change its registered agent, or both, upon the
filing in the Office of the Secretary of State of Texas of a statement
setting forth the facts required by law, and executed for the Corporation
by its President or a Vice President.
1.3 Other Offices. The Corporation may also have offices at such other
places within and without the State of Texas as the Board of Directors may, from
time to time, determine the business of the Corporation may require.
ARTICLE II.
SHAREHOLDERS
2.1 Place of Meetings. Each meeting of the shareholders of the Corporation
is to be held at the principal offices of the Corporation or at such other
place, either within or without the State of Texas, as may be specified in the
notice of the meeting or in a duly executed waiver of notice thereof.
2.2 Annual Meetings. The annual meeting of the shareholders for the
election of Directors and for the transaction of such other business as may
properly come before the meeting shall be held after the close of the fiscal
year of the Corporation on a day to be selected by the Board of Directors;
provided, however, that the failure to hold the annual meeting within the
designated period of time or on the designated date shall not work a forfeiture
or dissolution of the Corporation.
2.3 Special Meetings. Special meetings of the shareholders, for any
purpose or purposes, may be called by the Chairman of the Board or the
President. Special meetings of the shareholders shall be called by the President
or Secretary at the request in writing of a majority of the Board of Directors,
or at the request in writing of shareholders owning thirty percent (30%) of the
capital stock of the Corporation issued and outstanding and entitled to vote.
Such request shall state the purpose or purposes of the proposed meeting and the
business to be transacted at any such special meeting of shareholders, and shall
be limited to the purposes stated in the notice therefor.
2.4 Notice. Written or printed notice of the meeting stating the place,
day and hour of the meeting, and in the case of a special meeting, the purpose
or purposes for which the meeting is called, shall be delivered not less than
ten (10) nor more than sixty (60) days before the date of the meeting, either
personally or by mail, by or at the direction of the Chairman of the Board or
the President, the Secretary or a majority of the members of the Board of
Directors calling the meeting, to each shareholder entitled to vote at such
meeting as
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determined in accordance with the provisions of Section 2.10 hereof. If mailed,
such notice shall be deemed to be delivered when deposited in the United States
Mail, with postage thereon prepaid, addressed to the shareholder entitled
thereto at his address as it appears on the share transfer records of the
Corporation.
2.5 Voting List. The officer or agent having charge and custody of the
share transfer records of the Corporation, shall prepare, at least ten (10) days
before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting, arranged in alphabetical order and containing
the address and number of voting shares held by each, which list shall be kept
on file at the registered office or principal place of business of the
Corporation for a period of not less than ten (10) days prior to such meeting
and shall be subject to inspection by any shareholder at any time during usual
business hours. Such list shall also be produced and kept open at the time and
place of the meeting and shall be subject to the inspection of any shareholder
during the entire time of the meeting. The original share ledger or transfer
book, or a duplicate thereof, shall be prima facie evidence as to identity of
the shareholders entitled to examine such list or share ledger or transfer book
and to vote at any such meeting of the shareholders.
2.6 Quorum. The holders of a majority of the shares of the capital stock
issued and outstanding and entitled to vote thereat, represented in person or by
proxy, shall be requisite and shall constitute a quorum at all meetings of the
shareholders for the transaction of business except as otherwise provided by
statute or by the Articles of Incorporation or by these Bylaws. The shareholders
represented in person or by proxy at a meeting of the shareholders at which a
quorum is not present may adjourn the meeting until such time and to such place
as may be determined by a vote of the holders of a majority of the shares
represented in person or by proxy at that meeting. At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally notified.
2.7 Requisite Vote. If a quorum is present at any meeting, the vote of the
holders of a majority of the shares of capital stock having voting power and
casting a vote thereon, present in person or represented by proxy, shall
determine any question brought before such meeting, unless the question is one
upon which, by express provision of the Articles of Incorporation or of these
Bylaws, a different vote shall be required or permitted, in which case such
express provision shall govern and control the determination of such question.
2.8 Withdrawal of Quorum. If a quorum is present at the time of
commencement of any meeting, the shareholders present at such duly convened
meeting may continue to transact any business which may properly come before
said meeting until adjournment thereof, notwithstanding the withdrawal from such
meeting of sufficient holders of the shares of capital stock entitled to vote
thereat to leave less than a quorum remaining.
2.9 Voting at Meeting. Voting at meetings of shareholders shall be
conducted and exercised subject to the following procedures and regulations:
(a) Voting Power. In the exercise of voting power with respect to each
matter properly submitted to a vote at any meeting of shareholders, each
shareholder of the capital stock of the Corporation having voting power
shall be entitled to one (1) vote for each such share held in his name on
the records of the Corporation, except to the extent otherwise specified by
the Articles of Incorporation.
(b) Exercise of Voting Power; Proxies. At any meeting of the
shareholders, every holder of the shares of capital stock of the
Corporation entitled to vote at such meeting may vote either in person, or
by proxy executed in writing by such shareholder. A telegram, telex,
cablegram, or similar transmission by a shareholder, or a photographic,
photostatic, facsimile, or similar reproduction of a writing executed by a
shareholder, shall be treated as an execution in writing. No proxy shall be
valid after the expiration of eleven (11) months from the date of its
execution, unless otherwise stated therein. A proxy shall be revocable
unless expressly designated therein as irrevocable and coupled with an
interest. Proxies coupled with an interest include the appointment as proxy
of: (a) a pledgee; (b) a person who purchased or agreed to purchase or owns
or holds an option to purchase the shares voted; (c) a creditor of the
Corporation who extended its credit under terms requiring the appointment;
(d) an employee of the Corporation whose employment contract requires the
appointment; or (e) a party to a voting agreement created under Section B
of Article 2.30 of the Texas Business Corporation Act, as amended (the
"Act").
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Each proxy shall be filed with the Secretary of the Corporation prior to or
at the time of the meeting. Voting for directors shall be in accordance
with the provisions of paragraph (c) below of this Section 2.9. Any vote
may be taken by voice vote or by show of hands unless someone entitled to
vote at the meeting objects, in which case written ballots shall be used.
(c) Election of Directors. Directors shall be elected in accordance
with Section 3.4 of these Bylaws.
2.10 Record Date for Meetings; Closing Transfer Records. As more
specifically provided in Article 7, Section 7.7 hereof, the Board of Directors
may fix in advance a record date for the purpose of determining shareholders
entitled to notice of or to vote at a meeting of shareholders, such record date
to be not less than ten (10) nor more than sixty (60) days prior to such
meeting, or the Board of Directors may close the share transfer records for such
purpose for a period of not less than ten (10) nor more than sixty (60) days
prior to such meeting. In the absence of any action by the Board of Directors,
the date upon which the notice of the meeting is mailed shall be deemed the
record date.
2.11 Action Without Meetings. Any action required by the Act, the Articles
of Incorporation or these Bylaws to be taken at any annual or special meeting of
the shareholders, or any action which may be taken at any annual or special
meeting of the shareholders may be taken without a meeting, without prior notice
and without a vote, if a consent or consents in writing setting forth the action
so taken, shall be signed by the holder or holders of shares having not less
than the minimum number of votes that would be necessary to take such action at
a meeting at which the holders of all of the shares entitled to vote on the
action were present and voted, provided that such action is done in compliance
with Section 9.10 of the Act. Any such executed written consent, or an executed
counterpart thereof, shall be placed in the minute book of the Corporation.
Every written consent shall bear the date of signature of each shareholder who
signs the consent. No written consent shall be effective to take the action that
is the subject of the consent unless, within sixty (60) days after the date of
the earliest dated consent delivered to the Corporation in the manner required
under Section 2.12 hereof, a consent or consents signed by the holders of a
majority of the shares of the capital stock issued and outstanding and entitled
to vote on the action that is the subject of the consent are delivered to the
Corporation.
2.12 Record Date for Action Without Meetings. Unless a record date shall
have previously been fixed or determined by the Board of Directors as provided
in Section 2.10 hereof, whenever action by shareholders is proposed to be taken
by consent in writing without a meeting of shareholders, the Board of Directors
may fix a record date for the purpose of determining shareholders entitled to
consent to that action, which record date shall not precede, and shall not be
more than ten (10) days after, the date upon which the resolution fixing the
record date is adopted by the Board of Directors. If no record date has been
fixed by the Board of Directors and the prior action of the Board of Directors
is not required by statute or the Articles of Incorporation, the record date for
determining shareholders entitled to consent to action in writing without a
meeting shall be the first date on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to the Corporation by
delivery to its registered office, its principal place of business, or an
officer or agent of the Corporation having custody of the books in which
proceedings of meetings of shareholders are recorded. Delivery shall be by hand
or by certified or registered mail, return receipt requested. Delivery to the
Corporation's principal place of business shall be addressed to the President or
principal executive officer of the Corporation. If no record date shall have
been fixed by the Board of Directors and prior action of the Board of Directors
is required by statute, the record date for determining shareholders entitled to
consent to action in writing without a meeting shall be at the close of business
on the date in which the Board of Directors adopts a resolution taking such
prior action.
2.13 Preemptive Rights. Unless otherwise determined by the Board of
Directors in the manner provided under the Act, no holder of shares of capital
stock of the Corporation shall, as such holder, have any right to purchase or
subscribe for any capital stock of any class which the Corporation may issue or
sell, whether or not exchangeable for any capital stock of the Corporation of
any class or classes, whether issued out of unissued shares authorized by the
Articles of Incorporation, as amended, or out of shares of capital stock of the
Corporation acquired by it after the issue thereof; nor, unless otherwise
determined by the Board of Directors in the manner provided under the Act shall
any holder of shares of capital stock of the Corporation, as such
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holder, have any right to purchase, acquire or subscribe for any securities
which the Corporation may issue or sell whether or not convertible into or
exchangeable for shares of capital stock of the Corporation of any class or
classes, and whether or not any such securities have attached or appurtenant
thereto warrants, options or other instruments which entitle the holders thereof
to purchase, acquire or subscribe for shares of capital stock of any class or
classes.
ARTICLE III.
DIRECTORS
3.1 Management Powers. The powers of the Corporation shall be exercised by
or under the authority of, and the business and affairs of the Corporation shall
be managed under the direction of, its Board of Directors which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by statute or by the Articles of Incorporation or by these Bylaws directed or
required to be exercised or done by the shareholders.
3.2 Number and Qualification. The Board of Directors shall consist of not
less than one (1) member nor more than ten (10) members; provided, however, the
initial Board of Directors shall consist of one (1) member. Directors need not
be residents of the State of Texas nor shareholders of the Corporation. Each
Director shall qualify as a Director following election as such by agreeing to
act or acting in such capacity. The number of Directors may be increased or
decreased from time to time by resolution of the Board of Directors or
shareholders without the necessity of a written amendment to the Bylaws of the
Corporation; provided, however, no decrease shall have the effect of shortening
the term of any incumbent Director.
3.3 Election and Term. Members of the Board of Directors shall hold office
until the annual meeting of shareholders and until their successors shall have
been elected and qualified. At the annual meeting of the shareholders, the
shareholders entitled to vote in an election of Directors shall elect Directors
to hold office until the next succeeding annual meeting. Each Director shall
hold office for the term for which he is elected, and until his successor shall
be elected and qualified or until his death, resignation or removal, if earlier.
3.4 Voting on Directors. Directors shall be elected by the vote of the
holders of a plurality of the shares entitled to vote in the election of
Directors and represented in person or by proxy at a meeting of shareholders at
which a quorum is present. Cumulative voting in the election of Directors is
expressly prohibited.
3.5 Vacancies. Any vacancy occurring in the Board of Directors may be
filled by the affirmative vote of a majority of the remaining Directors then in
office, though less than a quorum of the Board of Directors. For purposes of
these Bylaws, a "vacancy" shall be defined as an unfilled directorship arising
by virtue of the death, resignation or removal of a Director theretofore duly
elected to serve in such capacity in accordance with the relevant provisions of
these Bylaws. A Director elected to fill a vacancy shall be elected for the
unexpired portion of the term of his predecessor in office.
3.6 New Directorships. Any directorship to be filled by reason of an
increase in the number of Directors actually serving as such shall be filled by
election at an annual meeting of the shareholders or at a special meeting of
shareholders called for that purpose, or by the Board of Directors for a term of
office continuing only until the next election of one or more Directors by the
shareholders, provided that the Board of Directors may not fill more than two
(2) such directorships during the period between any two (2) successive annual
meetings of shareholders.
3.7 Removal. Any Director may be removed either for or without cause at
any duly convened special or annual meeting of shareholders, by the affirmative
vote of a majority in number of shares of the shareholders present in person or
by proxy at any meeting and entitled to vote for the election of such Director,
provided notice of intention to act upon such matter shall have been given in
the notice calling such meeting.
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3.8 Meetings. The meetings of the Board of Directors shall be held and
conducted subject to the following regulations:
(a) Place. Meetings of the Board of Directors of the Corporation,
annual, regular or special, are to be held at the principal office or place
of business of the Corporation, or such other place, either within or
without the State of Texas, as may be specified in the respective notices,
or waivers of notice, thereof.
(b) Annual Meeting. The Board of Directors shall meet each year
immediately after the annual meeting of the shareholders, at the place
where such meeting of the shareholders has been held (either within or
without the State of Texas), for the purpose of organization, election of
officers, and consideration of any other business that may properly be
brought before the meeting. No notice of any kind to either old or new
members of the Board of Directors for such annual meeting shall be
required.
(c) Regular Meetings. Regular meetings of the Board of Directors may
be held without notice at such time and at such place or places as shall
from time to time be determined and designated by the Board.
(d) Special Meetings. Special meetings of the Board of Directors may
be called by the Chairman of the Board or the President of the Corporation
on notice of two (2) days to each Director either personally or by mail or
by telegram; special meetings shall be called by the Chairman of the Board
or the President or Secretary in like manner and on like notice on the
written request of two (2) Directors.
(e) Notice and Waiver of Notice. Attendance of a Director at any
meeting shall constitute a waiver of notice of such meeting, except where a
Director attends for the express purpose of objecting to the transaction of
any business because the meeting is not lawfully called or convened.
Neither the business to be transacted at, nor the purpose of, any regular
meeting of the Board of Directors need be specified in the notice or waiver
of notice of such meeting.
(f) Quorum. At all meetings of the Board of Directors, a majority of
the number of Directors fixed by these Bylaws shall constitute a quorum for
the transaction of business, until a greater number is required by law or
by the Articles of Incorporation. If a quorum shall not be present at any
meeting of Directors, the Directors present thereat may adjourn the
meeting, from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
(g) Requisite Vote. In the exercise of voting power with respect to
each matter properly submitted to a vote at any meeting of the Board of
Directors, each Director present at such meeting shall have one (1) vote.
The act of a majority of the Directors present at any meeting at which a
quorum is present shall be the act of the Board of Directors.
3.9 Action Without Meetings. Unless otherwise restricted by the Articles
of Incorporation or these Bylaws, any action required or permitted by law to be
taken at any meetings of the Board of Directors, or any committee thereof, may
be taken without a meeting, if prior to such action a written consent thereto is
signed by all members of the Board or of such committee, as the case may be, and
such written consent is filed in the minutes or proceedings of the Board of
Directors or committee.
3.10 Committees. Committees designated and appointed by the Board of
Directors shall function subject to and in accordance with the following
regulations and procedures:
(a) Designation and Appointment. The Board of Directors may, by
resolution adopted by a majority of the entire Board, designate and appoint
one or more committees under such name or names and for such purpose or
function as may be deemed appropriate.
(b) Members; Alternate Members; Terms. Each Committee thus designated
and appointed shall consist of two or more of the Directors of the
Corporation. The Board of Directors may designate one or more of its
members as alternate members of any committee, who may, subject to any
limitations imposed by the entire Board, replace absent or disqualified
members at any meeting of that committee. The members or alternate members
of any such committee shall serve at the pleasure of and subject to the
discretion of the Board of Directors.
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(c) Authority. Each Committee, to the extent provided in the
resolution of the Board creating same, shall have and may exercise such of
the powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation as the Board of Directors may
direct and delegate, except, however, those matters which are required by
statute to be reserved unto or acted upon by the entire Board of Directors.
(d) Records. Each such Committee shall keep and maintain regular
records or minutes of its meetings and report the same to the Board of
Directors when required.
(e) Change in Number. The number of members or alternate members of
any Committee appointed by the Board of Directors, as herein provided, may
be increased or decreased (but not below two) from time to time by
appropriate resolution adopted by a majority of the entire Board of
Directors.
(f) Vacancies. Vacancies in the membership of any committee designated
and appointed hereunder shall be filled by the Board of Directors, at a
regular or special meeting of the Board of Directors, in a manner
consistent with the provisions of this Section 3.10.
(g) Removal. Any member or alternate member of any committee appointed
hereunder may be removed by the Board of Directors by the affirmative vote
of a majority of the entire Board, whenever in its judgment the best
interests of the Corporation will be served thereby.
(h) Meetings. The time, place and notice (if any) of committee
meetings shall be determined by the members of such committee.
(i) Quorum; Requisite Vote. At meetings of any committee appointed
hereunder, a majority of the number of members designated by the Board of
Directors shall constitute a quorum for the transaction of business. The
act of a majority of the members and alternate members of the committee
present at any meeting at which a quorum is present shall be the act of
such committee, except as otherwise specifically provided by statute or by
the Articles of Incorporation or by these Bylaws. If a quorum is not
present at a meeting of such committee, the members of such committee
present may adjourn the meeting from time to time, without notice other
than an announcement at the meeting, until a quorum is present.
(j) Compensation. Appropriate compensation for members and alternate
members of any committee appointed pursuant to the authority hereof may be
authorized by the action of a majority of the entire Board of Directors
pursuant to the provisions of Section 3.11 hereof.
(k) Action Without Meetings. Any action required or permitted to be
taken at a meeting of any committee may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all
members of such committee. Such consent shall have the same force and
effect as a unanimous vote at a meeting. The signed consent, or a signed
copy, shall become a part of the record of such committee.
(l) Responsibility. Notwithstanding any provision to the contrary
herein, the designation and appointment of a committee and the delegation
of authority to it shall not operate to relieve the Board of Directors, or
any member or alternate member thereof, of any responsibility imposed upon
it or him by law.
3.11 Compensation. By appropriate resolution of the Board of Directors,
the Directors may be reimbursed their expenses, if any, of attendance at each
meeting of the Board of Directors and may be paid a fixed sum (as determined
from time to time by the vote of a majority of the Directors then in office) for
attendance at each meeting of the Board of Directors or a stated salary as
Director. No such payment shall preclude any Director from serving the
Corporation in another capacity and receiving compensation therefor. Members of
special or standing committees may, by appropriate resolution of the Board of
Directors, be allowed similar reimbursement of expenses and compensation for
attending committee meetings.
3.12 Maintenance of Records. The Directors may keep the books and records
of the Corporation, except such as are required by law to be kept within the
State, outside the State of Texas or at such place or places as they may, from
time to time, determine.
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<PAGE> 171
ARTICLE IV
NOTICES
4.1 Method of Notice. Whenever under the provisions of the Act or of the
Articles of Incorporation or of these Bylaws, notice is required to be given to
any Director or shareholder, it shall not be construed to mean personal notice,
but such notice may be given in writing, by mail, addressed to such Director or
shareholder, at his address as it appears on the records of the Corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States Mail. Notice to
Directors or shareholders may also be given by telegram.
4.2 Waiver. Whenever any notice whatever is required to be given under the
provisions of the Act or under the provisions of the Articles of Incorporation
or these Bylaws, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice. Attendance by such person or
persons, whether in person or by proxy, at any meeting requiring notice shall
constitute a waiver of notice of such meeting, except as provided in Section
3.8(e) hereof.
ARTICLE V
OFFICERS AND AGENTS
5.1 Designation. The officers of the Corporation shall be chosen by the
Board of Directors and shall consist of the offices of:
(a) President and Secretary; and
(b) Such other offices and officers (including a Chairman of the
Board, one or more Vice Presidents and a Treasurer) and assistant officers
and agents as the Board of Directors shall deem necessary.
5.2 Election of Officers. Each officer designated in Section 5.1(a) hereof
shall be elected by the Board of Directors on the expiration of the term of
office of such officer, as herein provided, or whenever a vacancy exists in such
office. Each officer or agent designated in Section 5.1(b) above may be elected
by the Board at any meeting.
5.3 Qualifications. No officer or agent need be a shareholder of the
Corporation or a resident of Texas. No officer or agent is required to be a
Director, except the Chairman of the Board. Any two or more offices may be held
by the same person.
5.4 Term of Office. Unless otherwise specified by the Board of Directors
at the time of election or appointment, or by the express provisions of an
employment contract approved by the Board, the term of office of each officer
and each agent shall expire on the date of the first meeting of Directors next
following the annual meeting of shareholders each year. Each such officer or
agent shall serve until the expiration of the term of his office or, if earlier,
his death, resignation or removal.
5.5 Authority. Officers and agents shall have such authority and perform
such duties in the management of the Corporation as are provided in these Bylaws
or as may be determined by resolution of the Board of Directors not inconsistent
with these Bylaws.
5.6 Removal. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its judgment the
best interests of the Corporation will be served thereby. Such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
5.7 Vacancies. Any vacancy occurring in any office of the Corporation (by
death, resignation, removal or otherwise) shall be filled by the Board of
Directors.
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5.8 Compensation. The compensation of all officers and agents of the
Corporation shall be fixed from time to time by the Board of Directors.
5.9 Chairman of the Board. If a Chairman of the Board is elected, he shall
be chosen from among the Directors and shall be the chief executive and
principal officer of the Corporation. He shall have the power to call special
meetings of the shareholders and of the Directors for any purpose or purposes,
and he shall preside at all meetings of the shareholders and of the Board of
Directors, unless he shall be absent or unless he shall, at his election,
designate the President to preside in his stead. The Chairman of the Board shall
be responsible for the operations and business affairs of the Corporation and
shall possess all of the powers granted by the Bylaws to the President,
including the power to make and sign contracts and agreements in the name and on
behalf of the Corporation. He shall, in general, have supervisory power over the
President and all other officers and the business activities of the Corporation,
subject to the discretion of the Board of Directors.
5.10 President. Subject to the supervision of the Chairman of the Board,
or in the absence of the election of a Chairman of the Board, the President
shall be the chief executive officer of the Corporation; shall preside at all
meetings of the shareholders and the Board of Directors; shall have general and
active management of the business of the Corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect. The
President shall execute bonds, mortgages and other contracts requiring a seal,
under the seal of the Corporation, except where required or permitted by law to
be otherwise executed and except where the execution thereof shall be expressly
delegated by the Board of Directors to some other officer or agent of the
Corporation. The President shall perform such other duties and possess such
other authority and powers as the Board of Directors may from time to time
prescribe.
5.11 Vice Presidents. The Vice President, or if there shall be more than
one, the Vice Presidents in the order determined by a majority vote of the Board
of Directors, shall, in the prolonged absence or disability of the President
(and Chairman of the Board, if one is elected), perform the duties and exercise
the powers of the President and shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe or the
chief executive officer may from time to time delegate.
5.12 Secretary. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the shareholders of the Corporation and record all
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be maintained for that purpose and shall perform like duties for the
standing committees when required. The Secretary shall give, or cause to be
given, notice of all meetings of the shareholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed by
the Board of Directors, the Chairman of the Board, or President. He shall have
custody of the corporate seal of the Corporation, and he, or an Assistant
Secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by his signature or by the signature of
such Assistant Secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his signature.
5.13 Assistant Secretaries. The Assistant Secretary, or if there be more
than one, the Assistant Secretaries in the order determined by the Board of
Directors, shall in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe or the chief executive officer may from time to time delegate.
5.14 Treasurer. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the President (and Chairman of the Board, if one is elected) and the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all his transactions as Treasurer and of the financial condition
of the Corporation. If required by the Board of Directors, he shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in
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case of his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money, and other property of whatever kind in his possession
or under his control owned by the Corporation. The Treasurer shall perform such
other duties and have such other authority and powers as the Board of Directors
may from time to time prescribe or as the chief executive officer may from time
to time delegate.
5.15 Assistant Treasurers. The Assistant Treasurer, or, if there shall be
more than one, the Assistant Treasurers in the order determined by the Board of
Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe or as the chief executive officer may from time to time delegate.
ARTICLE VI.
INDEMNIFICATION
6.1 Indemnification of Directors. To the fullest extent permitted by
Section B and Section E of Article 2.02-1 of the Act, the corporation shall
indemnify each person who was, is, or is threatened to be made a named defendant
or respondent in a proceeding because the person is or was a director of the
corporation, and this provision for indemnification shall be deemed to
constitute authorization of such indemnification in the manner required by
Section G of said Article 2.02-1 of the Act.
6.2 Expenses of a Defendant. To the fullest extent permitted by Section K
of Article 2.02-1 of the Act, reasonable expenses incurred by a director of the
corporation who was, is, or is threatened to be made a named defendant or
respondent in a proceeding shall be paid or reimbursed by the corporation, in
advance of the final disposition of such proceeding, after the corporation
receives a written affirmation by the director of his good faith belief that he
has met the standard of conduct necessary for indemnification by the corporation
and the corporation receives a written undertaking by or behalf of the director
to repay the amount paid or reimbursed if it is ultimately determined that he
has not met that standard or if it is ultimately determined that indemnification
of the director against expenses incurred by him in connection with that
proceeding is otherwise prohibited by said Article 2.02-1 of the Act. This
provision for payment or reimbursement shall be deemed to constitute
authorization of such payment or reimbursement as provided by said Section K of
Article 2.02-1 of the Act.
6.3 Officers. Pursuant to Section O of Article 2.02-1 of the Act, the
corporation shall indemnify and advance expenses to an officer of the
corporation to the same extent that the corporation shall indemnify and pay or
reimburse expenses to directors of the corporation as set forth in subsections
(a) and (b) hereinabove.
6.4 Expenses of a Witness. To the fullest extent permitted by Section N of
Article 2.02-1 of the Act, the corporation shall pay or reimburse expenses
incurred by a director or officer in connection with his appearance as a witness
or other participation, only in his capacity as a director or officer of the
corporation, in a proceeding at a time when he is not a named defendant or
respondent in the proceeding as set out therein.
6.5 Other. In addition to the foregoing, the corporation hereby adopts all
other terms, provisions and authorizations of Article 2.02-1 of the Act, not in
conflict with subsections (a), (b), (c) and (d) hereinabove, including but not
limited to Sections H, I, J and O of said Article 2.02-1 of the Act. It is the
intention of the corporation to provide the maximum indemnification allowed by
law to its directors and officers and to make mandatory in all instances any
permissive provisions of Article 2.02-1 of the Act for the benefit of the
corporation's directors and officers.
6.6 Insurance. The Corporation shall have power to purchase and maintain
insurance or another arrangement on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article or the Act.
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6.7 Amendment of this Article. No amendment or repeal of this Article VI
shall apply to or have any affect on the indemnification or reimbursement of any
director or officer of the corporation for or with respect to any such
indemnification or reimbursement on the part of such director or officer for
events covered by such indemnification or reimbursement occurring prior to such
amendment or repeal.
6.8 Amendment of the Act. In the event any provision of the Act set out in
this Article VI is amended, altered or repealed in any way, then any such
amendment, alteration or repeal shall be incorporated herein without the
necessity of any further action by the corporation upon the effective date of
such action. The corporation shall indemnify any director or officer or former
director or officer of the corporation, or any person who may have served at its
request as a director or officer of another corporation in which it owns shares
of capital stock or of which it is a creditor, against expenses actually and
necessarily incurred by him in connection with the defense of any action, suit,
or proceeding in which he is made a party by reason of being or having been such
director or officer, except in relation to matters as to which he shall be
adjudged in some action, suit or proceeding to be liable for negligence or
misconduct in performance of duty, but such indemnification shall not be deemed
exclusive of any other rights to which such director or officer may be entitled,
under any bylaw, agreement, vote of shareholders, or otherwise.
ARTICLE VII.
STOCK CERTIFICATES AND TRANSFER REGULATIONS
7.1 Description of Certificates. The shares of the capital stock of the
Corporation shall be represented by certificates in the form approved by the
Board of Directors and signed in the name of the Corporation by the President or
a Vice President and the Secretary or an Assistant Secretary of the Corporation,
and sealed with the seal of the Corporation or a facsimile thereof. Each
certificate shall state on the face thereof the name of the holder, the number
and class of shares and the designation of the series, if any, which such
certificate represents, the par value of shares covered thereby or a statement
that such shares are without par value, and such other matters as are required
by law. At such time as the Corporation may be authorized to issue shares of
more than one class or any class in series, every certificate shall set forth
upon the face or back of such certificate a statement of the designations,
preferences, limitations and relative rights of the shares of each class or
series authorized to be issued, as required by the laws of the State of Texas.
7.2 Delivery. Every holder of the capital stock in the Corporation shall
be entitled to have a certificate signed in the name of the Corporation by the
President or a Vice President and the Secretary or an Assistant Secretary of the
Corporation, certifying the class of capital stock and the number of shares
represented thereby as owned or held by such shareholder in the Corporation.
7.3 Signatures. The signatures of the President, Vice President, Secretary
or Assistant Secretary upon a certificate may be facsimiles. In case any officer
or officers who have signed, or whose facsimile signature or signatures have
been placed upon any such certificate or certificates, shall cease to serve as
such officer or officers of the Corporation, whether because of death,
resignation, removal or otherwise, before such certificate or certificates are
issued and delivered by the Corporation, such certificate or certificates may
nevertheless be adopted by the Corporation and be issued and delivered with the
same effect as though the person or persons who signed such certificate or
certificates or whose facsimile signature or signatures have been used thereon
had not ceased to serve as such officer or officers of the Corporation.
7.4 Issuance of Certificates. Certificates evidencing shares of its
capital stock (both treasury and authorized but unissued) may be issued for such
consideration (not less than par value, except for treasury shares which may be
issued for such consideration) and to such persons as the Board of Directors may
determine from time to time. Shares shall not be issued until the full amount of
the consideration, fixed as provided by law, has been paid.
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7.5 Payment for Shares. Consideration for the issuance of shares shall be
paid, valued and allocated as follows:
(a) Consideration. The consideration for the issuance of shares shall
consist of money paid, labor done (including services actually performed
for the Corporation), or property (tangible or intangible) actually
received.
(b) Valuation. In the absence of fraud in the transaction, the
determination of the Board of Directors as to the value of consideration
received shall be conclusive.
(c) Effect. When consideration, fixed as provided by law, has been
paid, the shares shall be deemed to have been issued and shall be
considered fully paid and nonassessable.
(d) Allocation of Consideration. The consideration received for shares
shall be allocated by the Board of Directors, in accordance with law,
between the stated capital and capital surplus accounts.
7.6 Subscriptions. Unless otherwise provided in the subscription
agreement, subscriptions of shares, whether made before or after organization of
the Corporation, shall be paid in full in such installments and at such times as
shall be determined by the Board of Directors. Any call made by the Board of
Directors for payment on subscriptions shall be uniform as to all shares of the
same class and series. In case of default in the payment of any installment or
call when payment is due, the Corporation may proceed to collect the amount due
in the same manner as any debt due to the Corporation.
7.7 Closing of Transfer Records; Record Date for Action With Meetings. For
the purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders, or any adjournment thereof, or entitled to receive a
distribution by the Corporation (other than a distribution involving a purchase
or redemption by the Corporation of any of its own shares) or a share dividend,
or in order to make a determination of shareholders for any other proper purpose
(other than determining shareholders entitled to consent to action by
shareholders proposed to be taken without a meeting of shareholders), the Board
of Directors may provide that share transfer records shall be closed for a
stated period of time not to exceed, in any case, sixty (60) days. If the share
transfer records shall be closed for the purpose of determining shareholders,
such records shall be closed for at least ten (10) days immediately preceding
such meeting. In lieu of closing the share transfer records, as aforesaid, the
Board of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than sixty
(60) days, and in the case of a meeting of shareholders, not less than ten (10)
days prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If the share transfer records are
not closed and no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive a distribution (other than a distribution involving a
purchase or redemption by the Corporation of any of its own shares) or a share
dividend, the date on which notice of the meeting is mailed or the date on which
the resolution of the Board of Directors declaring such distribution or share
dividend is adopted, as the case may be, shall be the record date for such
determination of shareholders. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this Section,
such determination shall be applied to any adjournment thereof except where the
determination has been made through the closing of the stock transfer books and
the stated period of closing has expired.
7.8 Registered Owners. Prior to due presentment for registration of
transfer of a certificate evidencing shares of the capital stock of the
Corporation in the manner set forth in Section 7.10 hereof, the Corporation
shall be entitled to recognize the person registered as the owner of such shares
on its records (or the records of its duly appointed transfer agent, as the case
may be) as the person exclusively entitled to vote, to receive notices and
dividends with respect to, and otherwise exercise all rights and powers relative
to such shares; and the Corporation shall not be bound or otherwise obligated to
recognize any claim, direct or indirect, legal or equitable, to such shares by
any other person, whether or not it shall have actual, express or other notice
thereof, except as otherwise provided by the laws of Texas.
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7.9 Lost, Stolen or Destroyed Certificates. The Corporation shall issue a
new certificate in place of any certificate for shares previously issued if the
registered owner of the certificate satisfies the following conditions:
(a) Proof of Loss. Submits proof in affidavit form satisfactory to the
Corporation that such certificate has been lost, destroyed or wrongfully
taken; and
(b) Timely Request. Requests the issuance of a new certificate before
the Corporation has notice that the certificate has been acquired by a
purchaser for value in good faith and without notice of an adverse claim;
and
(c) Bond. Gives a bond in such form, and with such surety or sureties,
with fixed or open penalty, as the Corporation may direct, to indemnify the
Corporation (and its transfer agent and registrar, if any) against any
claim that may be made or otherwise asserted by virtue of the alleged loss,
destruction, or theft of such certificate or certificates; and
(d) Other Requirements. Satisfies any other reasonable requirements
imposed by the Corporation.
In the event a certificate has been lost, apparently destroyed or wrongfully
taken, and the registered owner of record fails to notify the Corporation within
a reasonable time after he has notice of such loss, destruction, or wrongful
taking, and the Corporation registers a transfer (in the manner hereinbelow set
forth) of the shares represented by the certificate before receiving such
notification, such prior registered owner of record shall be precluded from
making any claim against the Corporation for the transfer required hereunder or
for a new certificate.
7.10 Registration of Transfers. Subject to the provisions hereof, the
Corporation shall register the transfer of a certificate evidencing shares of
its capital stock presented to it for transfer if:
(a) Endorsement. Upon surrender of the certificate to the Corporation
(or its transfer agent, as the case may be) for transfer, the certificate
(or an appended stock power) is properly endorsed by the registered owner,
or by his duly authorized legal representative or attorney-in-fact, with
proper written evidence of the authority and appointment of such
representative, if any, accompanying the certificate; and
(b) Guaranty and Effectiveness of Signature. The signature of such
registered owner or his legal representative or attorney-in-fact, as the
case may be, has been guaranteed by a national banking association or
member of the New York Stock Exchange, and reasonable assurance in a form
satisfactory to the Corporation is given that such endorsements are genuine
and effective; and
(c) Adverse Claims. The Corporation has no notice of an adverse claim
or has otherwise discharged any duty to inquire into such a claim; and
(d) Collection of Taxes. Any applicable law (local, state or federal)
relating to the collection of taxes relative to the transaction has been
complied with; and
(e) Additional Requirements Satisfied. Such additional conditions and
documentation as the Corporation (or its transfer agent, as the case may
be) shall reasonably require, including without limitation thereto, the
delivery with the surrender of such stock certificate or certificates of
proper evidence of succession, assignment or other authority to obtain
transfer thereof, as the circumstances may require, and such legal opinions
with reference to the requested transfer as shall be required by the
Corporation (or its transfer agent) pursuant to the provisions of these
Bylaws and applicable law, shall have been satisfied.
7.11 Restrictions on Transfer and Legends on Certificates.
(a) Shares in Classes or Series. If the Corporation is authorized to
issue shares of more than one class, the certificate shall set forth,
either on the face or back of the certificate, a full or summary statement
of all of the designations, preferences, limitations, and relative rights
of the shares of each such
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class and, if the Corporation is authorized to issue any preferred or
special class in series, the variations in the relative rights and
preferences of the shares of each such series so far as the same have been
fixed and determined, and the authority of the Board of Directors to fix
and determine the relative rights and preferences of subsequent series. In
lieu of providing such a statement in full on the certificate, a statement
on the face or back of the certificate may provide that the Corporation
will furnish such information to any shareholder without charge upon
written request to the Corporation at its principal place of business or
registered office and that copies of the information are on file in the
office of the Secretary of State.
(b) Restriction on Transfer. Any restrictions imposed or agreed to by
the Corporation on the sale or other disposition of its shares and on the
transfer thereof must be copied at length or in summary form on the face,
or so copied on the back and referred to on the face, of each certificate
representing shares to which the restriction applies. The certificate may
however state on the face or back that such a restriction exists pursuant
to a specified document and that the Corporation will furnish a copy of the
document to the holder of the certificate without charge upon written
request to the Corporation at its principal place of business.
(c) Preemptive Rights. The preemptive rights of a shareholder to
acquire unissued or treasury shares of the Corporation which are denied by
the Articles of Incorporation must be set forth at length on the face or
back of the certificate representing shares subject thereto. In lieu of
providing such a statement in full on the certificate, a statement on the
face or back of the certificate may provide that the Corporation will
furnish such information to any shareholder without charge upon written
request to the Corporation at its principal place of business and that a
copy of such information is on file in the office of the Secretary of
State.
(d) Unregistered Securities. Any security of the Corporation,
including, among others, any certificate evidencing shares of the Common
Stock or warrants to purchase Common Stock of the Corporation, which is
issued to any person without registration under the Securities Act of 1933,
as amended, or the Blue Sky laws of any state, shall not be transferable
until the Corporation has been furnished with a legal opinion of counsel
with reference thereto, satisfactory in form and content to the Corporation
and its counsel, to the effect that such sale, transfer or pledge does not
involve a violation of the Securities Act of 1933, as amended, or the Blue
Sky laws of any state having jurisdiction. The certificate representing the
security shall bear substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW BUT HAVE BEEN
ACQUIRED FOR THE PRIVATE INVESTMENT OF THE HOLDER HEREOF AND MAY
NOT BE OFFERED, SOLD OR TRANSFERRED UNTIL EITHER (i) A
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE
WITH REGARD THERETO, OR (ii) THE CORPORATION SHALL HAVE RECEIVED
AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION AND ITS
COUNSEL THAT REGISTRATION UNDER SUCH SECURITIES ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION
WITH SUCH PROPOSED OFFER, SALE OR TRANSFER.
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ARTICLE VIII.
GENERAL PROVISIONS
8.1 Distributions. Subject to the provisions of the Act, as amended, and
the Articles of Incorporation, distributions of the Corporation shall be
declared and paid pursuant to the following regulations:
(a) Declaration and Payment. Distributions on the issued and
outstanding shares of capital stock of the Corporation required or allowed
by the Articles of Incorporation to receive such distribution may be
declared by the Board of Directors at any regular or special meeting and
may be paid in cash, in property, or in shares of capital stock. Such
declaration and payment shall be at the discretion of the Board of
Directors.
(b) Record Date. The Board of Directors may fix in advance a record
date for the purpose of determining shareholders entitled to receive
payment of any distribution, such record date to be not more than sixty
(60) days prior to the payment date of such distribution, or the Board of
Directors may close the stock transfer books for such purpose for a period
of not more than sixty (60) days prior to the payment date of such
distribution. In the absence of action by the Board of Directors, the date
upon which the Board of Directors adopts the resolution declaring such
distribution shall be the record date.
8.2 Reserves. There may be created by resolution of the Board of Directors
out of the surplus of the Corporation such reserve or reserves as the Directors
from time to time, in their discretion, think proper to provide for
contingencies, or to equalize distributions, or to repair or maintain any
property of the Corporation, or for such other purposes as the Directors shall
think beneficial to the Corporation, and the Directors may modify or abolish any
such reserve in the manner in which it was created.
8.3 Books and Records. The Corporation shall maintain books and records of
account and shall prepare and maintain minutes of the proceedings of its
shareholders, its Board of Directors and each committee of its Board of
Directors. The Corporation shall keep at its registered office or principal
place of business, or at the office of its transfer agent or registrar, a record
of the original issuance of shares issued by the Corporation and a record of
each transfer of those shares that have been presented to the Corporation for
registration of transfer. Such records shall contain the names and addresses of
all past and present shareholders of the Corporation and the number and class of
shares issued by the Corporation held by each of them.
8.4 Annual Statement. The Board of Directors shall present at or before
each annual meeting of shareholders a full and clear statement of the business
and financial condition of the Corporation, including a reasonably detailed
balance sheet and income statement under current date.
8.5 Contracts and Negotiable Instruments. Except as otherwise provided by
law or these Bylaws, any contract or other instrument relative to the business
of the Corporation may be executed and delivered in the name of the Corporation
and on its behalf by the Chairman of the Board, the Chief Executive Officer, or
the Chief Operating Officer, if any, or the President of the Corporation. The
Board of Directors may authorize any other officer or agent of the Corporation
to enter into any contract or execute and deliver any contract in the
name and on behalf of the Corporation, and such authority may be general or
confined to specific instances as the Board of Directors may determine by
resolution. All bills, notes, checks or other instruments for the payment of
money shall be signed or countersigned by such officer, officers, agent or
agents and in such manner as are permitted by these Bylaws and/or as, from time
to time, may be prescribed by resolution of the Board of Directors. Unless
authorized to do so by these Bylaws or by the Board of Directors, no officer,
agent or employee shall have any power or authority to bind the Corporation by
any contract or engagement, or to pledge its credit, or to render it liable
pecuniarily for any purpose or to any amount.
8.6 Fiscal Year. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
8.7 Corporate Seal. The Corporation seal shall be in such form as may be
determined by the Board of Directors. The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any manner reproduced.
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8.8 Resignations. Any director, officer or agent may resign his office or
position with the Corporation by delivering written notice thereof to the
President or the Secretary. Such resignation shall be effective at the time
specified therein, or immediately upon delivery if no time is specified. Unless
otherwise specified therein, an acceptance of such resignation shall not be a
necessary prerequisite of its effectiveness.
8.9 Amendment of Bylaws. These Bylaws may be altered, amended, or repealed
and new Bylaws adopted at any meeting of the Board of Directors at which a
quorum is present, by the affirmative vote of a majority of the Directors
present at such meeting, provided notice of the proposed alteration, amendment,
or repeal be contained in the notice of such meeting.
8.10 Construction. Whenever the context so requires herein, the masculine
shall include the feminine and neuter, and the singular shall include the
plural, and conversely. If any portion or provision of these Bylaws shall be
held invalid or inoperative, then, so far as is reasonable and possible: (1) the
remainder of these Bylaws shall be considered valid and operative, and (2)
effect shall be given to the intent manifested by the portion or provision held
invalid or inoperative.
8.11 Telephone Meetings. Shareholders, Directors, or members of any
committee may hold any meeting of such shareholders, Directors or committee by
means of conference telephone or similar communications equipment which permits
all persons participating in the meeting to hear each other and actions taken at
such meetings shall have the same force and effect as if taken at a meeting at
which persons were present and voting in person. The Secretary of the
Corporation shall prepare a memorandum of the action taken.
8.12 Table of Contents; Captions. The table of contents and captions used
in these Bylaws have been inserted for administrative convenience only and do
not constitute matter to be construed in interpretation.
IN DUE CERTIFICATION WHEREOF, the undersigned, being the Secretary of
INDEX, INC. confirms the adoption and approval of the foregoing Bylaws,
effective as of the day of , 1996.
------------------------------------
Name:
------------------------------------
Title: Secretary
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEX, INC.
Report of Independent Auditors................................................... F-2
Balance Sheet.................................................................... F-3
Notes to Balance Sheet........................................................... F-4
SEPCO INDUSTRIES, INC.
Year Ended December 31, 1995
Report of Independent Auditors................................................... F-5
Consolidated Balance Sheets...................................................... F-6
Consolidated Statements of Earnings.............................................. F-7
Consolidated Statements of Shareholders' Equity.................................. F-8
Consolidated Statements of Cash Flows............................................ F-9
Notes to Consolidated Financial Statements....................................... F-10
Six Months Ended June 30, 1996 (unaudited)
Condensed Consolidated Balance Sheets............................................ F-19
Condensed Consolidated Statements of Earnings.................................... F-20
Condensed Consolidated Statements of Cash Flows.................................. F-21
Notes to Condensed Consolidated Financial Statements............................. F-22
NEWMAN COMMUNICATIONS CORPORATION
Nine Months Ended December 31, 1995
Independent Auditor's Report..................................................... F-24
Balance Sheets................................................................... F-25
Statements of Operations......................................................... F-26
Statements of Cash Flows......................................................... F-27
Statements of Changes in Shareholders' Equity.................................... F-28
Notes to Financial Statements.................................................... F-29
Six Months Ended June 30, 1996 (unaudited)
Balance Sheet.................................................................... F-31
Statements of Operations......................................................... F-32
Statement of Cash Flows.......................................................... F-34
Notes to Financial Statements.................................................... F-35
</TABLE>
F-1
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REPORT OF INDEPENDENT AUDITORS
Board of Directors
Index, Inc.
We have audited the accompanying balance sheet of Index, Inc., as of July
31, 1996. This balance sheet is the responsibility of the Company's management.
Our responsibility is to express an opinion on this balance sheet 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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Index, Inc., at July 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
August 6, 1996
F-2
<PAGE> 182
INDEX, INC.
BALANCE SHEET
JULY 31, 1996
ASSETS
<TABLE>
<S> <C>
Cash................................................................................ $1,000
------
Total Assets........................................................................ $1,000
======
SHAREHOLDERS' EQUITY
Series A Preferred Stock, 1/10th vote per share; $1.00 par value; liquidation
preference of $100 per share; authorized shares -- 1,000,000; issued and
outstanding -- none
Series B Convertible Preferred Stock, 1/10th vote per share; $1.00 par value; $100
stated value; liquidation preference of $100 per share; authorized
shares -- 1,000,000; issued and outstanding -- none
Common Stock, $.01 par value; authorized shares 100,000,000; issued and
outstanding -- 100 shares......................................................... $ 1
Paid-in capital..................................................................... 999
------
Total Shareholders' Equity.......................................................... $1,000
======
</TABLE>
See notes to balance sheet.
F-3
<PAGE> 183
INDEX, INC.
NOTES TO BALANCE SHEET
JULY 31, 1996
1. THE COMPANY
Index, Inc. (the "Company") was incorporated on July 26, 1996 in the State
of Texas. The Company was formed to facilitate a proposed reorganization
transaction whereby subsequent to July 31, 1996 the Company will become a public
holding company and acquire 100% of the outstanding capital stock of Sepco
Industries, Inc. ("Sepco"), a private distribution company with revenues
approximating $120 million, and Newman Communications Corporation ("Newman"), an
inactive public entity with nominal net tangible assets. The Company's only
transaction to date has been the issuance of 100 shares of Common Stock for
$1,000.
Contemporaneously with the proposed reorganization transaction, the Company
will file a registration statement on Form S-4 with the Securities and Exchange
Commission to register 18,584,400 shares of its Common Stock, 19,500 shares of
its Series B Convertible Preferred Stock and 3,366 shares of its Series A
Preferred Stock. Because the Company and Newman are non-operating entities with
nominal tangible net assets, the proposed transaction will be accounted for as a
recapitalization of Sepco into the Company and an issuance of shares for the net
tangible assets of Newman. Accordingly, the historical financial statements for
the Company will be those of Sepco. The proposed reorganization transaction is
subject to the approval by vote of the shareholders of record of both Sepco and
Newman.
2. SHAREHOLDERS' EQUITY
The holders of Series B Convertible Preferred Stock would have the right to
convert each share into 112 shares of Common Stock at any time. The Series B
Convertible Preferred Stock provides for a cumulative 6% dividend. The Company's
Board of Directors may at any time five years from the date of issuance redeem
the Series B Convertible Preferred Stock for $110 per share. The Company must at
all times reserve out of its authorized but unissued shares of Common Stock the
full number of shares deliverable upon conversion of any outstanding shares of
Series B Convertible Preferred Stock.
In the event of liquidation, the holders of Series A Preferred Stock would
be entitled to receive $100 for each share and are first in priority. The
holders of Series A Preferred Stock would not be entitled to participate in the
distribution of assets exceeding the $100 per share liquidation preference. The
holders of Series B Convertible Preferred Stock would be entitled to receive
$100 for each share upon liquidation and would be entitled to participate in the
distribution of assets exceeding the liquidation preferences on a ratable basis
with the holders of Common Stock. An additional 8,000,000 shares of preferred
stock have been authorized and are available for future designation as provided
in the Company's articles of incorporation.
F-4
<PAGE> 184
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
SEPCO Industries, Inc.
We have audited the accompanying consolidated balance sheets of SEPCO
Industries, Inc., as of December 31, 1995 and 1994, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SEPCO
Industries, Inc., at 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.
As discussed in Note 6 to the financial statements, in 1993 SEPCO
Industries, Inc., changed its method of accounting for income taxes.
ERNST & YOUNG LLP
Houston, Texas
March 22, 1996,
except for Notes 8 and 10, as to which the date is
August 7, 1996
F-5
<PAGE> 185
SEPCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash......................................................................................... $ 1,492 $ 889
Trade accounts receivable, net of allowance for doubtful accounts of $200,000 in 1995 and
$250,000
in 1994.................................................................................... 15,892 13,648
Inventory.................................................................................... 16,706 15,068
Prepaid expenses and other current assets.................................................... 813 797
Deferred income taxes........................................................................ 170 191
------- -------
Total current assets........................................................................... 35,073 30,593
Property and equipment, net.................................................................... 6,744 6,065
Other assets:
Notes receivable from officers and shareholders.............................................. 640 771
Intangible assets, net of accumulated amortization of $1,394,000 in 1995 and $1,105,000 in
1994....................................................................................... 797 734
------- -------
1,437 1,505
------- -------
Total assets........................................................................... $43,254 $38,163
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable....................................................................... $ 6,435 $ 5,711
Employee compensation........................................................................ 1,129 895
Other accrued liabilities.................................................................... 1,419 2,092
Current portion of long-term debt............................................................ 1,888 1,566
Current portion of subordinated debt......................................................... 235 318
------- -------
Total current liabilities...................................................................... 11,106 10,582
Long-term debt, less current portion......................................................... 20,130 17,082
Subordinated debt, less current portion...................................................... 1,145 1,379
Deferred compensation........................................................................ 380 293
Deferred income taxes........................................................................ 205 119
Equity subject to redemption -- Notes 7 and 10:
Preferred Stock, 1,496 shares and 3,927 shares in 1995 and 1994, respectively................ 150 393
Class A convertible preferred stock, 4,500 shares............................................ 450 --
Class A common stock, 272,000 shares and 322,400 shares in 1995 and 1994, respectively....... 1,888 1,831
Shareholders' equity:
Preferred stock, nonvoting, noncumulative $1 par value; liquidation preference of $100 per
share:
Authorized shares -- 1,000,000
Issued and outstanding shares -- 10,098, including 1,496 shares and 3,927 shares subject to
redemption in 1995 and 1994, respectively -- Notes 7 and 10............................... 9 6
Class A convertible preferred stock, nonvoting, cumulative $100 par value; liquidation
preference of $100 per share:
Authorized shares -- 1,000,000
Issued and outstanding shares -- 19,500 in 1995, including 4,500 shares subject to
redemption -- Notes 7 and 10.............................................................. 1,500 --
Class B convertible preferred stock, nonvoting, cumulative $100 par value; liquidation
preference of $100 per share:
Authorized shares -- 1,000,000
Issued and outstanding shares -- none...................................................... -- --
Class A common stock, $.01 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 980,300 and 1,100,500 in 1995 and 1994, including 272,000
shares and 322,400 shares subject to redemption in 1995 and 1994, respectively -- Notes 7
and 10.................................................................................... 7 8
Class B common stock, $.01 par value; liquidation preference of $7.5075 per share:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 176,900................................................... 2 2
Paid-in capital.............................................................................. 580 1,847
Retained earnings............................................................................ 7,399 5,151
------- -------
9,497 7,014
Less: treasury stock, 6,732 and 4,301 shares preferred and 221,401 and 81,200 shares Class A
common in 1995 and 1994.................................................................... (1,697) (530)
------- -------
Total shareholders' equity..................................................................... 7,800 6,484
------- -------
Total liabilities and shareholders' equity..................................................... $43,254 $38,163
======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 186
SEPCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
-------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Sales......................................................... $111,328 $102,592 $99,353
Cost of sales................................................. 82,171 75,375 72,561
-------- -------- -------
Gross profit.................................................. 29,157 27,217 26,792
Selling, general, and administrative expenses................. 24,559 23,067 23,504
-------- -------- -------
Operating income.............................................. 4,598 4,150 3,288
Other income.................................................. 867 817 858
Interest expense.............................................. (1,953) (1,929) (1,800)
-------- -------- -------
(1,086) (1,112) (942)
-------- -------- -------
Income before income taxes, minority interest, and cumulative
effect of change in accounting principle.................... 3,512 3,038 2,346
Provision for income taxes.................................... 1,424 1,176 982
-------- -------- -------
Income before minority interest and cumulative effect of
change in accounting principle.............................. 2,088 1,862 1,364
Minority interest in earnings of subsidiaries................. -- -- (403)
-------- -------- -------
Income before cumulative effect of change in accounting
principle................................................... 2,088 1,862 961
Cumulative effect of change in accounting principle........... -- -- 882
-------- -------- -------
Net income.................................................... $ 2,088 $ 1,862 $ 1,843
======== ======== =======
Income before cumulative effect of change in accounting
principle per common and common equivalent share............ $ 1.68 $ 1.41 $ 0.83
======== ======== =======
Primary net income per common and common equivalent share..... $ 1.68 $ 1.41 $ 1.58
======== ======== =======
Number of shares used to compute primary net income per common
and common equivalent share................................. 1,244 1,319 1,163
======== ======== =======
Fully diluted net income per common and common equivalent
share....................................................... $ 1.61 $ 1.40 $ 1.55
======== ======== =======
Number of shares used to compute fully diluted net income per
common and common equivalent share.......................... 1,293 1,328 1,187
======== ======== =======
</TABLE>
See accompanying notes.
F-7
<PAGE> 187
SEPCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS CLASS
CLASS A A B
PREFERRED PREFERRED COMMON COMMON PAID-IN RETAINED TREASURY
STOCK STOCK STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
--------- --------- ------ ------ ------- -------- -------- -------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992............ $ 6 $ -- $ 8 $2 $ 1,551 $2,582 $ (484) $ 3,665
Issuance of 10,000 shares of Class A
common stock....................... -- -- -- -- 22 -- -- 22
Acquisition of 10,000 shares of Class
A common stock..................... -- -- -- -- -- -- (22) (22)
Increase in redemption value of Class
A common stock subject to
redemption......................... -- -- -- -- -- (375) -- (375)
Net income............................ -- -- -- -- -- 1,843 -- 1,843
-- -- --
------ ------- ------ ------- -------
Balance at December 31, 1993............ 6 -- 8 2 1,573 4,050 (506) 5,133
Issuance of 5,300 shares of Class A
common stock....................... -- -- -- -- 25 -- -- 25
Acquisition of 5,300 shares of Class A
common stock....................... -- -- -- -- -- -- (24) (24)
Increase in redemption value of Class
A common stock subject to
redemption......................... -- -- -- -- -- (512) -- (512)
Net income............................ -- -- -- -- -- 1,862 -- 1,862
-- -- --
------ ------- ------ ------- -------
Balance at December 31, 1994............ 6 -- 8 2 1,598 5,400 (530) 6,484
Issuance of 89,800 shares of Class A
common stock....................... -- -- 1 -- 231 -- -- 232
Conversion of 210,000 shares of Class
A common stock to 15,000 shares of
Class A preferred stock............ -- 1,500 (2) -- (1,498) -- -- --
Acquisition of 140,201 shares of Class
A common stock and 2,431 shares of
preferred stock.................... 3 -- -- -- -- 526 (1,167) (638)
Increase in redemption value of Class
A common stock subject to
redemption......................... -- -- -- -- -- (343) -- (343)
Preferred dividends paid.............. -- -- -- -- -- (23) -- (23)
Net income............................ -- -- -- -- -- 2,088 -- 2,088
-- -- --
------ ------- ------ ------- -------
Balance at December 31, 1995............ $ 9 $ 1,500 $ 7 $2 $ 331 $7,648 $ (1,697) $ 7,800
== ====== == == ======= ====== ======= =======
</TABLE>
See accompanying notes.
F-8
<PAGE> 188
SEPCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net income................................................ $ 2,088 $ 1,862 $ 1,843
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Cumulative effect of change in accounting principle..... -- -- (882)
Depreciation and amortization........................... 965 1,113 1,196
Deferred compensation on stock option plans............. 87 146 147
Provision (benefit) for deferred income taxes........... 109 791 (100)
Minority interest in earnings of subsidiaries........... -- -- 403
Gain on sale of property and equipment.................. (11) (16) (7)
Changes in operating assets and liabilities:
Trade accounts receivable............................ (1,915) (523) (609)
Inventories.......................................... (1,288) (467) (220)
Prepaid expenses and other assets.................... (88) 41 (51)
Accounts payable and other accrued liabilities....... (6) (302) (988)
--------- --------- ---------
Net cash provided by (used in) operating activities....... (59) 2,645 732
Investing activities
Purchase of minority interest shares...................... -- -- (621)
Purchase of Cunningham Bearing net assets................. -- -- (40)
Purchase of Bayou Pumps common stock, net of cash
received................................................ 38 -- --
Purchase of property and equipment........................ (739) (319) (308)
Proceeds from sale of property and equipment.............. 177 60 14
Payments received on notes receivable from officers....... 172 80 86
--------- --------- ---------
Net cash used in investing activities..................... (352) (179) (869)
Financing activities
Proceeds from debt........................................ 123,261 109,295 104,123
Principal payments on revolving line of credit, long-term
and subordinated debt, and notes payable to bank........ (121,867) (111,689) (103,804)
Issuance of Class A common stock.......................... 232 25 22
Acquisition of common stock............................... (589) (24) (22)
Preferred dividends paid.................................. (23) -- --
Payment of loan costs..................................... -- -- (11)
--------- --------- ---------
Net cash provided by (used in) financing activities....... 1,014 (2,393) 308
--------- --------- ---------
Increase in cash.......................................... 603 73 171
Cash at beginning of year................................. 889 816 645
--------- --------- ---------
Cash at end of year....................................... $ 1,492 $ 889 $ 816
========= ========= =========
Supplemental disclosures of noncash investing and
financing activities:
The Company purchased a computer system in exchange for
cash of $23,000 and a note payable to the leasing
company totaling $776,000
Cash paid for:
Interest............................................. $ 1,901 $ 1,855 $ 1,752
========= ========= =========
Income taxes......................................... $ 1,500 $ 165 $ 795
========= ========= =========
</TABLE>
See accompanying notes.
F-9
<PAGE> 189
SEPCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Sepco Industries, Inc. (the "Company") and its wholly owned subsidiary, Bayou
Pumps, purchased December 31, 1995 (see Note 2). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Concentration of Credit Risk
The Company sells rotating equipment to a diversified customer base in the
southwestern region of the United States. The Company believes no significant
concentration of credit risk exists. The Company continually evaluates the
creditworthiness of its customers' financial positions and monitors accounts on
a periodic basis, but does not require collateral.
Inventory
Inventory consists principally of finished goods and is priced at lower of
cost or market, cost being determined using the LIFO (last-in, first-out)
method.
Property, Plant, and Equipment
Assets are carried on the basis of cost. Provisions for depreciation are
computed at rates considered to be sufficient to amortize the costs of assets
over their expected useful lives. Depreciation and amortization of property,
plant, and equipment is computed using principally the straight-line method for
financial reporting purposes. Useful lives assigned to property, plant, and
equipment range from 3 to 20 years. Maintenance and repairs of depreciable
assets are charged against earnings as incurred. Additions and improvements are
capitalized. When properties are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and gains or losses are
credited or charged to earnings.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("Statement 121"), which requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The Company will adopt Statement 121 in the first quarter of 1996 and, based
on current circumstances, does not believe the effect of adoption will be
material.
Intangibles
Intangibles consist of non-compete and licensing agreements and goodwill.
The non-compete and licensing agreements are amortized over three to five years
and goodwill is amortized over five to ten years. All amortization of
intangibles is computed using the straight-line method.
Federal Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("Statement 109").
Under Statement 109, the liability method is used in accounting for income
taxes. Under this method, deferred taxes are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted marginal tax rates and laws that will be in effect
when the differences reverse.
F-10
<PAGE> 190
SEPCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------
CARRYING FAIR
VALUE VALUE
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash........................................................... $ 1,492 $ 1,492
Notes receivable from officers................................. 355 355
Long-term debt, including current portion...................... 22,028 22,028
Subordinated debt, including current portion................... 1,380 1,380
</TABLE>
The carrying value of the long-term debt and subordinated debt approximates
fair value based upon the current rates and terms available to the Company for
instruments with similar remaining maturities. The carrying value of the notes
receivable from officers approximates fair value because the interest rate of
the notes (9%) is consistent with the interest rate of the Company's revolving
debt and with rates currently available in the market for similar instruments.
Stock Options
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25") in accounting for its employee stock
options. In October 1995, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, was issued, which established a
fair-value based method of accounting for stock-based compensation plans. In
accordance with the provisions of this new accounting standard, the Company has
elected to continue following the provisions of APB 25 and will include in
future financial statements pro forma disclosures for the new standard.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Per Share Amounts
Net income per common and common equivalent share has been computed by
dividing net income applicable to common stock by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Options to purchase common stock issued by the Company within the 12
months preceding the filing of the registration statement on Form S-4 of Index,
Inc. (see Note 10) have been included in the calculation of common equivalent
shares outstanding (using the treasury stock method) as if they were outstanding
for all periods presented. The computation of fully diluted net income per
common and common equivalent share assumes the Class A convertible preferred
stock was converted as of the beginning of the period.
Reclassifications
Certain 1994 and 1993 amounts have been reclassified to conform with the
1995 presentation.
2. ACQUISITION
Effective December 31, 1995, the Company acquired 100% of the outstanding
common stock of Bayou Pumps. The purchase price totaled $500,000 and consisted
of (i) issuance of $450,000 of the Company's Class A convertible preferred stock
and (ii) cash of $50,000. The acquisition has been accounted for using the
F-11
<PAGE> 191
SEPCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase method of accounting. Accordingly, no results of operations of the
acquired company are included in the Company's consolidated results of
operations as the acquisition date was December 31, 1995. Goodwill of $400,000
was recorded on the acquisition. Pro forma disclosures of operating results are
omitted because the acquired company's operations were not significant.
3. INVENTORY
The Company uses the LIFO method of inventory valuation for approximately
88% of its inventories as the LIFO method results in a better matching of
current costs and revenues. Remaining inventories are accounted for using the
FIFO (first-in, first-out) method. The reconciliation of FIFO inventory to LIFO
basis is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods................................................... $18,155 $16,190
Work in process.................................................. 1,798 1,635
------- -------
Inventory at FIFO................................................ 19,953 17,825
LIFO allowance................................................... (3,247) (2,757)
------- -------
Inventory at LIFO................................................ $16,706 $15,068
======= =======
</TABLE>
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land............................................................. $ 1,368 $ 1,441
Buildings and leasehold improvements............................. 5,946 5,969
Furniture, fixtures, and equipment............................... 6,790 5,400
------- -------
14,104 12,810
Less: allowances for depreciation and amortization............... (7,360) (6,745)
------- -------
$ 6,744 $ 6,065
======= =======
</TABLE>
F-12
<PAGE> 192
SEPCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM AND SUBORDINATED DEBT
Long-term and subordinated notes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Revolving credit agreement..................................... $16,891 $13,597
Note payable to insurance company, 10.125%, collateralized by
real property, payable in monthly installments through
December 2006............................................... 1,793 1,878
Notes payable to former shareholders, 7% - 10%, unsecured,
payable in varying annual installments through August
2002........................................................ 1,410 1,482
Note payable to credit corporation, 2.25% above prime (10.75%
at December 31, 1995), collateralized by computer equipment,
payable in monthly installments beginning May 1996.......... 776 --
Other.......................................................... 1,148 1,691
------- -------
22,018 18,648
Less current portion........................................... 1,888 1,566
------- -------
$20,130 $17,082
======= =======
Subordinated debt:
Notes payable to former shareholders, 12%, unsecured, payable
in varying installments through January 1997................ $ 1,380 $ 1,697
Less current portion........................................... 235 318
------- -------
$ 1,145 $ 1,379
======= =======
</TABLE>
The Company has a $20 million line of credit available to it. The rate of
interest is prime plus 0.75% (9.25% at December 31, 1995). The line of credit is
secured by receivables, inventory, and machinery and equipment and matures
January 1997. As of December 31, 1995, the unused line is approximately $3
million.
The bank agreements include loan covenants which, among other things,
require the Company to maintain a positive cash flow and other financial ratios,
which are measured monthly. The maturities of long-term and subordinated debt
for the next five years and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1996............................................... $ 2,123
1997............................................... 18,449
1998............................................... 445
1999............................................... 480
2000............................................... 518
Thereafter......................................... 1,383
-------
$23,398
=======
</TABLE>
F-13
<PAGE> 193
SEPCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement 109. The cumulative effect of adopting this accounting standard as of
January 1, 1993 was to increase net earnings by $882,000 in 1993.
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $1,172 $ 190 $ 946
State.................................................... 143 195 136
------ ------ ------
1,315 385 1,082
Deferred:
Federal.................................................. 107 797 (94)
State.................................................... 2 (6) (6)
------ ------ ------
109 791 (100)
------ ------ ------
$1,424 $1,176 $ 982
====== ====== ======
</TABLE>
The differences between income taxes computed at the federal statutory
income tax rate and the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1994 1993
------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes computed at federal statutory income tax rate... $1,194 $1,033 $798
State income taxes, net of federal benefit................... 96 125 86
Nondeductible goodwill amortization.......................... 51 22 22
Other........................................................ 83 (4) 76
------ ------ ----
$1,424 $1,176 $982
====== ====== ====
</TABLE>
The net current and noncurrent components of deferred income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net current assets.................................................... $170 $191
Net noncurrent liabilities............................................ 205 119
---- ----
Net liability (asset)................................................. $ 35 $(72)
==== ====
</TABLE>
F-14
<PAGE> 194
SEPCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities and assets were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liability:
Difference between financial and tax depreciation of assets
acquired......................................................... $214 $220
Deferred tax assets:
Allowance for doubtful accounts..................................... 68 85
Section 263A inventory costs........................................ 102 106
Deferred compensation on stock options.............................. 9 101
---- ----
Total deferred tax assets............................................. 179 292
---- ----
Net deferred tax liability (asset).................................... $ 35 $(72)
==== ====
</TABLE>
During 1994, the Company utilized its net operating loss carryforwards of
approximately $3 million for income tax purposes. Those carryforwards were used
to offset the taxable income of the Company in 1994, eliminating the majority of
the 1993 deferred tax asset.
7. SHAREHOLDERS' EQUITY
During 1995, the Company created two new classes of convertible preferred
stock designated Class A and Class B. Class A convertible preferred stock may be
converted into 7 shares of Class A common stock, and Class B convertible
preferred stock may be converted into 3.5 shares of Class B common stock. Upon
liquidation, the Class A and Class B convertible preferred stock is second in
priority to the preferred stock and the Class B common stock. During 1995,
holders of 210,000 shares of Class A common stock exchanged their shares for
15,000 shares of Class A convertible preferred stock.
Both Class A and Class B convertible preferred stock have a 6% cumulative
monthly dividend. As of December 31, 1995, $23,000 in dividends has been paid.
During 1994, the Board of Directors of the Company approved a 100 to 1
stock split resulting in the modification of the shares authorized, issued, and
outstanding and the par value per share of its Class A and B common stock. The
1993 share disclosures have been adjusted for the effect of the stock split.
During 1993, the Company increased its ownership in Southern Engine & Pump
Company from 68% to 100%. The transaction, accounted for using the purchase
method of accounting, involved acquiring approximately 26% of the stock by
direct purchase. The purchase price was $2,843,845, of which $1,973,856 was
financed by the selling shareholders and $620,602 was paid in cash. The
remaining 6% of Southern Engine & Pump Company was acquired by exchanging 70,700
shares of the Company's Class A common stock valued at $249,387 for 112,068
shares of Southern Engine & Pump Company common stock. The Company recorded
$291,610 of goodwill on the transactions.
The Company has agreements with certain holders of Class A common,
preferred and Class A convertible preferred stock that, upon termination of
employment, the shareholders have an obligation to sell and the Company has the
first opportunity to buy the stock. The Company also has the opportunity to
match a higher offer obtained by the shareholder from another party. The selling
price of the stock will be at a price per share equal to the equity per share
for the Class A common stock and $100 per share for the preferred and Class A
convertible preferred stock. Payment may be in the form of cash or a promissory
note bearing interest at 10% and payable in five equal installments beginning on
the first anniversary date of the note. During 1995, the Company purchased
140,201 shares of Class A common stock and 2,431 shares of preferred stock in
exchange for a note payable of $578,000 from a shareholder upon his retirement.
F-15
<PAGE> 195
SEPCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
Prior to and during 1995, the Company issued nonqualified, book value plan
stock options to certain officers of the Company to purchase shares of its Class
A common stock, which had exercise prices equal to the book value of the common
stock at the date of grant. The option agreement allows the employee to put the
stock acquired back to the Company at the book value at that time. The Company
recognizes compensation expense for increases in the book value of the stock
while the options are outstanding. In 1993, the Company purchased 100,058 shares
acquired by an officer upon exercise of his options at $5.25 per share. The
officer also purchased 59,800 shares of the Company's Class A common stock for
which the Company obtained a note receivable of $211,000. During 1995, the
Company purchased 89,800 shares acquired by an officer upon exercise of his
options at $6.56 per share. Compensation expense related to these option
agreements of $87,000, $155,000, and $372,000 was recorded in 1995, 1994, and
1993, respectively. As of December 31, 1995 and 1994, a deferred compensation
liability of $380,000 and $293,000, respectively, has been recorded in
conjunction with these option agreements. Activity during 1995 with respect to
the stock options follows (see also Note 10):
<TABLE>
<CAPTION>
OPTION
SHARES PRICE PER SHARE
-------- ---------------
<S> <C> <C>
Outstanding at January 1, 1993............................. 100,058 $3.00
Granted.................................................. 100,400 $2.58 - $3.01
Exercised................................................ (100,058) $3.00
-------
Outstanding at December 31, 1993........................... 100,400 $2.58 - $3.01
Exercised................................................ (5,300) $3.01
-------
Outstanding at December 31, 1994........................... 95,100 $2.58 - $3.01
Granted.................................................. 302,000 $5.90 - $7.14
Exercised................................................ (89,800) $2.58
Canceled or expired...................................... -- --
-------
Outstanding at December 31, 1995........................... 307,300
=======
Options exercisable at end of year......................... 307,300
=======
</TABLE>
The outstanding options at December 31, 1995 expire between March 31, 2000
and October 24, 2005 or 90 days after termination of full-time employment.
F-16
<PAGE> 196
SEPCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company leases equipment, automobiles, and office facilities under
various operating leases. The future minimum rental commitments as of December
31, 1995 for noncancelable leases are as follows (in thousands):
<TABLE>
<S> <C>
1996................................................ $1,142
1997................................................ 794
1998................................................ 546
1999................................................ 315
2000................................................ 208
Thereafter.......................................... 206
------
$3,211
======
</TABLE>
Rental expense for operating leases was $1,338,000, $1,084,000, and
$1,274,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
The Company is currently undergoing an examination of its tax returns by
the Internal Revenue Service ("IRS") which is asserting claims against the
Company for additional taxes and penalties of approximately $1 million plus
interest of approximately $240,000. This claim relates primarily to a challenge
by the IRS of the Company's use of the LIFO method of accounting for inventory.
The Company believes that its LIFO elections were valid and currently is
pursuing its rights to administrative appeal. Although an unfavorable outcome on
this matter would result in the payment of additional taxes and impact the
Company's liquidity position, the Company believes that any liability that may
ultimately result from the resolution of this matter will not have a material
adverse effect on the financial position of the Company.
9. RETIREMENT PLANS
The Company provides an Employee Stock Ownership Plan ("ESOP") which is
eligible to employees having 1,000 hours of service in 12 consecutive months of
employment. Employer contributions are at the discretion of the board of
directors. The ESOP held 176,900 shares of the Company's Class B common stock at
December 31, 1995 (see also Note 10). The Company contributed and expensed
$150,000 in 1995, 1994, and 1993. The Company also offers a 401(k) profit
sharing plan for employees having 1,000 hours of service in 12 consecutive
months of employment. The Company matches contributions at a rate of 10%. The
Company contributed $62,000, $56,000, and $49,000 in the years ended December
31, 1995, 1994, and 1993, respectively.
10. SUBSEQUENT EVENTS
Reorganization
On May 7, 1996, the Company's Board of Directors approved a reorganization
plan. Under the reorganization plan, the Company will merge with a newly formed
shell subsidiary of Index, Inc. ("Index"), a newly organized Texas holding
company. The Class A common shareholders of the Company will exchange each of
their shares for 16 shares of Index common stock and the Class B common
shareholders of the Company will exchange each of their shares for 18.1232
shares of Index common stock. The exchange ratios for the Class A common and
Class B common stock are based upon the relative value of each security as
determined by the independent appraisal of the Company's stock for purposes of
valuing the stock owned by the ESOP. As a result, the Class A common and Class B
common shareholders retain the same relative value in relation to each other
after the reorganization. As a result, no compensation expense was recognized.
F-17
<PAGE> 197
SEPCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In aggregate, former Company common shareholders will hold 96% of the
outstanding common stock of Index upon completion of the transaction. In
addition, the holders of each class of the Company's preferred stock will
exchange their shares for shares of Index preferred stock with identical rights
and terms except that the Class A convertible preferred stock will be
convertible into 112 shares of Index common stock. Simultaneously, Newman
Communications Corporation ("Newman"), a public corporation with nominal assets,
will merge with another newly formed shell subsidiary of Index. The common
shareholders of Newman will exchange their shares for approximately 4% of the
outstanding common shares of Index. Index's capital structure after the proposed
reorganization will be as follows:
<TABLE>
<CAPTION>
OUTSTANDING SHARES
------------------
<S> <C>
Preferred stock, nonvoting, noncumulative $1 par value; liquidation
preference of $100 per share: Authorized shares -- 1,000,000...... 10,000
Convertible preferred stock, nonvoting, cumulative $100 par value;
liquidation preference of $100 per share: Authorized
shares -- 1,000,000............................................... 19,500
Common stock, $0.01 par value: Authorized shares -- 100,000,000..... 15,987,900
</TABLE>
Each outstanding option to purchase the Company's Class A common stock will
be exchanged for an option to purchase 16 shares of Index common stock at a
split-adjusted exercise price resulting in aggregate options to purchase
4,916,800 shares of Index common stock.
Index and Newman have nominal assets and no operations; therefore, the
proposed merger will be accounted for as a recapitalization. Accordingly, the
historical financial statements for Index prior to the reorganization will be
those of the Company. The reorganization plan is subject to the approval by vote
of the shareholders of record of both the Company and Newman. In conjunction
with the reorganization, all repurchase arrangements on the Company's stock as
discussed in Note 7 will be eliminated upon the issuance of Index stock to the
Company's shareholders.
Repayment of Notes Receivable From Shareholders
At December 31, 1995 and 1994, the Company held notes receivable from
employees arising from stock purchases which had outstanding balances totaling
$285,000. Such notes were full recourse and were collateralized by shares of
common stock. In June and July 1996, these notes were collected. Prior to
January 1, 1995, the outstanding balances on these notes were classified in the
consolidated balance sheets as a reduction of shareholders' equity. As a result
of the subsequent collection of these notes, the outstanding balances have been
reclassified on the 1995 and 1994 consolidated balance sheets as a noncurrent
asset included in notes receivable from officers and shareholders.
F-18
<PAGE> 198
SEPCO INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 1996
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash....................................................................................... $ --
Trade accounts receivable, net of allowance for doubtful accounts of $245,000.............. 18,016
Inventory.................................................................................. 17,247
Prepaid expenses and other current assets.................................................. 971
Deferred income taxes...................................................................... 503
-------
Total current assets......................................................................... 36,737
Property and equipment, net.................................................................. 6,749
Other Assets................................................................................. 1,585
-------
Total assets................................................................................. $45,071
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable..................................................................... $ 7,370
Employee compensation...................................................................... 1,005
Other accrued liabilities.................................................................. 2,289
Current portion of long-term debt.......................................................... 1,347
Current portion of subordinated debt....................................................... 1,308
-------
13,319
Long-term debt, less current portion......................................................... 19,660
Deferred income taxes........................................................................ 205
Equity subject to redemption -- Note 8:
Preferred stock -- 1,496 shares............................................................ 150
Class A convertible preferred stock -- 4,500 shares........................................ 450
Class A common stock -- 272,000 shares..................................................... 2,200
Shareholders' equity:
Preferred stock, nonvoting, noncumulative $1 par value; liquidation preference of $100 per
share:
Authorized shares -- 1,000,000
Issued shares -- 10,098, including 1,496 shares subject to redemption -- Note 8.......... 9
Class A convertible preferred stock, nonvoting, cumulative $100 par value;
liquidation preference of $100 per share:
Authorized shares -- 1,000,000
Issued and outstanding shares -- 19,500, including 4,500 shares subject to
redemption -- Note 8..................................................................... 1,500
Class B convertible preferred stock, nonvoting, cumulative $100 par value;
liquidation preference $100 per share:
Authorized shares -- 1,000,000
Issued and outstanding shares -- none.................................................... --
Class A common stock, $.01 par value; liquidation preference of $7.5075 per share:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 980,300, including 272,000 shares subject to
redemption -- Note 8..................................................................... 7
Class B common stock, $.01 par value; liquidation preference of $7.5075 per share:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 176,900................................................. 2
Paid-in capital............................................................................ 1,421
Retained earnings.......................................................................... 7,845
-------
10,784
Less treasury stock, 6,732 shares preferred and 221,401 shares Class A common.............. (1,697)
-------
Total shareholders' equity................................................................... 9,087
-------
Total liabilities and shareholders' equity................................................... $45,071
=======
</TABLE>
See accompanying notes.
F-19
<PAGE> 199
SEPCO INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------
1996 1995
------- -------
(IN THOUSANDS
EXCEPT
PER SHARE DATA)
<S> <C> <C>
Sales...................................................................... $63,021 $56,395
Cost of sales.............................................................. 46,790 42,005
------- -------
Gross profit............................................................... 16,231 14,390
Selling, general, and administrative expenses.............................. 14,806 12,380
------- -------
Operating income........................................................... 1,425 2,010
Other income............................................................... 514 428
Interest expense........................................................... (1,008) (968)
------- -------
(494) (540)
------- -------
Income before income taxes................................................. 931 1,470
Provision for income taxes................................................. 377 596
------- -------
Net income................................................................. $ 554 $ 874
======= =======
Primary net income per common and common equivalent share.................. $ 0.55 $ 0.66
======= =======
Number of shares used to compute primary net income per common and common
equivalent share......................................................... 1,016 1,331
======= =======
Fully diluted net income per common and common equivalent share............ $ 0.48 $ 0.66
======= =======
Number of shares used to compute fully diluted net income per common and
common equivalent shares................................................. 1,152 1,334
======= =======
</TABLE>
See accompanying notes.
F-20
<PAGE> 200
SEPCO INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-----------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities............................ $ 704 $ 1,881
INVESTING ACTIVITIES
Purchase of Austin Bearing net assets................................ (550) --
Purchase of property and equipment................................... (481) (260)
--------- ---------
Net cash used in investing activities................................ (1,031) (260)
FINANCING ACTIVITIES
Proceeds from debt................................................... 60,704 56,773
Principal payments on revolving line of credit, long-term
and subordinated debt, and notes payable to bank................... (61,824) (59,283)
Dividends paid....................................................... (45) --
--------- ---------
Net cash used in financing activities................................ (1,165) (2,510)
--------- ---------
Decrease in cash..................................................... (1,492) (889)
Cash at beginning of period.......................................... 1,492 889
--------- ---------
Cash at end of period................................................ $ -- $ --
========= =========
</TABLE>
See accompanying notes.
F-21
<PAGE> 201
SEPCO INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
1. GENERAL
The unaudited interim condensed consolidated financial statements of Sepco
Industries, Inc. (the "Company") included herein have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. The Company
believes that the presentations and disclosures herein are adequate to make the
information not misleading. The condensed consolidated financial statements
reflect all elimination entries and adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements and notes included
elsewhere in this registration statement.
2. PER SHARE AMOUNTS
Net income per common and common equivalent share has been computed by
dividing net income applicable to common stock by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Options to purchase common stock issued by the Company within the 12
months preceding the filing of this registration statement have been included in
the calculation of common equivalent shares outstanding (using the treasury
stock method) as if they were outstanding for all periods presented. The
computation of fully diluted net income per common and common equivalent share
assumes the Class A convertible preferred stock was converted as of the
beginning of the period.
3. INVENTORY
An actual valuation of inventory under the LIFO method can be made only at
the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
4. ACQUISITION
Effective December 31, 1995, the Company acquired 100% of the outstanding
common stock of Bayou Pumps. The purchase price totaled $500,000 and consisted
of (i) issuance of $450,000 of the Company's Class A convertible preferred stock
and (ii) cash of $50,000. The acquisition has been accounted for using the
purchase method of accounting. Goodwill of $400,000 was recorded on the
acquisition.
Effective February 2, 1996, the Company acquired the net assets of Austin
Bearing Corporation. The purchase price totaled approximately $578,000 and
consisted of (i) issuance of a $249,000 note, bearing interest at 9%, payable
monthly over five years and (ii) cash of $329,000. The acquisition has been
accounted for using the purchase method of accounting. Goodwill of $84,000 was
recorded on the acquisition.
5. COMMITMENTS AND CONTINGENCIES
The Company is currently undergoing an examination of its tax returns by
the Internal Revenue Service ("IRS") which is asserting claims against the
Company for additional taxes and penalties of approximately $1 million plus
interest of approximately $240,000. This claim relates primarily to a challenge
by the IRS of
F-22
<PAGE> 202
SEPCO INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's use of the LIFO method of accounting for inventory. The Company
believes that its LIFO elections were valid and currently is pursuing its rights
to administrative appeal. Although an unfavorable outcome on this matter would
result in the payment of additional taxes and impact the Company's liquidity
position, the Company believes that any liability that may ultimately result
from the resolution of this matter will not have a material adverse effect on
the financial position of the Company.
6. STOCK OPTIONS
Prior to and during 1995, the Company issued nonqualified, book value plan
stock options to certain officers of the Company to purchase shares of its Class
A common stock, which had exercise prices equal to the book value of the common
stock of the date of grant. The option agreement allowed the employee to put the
stock acquired back to the Company at the book value at that time. The Company
recognized compensation expense for increases in the book value of the stock
while the options were outstanding.
Effective March 31, 1996, the stock option agreements were amended to
become nonqualified, market value plan stock options. Under the amended
agreement, the employees can no longer put the acquired stock back to the
Company. In connection with these changes, the Company has recognized
approximately $426,000 of compensation expense, net of a tax benefit of
$284,000, in the six months ended June 30, 1996.
The compensation expense was determined utilizing the deemed fair value of
the shares underlying the options as of March 31, 1996, as estimated by the
Company by updating the December 31, 1995, valuations made by an outside
independent appraiser to reflect earnings from December 31, 1995, to March 31,
1996.
7. LONG-TERM DEBT
In September 1996 the Company amended its credit facility, including its
$20 million line of credit, with its lender to extend the maturity to 1999. The
amendment increased the existing balance of the term loan from $123,898 to
$5,000,000 upon conversion of approximately $4.9 million of the amounts
outstanding under the revolving loan to the term loan. The interest rate on the
line of credit was reduced to prime plus 0.50% from prime plus 0.75%. The line
of credit is secured by accounts receivable, inventory, machinery and equipment
and real estate and matures January 1999. The borrowings available under the
existing credit facility at June 30, 1996 approximated $3,000,000.
8. STOCKHOLDERS' EQUITY
The Company has agreements with certain holders of Class A common,
preferred and Class A convertible preferred stock that, upon termination of
employment, the shareholders have an obligation to sell and the Company has the
first opportunity to buy the stock. The Company also has the opportunity to
match a higher offer obtained by the shareholder from another party. The selling
price of the stock will be at a price per share equal to the equity per share
for the Class A common stock and $100 per share for the preferred and Class A
convertible preferred stock.
In conjunction with the reorganization discussed in Note 10 to the
Company's December 31, 1995 financial statements, all put arrangements on the
Company's stock will be eliminated upon the issuance of stock of Index, Inc. to
the Company's shareholders.
F-23
<PAGE> 203
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Newman Communications Corporation
(A Development Stage Company)
We have audited the accompanying balance sheet of Newman Communications
Corporation (A Development Stage Company) as of December 31, 1995 and March 25,
1995 and the related statements of operations, changes in shareholders' equity
and cash flows for the nine months ended December 31, 1995 and for the years
ended March 25, 1995 and March 26, 1994. These 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Newman Communications
Corporation (A Development Stage Company) at December 31, 1995 and March 25,
1995 and the results of their operations and their cash flows for each of the
nine months ended December 31, 1995 and for the years ended March 25, 1995 and
March 26, 1994 in conformity with generally accepted accounting principles.
As discussed in note 4 to the financial statements, an error in the
presentation of the reorganization under bankruptcy was discovered during the
current year. Accordingly, the March 26, 1994 financial statements have been
restated.
CHESHIER & FULLER, INC.
A Professional Corporation
Dallas, Texas
January 27, 1996
F-24
<PAGE> 204
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1995 AND MARCH 25, 1995
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 25,
1995 1995
------------ -----------
<S> <C> <C>
Current Assets
Cash............................................................ $ 12,854 $ 5,832
----------- -----------
Total Assets............................................ $ 12,854 $ 5,832
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Priority claims................................................. $ -0- $ -0-
----------- -----------
Total Liabilities....................................... -0- -0-
=========== ===========
Shareholders' Equity
Preferred stock, no par value, authorized 2,000,000 shares, 0
issued and outstanding....................................... -0- -0-
Common stock, no par value, authorized 8,000,000 shares, 858,500
issued and outstanding at December 31, 1995, 834,500 issued
and outstanding at March 31, 1995............................ 1,409,193 1,387,599
Common stock warrants........................................... 11,406 20,000
Retained earnings (deficit)....................................... (1,392,275) (1,392,275)
Deficit accumulated during the developmental stage (since
November 23, 1993, reorganization)........................... (15,470) (9,492)
----------- -----------
Total Shareholders' Equity.............................. 12,854 5,832
----------- -----------
Total Liabilities and Shareholders' Equity.............. $ 12,854 $ 5,832
=========== ===========
</TABLE>
F-25
<PAGE> 205
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
AND FOR THE YEARS ENDED MARCH 25, 1995 AND MARCH 26, 1994
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 23, 1993
UNAUDITED (DATE OF
NINE MONTHS NINE MONTHS FOR THE YEAR FOR THE YEAR REORGANIZATION)
ENDED ENDED ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, MARCH 25, MARCH 26, DECEMBER 31,
1995 1994 1995 1994 1995
------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
REVENUE................................... $ -- $ -- $ -- $ -- $ --
-------- -------- -------- ----------- ---------
Total Revenue................... -- -- -- -- --
-------- -------- -------- ----------- ---------
EXPENSES
Professional fees....................... 4,726 2,581 2,682 5,600 12,508
Regulatory expense...................... 550 375 375 -- 925
Advertising and marketing............... 607 333 333 -- 940
Miscellaneous expense................... 95 717 817 -- 912
Office supplies......................... -- 185 185 -- 185
-------- -------- -------- ----------- ---------
Total Expenses.................. 5,978 4,191 4,392 5,600 15,470
-------- -------- -------- ----------- ---------
Net income (loss) before taxes............ (5,978) (4,191) (4,392) (5,600) (15,470)
Provision for income taxes................ -- -- -- -- --
-------- -------- -------- ----------- ---------
Net income (loss) before extraordinary
item.................................... (5,978) (4,191) (4,392) (5,600) (15,470)
Extraordinary item -- Relief of debt in
bankruptcy.............................. -- -- -- 4,026,333 --
-------- -------- -------- ----------- ---------
Net income (loss)......................... $ (5,978) $ (4,191) $ (4,392) $ 4,020,733 $ (15,470)
======== ======== ======== =========== =========
PRIMARY EARNINGS PER COMMON SHARE
Earnings (loss) before extraordinary
item.................................... (.01) (.01) (.01) NIL (.03)
Extraordinary item -- relief of debt in
bankruptcy.............................. -0- -0- -0- 1.14 -0-
-------- -------- -------- ----------- ---------
Net earnings (loss)....................... (.01) (.01) (.01) 1.14 $ (.03)
======== ======== ======== =========== =========
Weighted average common shares
outstanding............................. 839,833 740,222 763,792 3,540,407 535,760
======== ======== ======== =========== =========
FULLY DILUTED EARNINGS PER COMMON SHARE
Earnings (loss) before extraordinary
item.................................... (.01) (.01) (.01) NIL (.03)
Extraordinary item -- relief of debt in
bankruptcy.............................. -0- -0- -0- 1.14 -0-
-------- -------- -------- ----------- ---------
Net earnings (loss)....................... (.01) (.01) (.01) 1.14 $ (.03)
======== ======== ======== =========== =========
Weighted average common shares
outstanding.......................... 839,833 740,222 763,792 3,540,407 535,760
======== ======== ======== =========== =========
</TABLE>
See notes to financial statements.
F-26
<PAGE> 206
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
AND FOR THE YEARS ENDED MARCH 25, 1995 AND MARCH 26, 1994
<TABLE>
<CAPTION>
FOR THE PERIOD
UNAUDITED NOVEMBER 23, 1993
NINE MONTHS NINE MONTHS FOR THE YEAR FOR THE YEAR (DATE OF
ENDED ENDED ENDED ENDED REORGANIZATION)
DECEMBER 31, DECEMBER 31, MARCH 25, MARCH 26, THROUGH
1995 1994 1995 1994 DECEMBER 31, 1995
------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ (5,978) $ (4,191) $ (4,392) $ 4,020,733 $ (15,470)
Relief of debt in bankruptcy........ -- -- -- (4,026,333) --
-------- -------- -------- ------------ ---------
Net cash used from operating
activities........................ (5,978) (4,191) (4,392) (5,600) (15,470)
-------- -------- -------- ------------ ---------
Cash flows from investing activities..... -- -- -- -- --
-------- -------- -------- ------------ ---------
Cash flows from financing activities:
Warrants exercised..................... 13,000 1,000 1,000 -- 14,000
Subscription of 3,000,000 warrants..... -- -- -- 20,000 --
Priority claims payments............... -- (25) (25) (141) (25)
Unsecured debt payments................ -- -- -- (5,010) --
-------- -------- -------- ------------ ---------
Total financing activities.......... 13,000 975 975 14,849 13,975
Net increase (decrease) in cash..... 7,022 (3,216) (3,417) 9,249 (1,495)
Cash at beginning of period(1)...... 5,832 9,249 9,249 -0- 14,349
-------- -------- -------- ------------ ---------
Cash at end of period............... $ 12,854 $ 6,033 $ 5,832 $ 9,249 $ 12,854
======== ======== ======== ============ =========
</TABLE>
- ---------------
(1) Beginning cash for December 31, 1995 is as of March 25, 1995 as this cash
period is for nine months.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<S> <C> <C> <C> <C> <C>
Cash paid during the period for:
Income taxes........................ $ -- $ -- $ -- $ -- $ --
======== ======== ======== ============ =========
Interest............................ $ -- $ -- $ -- $ -- $ --
======== ======== ======== ============ =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
-- $4,026,333 unsecured debt was forgiven during the fiscal year ended
March 26, 1994.
-- 832,500 of common stock, no par, and 1,650,000 each of warrant A, B and
C have been issued to pre-petition stockholders, creditors and Little.
-- On November 23, 1995 the remaining 1,628,000 A warrants, and 1,648,000
B warrants expired.
See notes to financial statements.
F-27
<PAGE> 207
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
A, B, & C WARRANTS
COMMON STOCK TO BUY COMMON STOCK RETAINED
------------------------- PAID-IN ---------------------- EARNINGS
SHARES AMOUNT CAPITAL NUMBER AMOUNT (DEFICIT) TOTAL
---------- ---------- ---------- ---------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 26, 1994... 832,500 $1,386,599 $ 0 4,953,000 $20,000 $(1,397,375) $ 9,224
Warrants erroneously shown as
outstanding at March 26,
1994....................... (3,000)
Warrants exercised........... 2,000 1,000 (2,000) 1,000
Net (loss) for the nine
months ended December 31,
1994 (Unaudited)........... (4,191) (4,191)
------- ----------- ---------- ---------- ------- ----------- -----------
Balances at December 31, 1994
(Unaudited)................ 834,500 1,387,599 0 4,948,000 20,000 (1,401,566) 6,033
Net (loss) for the quarter
ended March 25, 1995
(Unaudited)................ (201) (201)
Warrants exercised........... 24,000 13,000 (24,000) 13,000
Expiration of Warrants....... 8,594 (3,274,000) (8,594 )
Net (loss) for the nine
months ended December 31,
1995....................... (5,978) (5,978)
------- ----------- ---------- ---------- ------- ----------- -----------
Balances at December 31,
1995....................... 858,500 $1,409,193 $ 0 1,650,000 $11,406 $(1,407,745) $ 12,854
======= =========== ========== ========== ======= =========== ===========
Balances at March 27, 1993... 5,310,160 $ 53,102 $1,333,497 $(5,418,108) $(4,031,509)
Net income (loss) for the
period March 27, 1993 to
November 23, 1993 (date of
reorganization)............ 4,025,833 4,025,833
Reorganization November 23,
1993....................... (5,310,160) 1,333,497 (1,333,497) 0
Subscription of warrants..... 3,000,000 $20,000 20,000
Subscription of stock and
warrants................... 832,500 1,953,000
Net (loss) for the period
November 23, 1993 (date of
reorganization) to March
26, 1994................... (5,100) (5,100)
------- ----------- ---------- ---------- ------- ----------- -----------
Balances at March 26, 1994... 832,500 1,386,599 0 4,953,000 20,000 (1,397,375) 9,224
Warrants erroneously shown as
outstanding at March 26,
1994....................... (3,000)
Warrants exercised........... 2,000 1,000 (2,000) 1,000
Net (loss) for the year ended
March 25, 1995............. (4,392) (4,392)
------- ----------- ---------- ---------- ------- ----------- -----------
Balances at March 25, 1995... 834,500 $1,387,599 $ 0 4,948,000 $20,000 $(1,401,767) $ 5,832
======= =========== ========== ========== ======= =========== ===========
</TABLE>
See notes to financial statements.
F-28
<PAGE> 208
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 25, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History
Newman Communications Corporation ("Company"), was incorporated June 25,
1981 in Albuquerque, New Mexico as a company directed toward the manufacture and
distribution of books on audio cassettes. The company began having financial
difficulties in early 1987, and subsequently ceased operations and liquidated
its assets in November of that year. The Company filed for chapter XI bankruptcy
on August 12, 1992. On November 22, 1993 the Company emerged from bankruptcy as
a reorganized entity.
Little and Company/Southwest ("Little") had no relationship with the
Company before it became illiquid and ceased operations. Little acquired
1,792,000 shares of common stock from previous stockholders for $5,000 and
purchased an outstanding judgment. When the Company filed a Chapter XI petition
under the United States Bankruptcy Code, a Plan of Reorganization (the "Plan")
was proposed by Little that was confirmed by the Court.
Development Stage Operations
The Company currently has no operational activities.
Reorganization
The terms of the recent Chapter XI reorganization are, in general, as
follows:
(A) The articles of incorporation of the Company were amended to authorize
no par common stock. All of the pre-petition common stock held by
stockholders was voided.
(B) The unsecured creditors were given the option of receiving cash or
common stock. Those electing to receive cash were paid $5,010 as a
group. Those creditors that elected to receive common stock of the
Company received four shares of common stock of the Company and four
warrants each of A, B & C for each dollar of claims filed with no claim
exceeding the issuance of more than 7,500 shares of common stock and
7,500 each of warrants A, B & C. All creditors were issued a minimum of
100 shares of common and 100 warrants A, B & C.
(C) Holders of the common stock of the Company were designated as a
separate class in the Plan and allowed to voluntarily participate in the
reorganization. Stockholders that elected to participate were required
to provide proof of ownership and pay a $20.00 administrative fee
directly to the transfer agent. Those pre-petition stockholders that
participated received 500 shares of the new common stock of the
reorganized entity and 1,000 each of Warrants A, B and C. All
stockholders and their respective shares that did not participate in the
Plan were removed from the stockholders list and their respective shares
canceled.
(D) The following is a description of the warrants:
Warrant A will allow the holder to purchase 1 share of the common stock
of the reorganized Company at $.50 per share for a period of 12 months
from November 22, 1993. During the year ended March 25, 1995, the period
in which the warrants may be exercised was extended twelve months.
Warrant B will allow the holder to purchase 1 share of the common stock
of the reorganized Company at $1.00 per share for a period of 24 months
from November 22, 1993.
F-29
<PAGE> 209
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Warrant C will allow the holder to purchase 1 share of the common stock
of the reorganized Company at $2.00 per share for a period of 36 months
from November 22, 1993.
(E) Under the Plan, Little contributed $20,000 and received 1,000,000 each
of Warrants A, B and C. Little returned to the Company's treasury
1,792,000 shares of the Company's pre-petition common stock and received
500,000 shares of new common stock under the Plan.
(F) Pre-petition creditors and shareholders had until March 22, 1994
according to the Plan to subscribe to stock and warrants. A total of
332,500 shares of common stock and 650,000 each of warrants A, B & C
were subscribed to by this group.
Fiscal Year
During 1995 the Company changed its year end from a fiscal year, which is
based on a 52 week year ending on the last Saturday in March, to a calendar year
end.
Accounting 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.
NOTE 2 -- EXTRAORDINARY ITEM
The net result of settling the pre-petition unsecured creditors' claims and
other liabilities of $4,031,343 for $5,010 was accounted for as an extraordinary
item. The discharge of debts in bankruptcy has no tax effect.
NOTE 3 -- INCOME TAXES
There are no temporary timing differences between recognition of revenue
and expenses for financial reporting purposes and income tax purposes.
There are no net operating loss carryforwards available from periods prior
to November 22, 1993. Subsequent to November 22, 1993 there are loss carry
forwards of $15,769 which can be carried forward to reduce taxable income. These
carryforwards expire between 2008 and 2010, respectively. These carryforwards
may be limited under IRS Code Section 382 should significant changes in stock
ownership in the Company occur in the future.
Because there is at least a 50% chance that the carryforward will expire
unused, the benefit associated with the loss carryforward has not been
reflected.
NOTE 4 -- CORRECTION OF ERROR -- PRIOR YEAR
During 1995, it was determined that the forgiveness of debt under
bankruptcy should have been reported as an extraordinary item and shown as a
component of net income for the year ended March 26, 1994. The change had no
effect on net loss before extraordinary items, or the related net loss per share
data. Net income was increased by $4,026,333 and earnings per share was
increased by $1.14. Total equity was not affected. All changes pertain to the
year ended March 26, 1994 only.
F-30
<PAGE> 210
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
BALANCE SHEET
JUNE 30, 1996
<TABLE>
<S> <C> <C>
ASSETS
Current Assets:
Cash........................................................................... $5,200
------
Total Current Assets................................................... $5,200
======
LIABILITIES AND CAPITAL
Current Liabilities:
Accrued liabilities............................................................ $6,034
------
Total Current Liabilities.............................................. 6,034
Capital:
Common stock........................................................ $1,409,193
Warrants subscribed................................................. 11,406
Deficit accumulated/development stage............................... (15,470)
Retained earnings................................................... (1,392,275)
Year-to-date earnings............................................... (13,688)
---------
Total Capital.......................................................... (834)
------
TOTAL LIABILITIES AND CAPITAL.......................................... $5,200
======
</TABLE>
See notes to financial statements.
F-31
<PAGE> 211
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1996 1995
-------- --------
<S> <C> <C>
Revenues............................................................. $ -0- $ -0-
Expenses:
Advertising/marketing.............................................. -0- 608
Office supplies and services....................................... 873 -0-
Professional services.............................................. 12,690 4,451
Regulatory expenses................................................ 125 550
Miscellaneous...................................................... -0- 35
-------- --------
Total Expenses............................................. 13,688 5,644
-------- --------
Net income (loss) before taxes....................................... (13,688) (5,644)
Provision for income taxes........................................... -0- -0-
-------- --------
Net income (loss).................................................... $(13,688) $ (5,644)
======== ========
Weighted average common shares outstanding........................... 858,500 834,500
======== ========
Earnings (loss) per share............................................ $ (.02) $ (.01)
======== ========
</TABLE>
See notes to financial statements.
F-32
<PAGE> 212
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
JUNE 30, JUNE 30,
1996 1995
-------- --------
<S> <C> <C>
Revenues............................................................. $ -0- $ -0-
Expenses
Office supplies and services....................................... 873 -0-
Professional services.............................................. -0- 201
Regulatory expenses................................................ 125 -0-
-------- --------
Total Expenses............................................. 998 201
-------- --------
Net income (loss) before taxes....................................... (998) (201)
-------- --------
Provision for income taxes........................................... -0- -0-
-------- --------
Net income (loss).................................................... $ (998) $ (201)
======== ========
Weighed average common shares outstanding............................ 858,500 834,500
======== ========
Earnings (loss) per share............................................ NIL NIL
======== ========
</TABLE>
See notes to financial statements.
F-33
<PAGE> 213
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE
FOR THE SIX
SIX MONTHS
MONTHS ENDED
ENDED JUNE
JUNE 30, 30,
1996 1995
-------- -------
<S> <C> <C>
Cash Flows from
Operating Activities:
Net income (loss)................................................ $(13,688) $(5,644)
Change in liabilities
Accrued liabilities.............................................. 6,034 2,251
-------- -------
Net cash used from operating activities............................... (7,654) (3,393)
Cash flows from investing activities.................................. -0- -0-
-------- -------
Cash flow from financing activities................................... -0- -0-
-------- -------
Net decrease in cash.................................................. (7,654) (3,393)
Cash at beginning of period........................................... 12,854 6,033
-------- -------
Ending cash........................................................... $ 5,200 $ 2,640
======== =======
</TABLE>
See notes to financial statements.
F-34
<PAGE> 214
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
NOTE 1 -- GENERAL
The unaudited interim financial statements of Newman Communications
Corporation (the "Company") included herein have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The Company believes that the
presentations and disclosures herein are adequate to make the information not
misleading. The financial statements reflect all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the interim
periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
financial statements should be read in conjunction with the Company's audited
financial statements and notes included elsewhere in this registration
statement.
NOTE 2 -- SUBSEQUENT EVENT
On August 12, 1996, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Index, Inc., a Texas corporation ("Index").
Under the terms of the Merger Agreement, each shareholder of the Company will
receive one-fourth ( 1/4) of a share of Index common stock for each share of the
Company's common stock subject to the merger transaction. The effectiveness of
the merger transaction is subject to the satisfaction of numerous contingencies.
A Registration Statement on Form S-4 has been filed with the SEC for the purpose
of registering the shares of Index common stock issuable to shareholders of the
Company under the Merger Agreement. Upon consummation of the transactions
contemplated in the Merger Agreement, the Company will become a wholly-owned
subsidiary of Index.
Subsequent to the execution of the Merger Agreement, the Company issued to
Halter Financial Group, Inc. 1,693,564 shares of the Company's common stock, or
approximately 66.2% of the Company's issued and outstanding common stock, in
exchange for the payment of $1,694.00 The purchase of such shares resulted in a
change in control of the Company from Little & Company Investment Securities to
Halter Financial Group, Inc.
F-35
<PAGE> 215
[ALTERNATE SECTION FOR HALTER PROSPECTUS]
SUBJECT TO COMPLETION, DATED NOVEMBER 8, 1996
INDEX, INC.
COMMON STOCK
---------------------
PROSPECTUS
Of the 347,391 shares of Common Stock, $.01 par value per share (the
"Common Stock"), of Index, Inc. (the "Company") offered hereby, all of such
shares are being offered for the account of Halter Financial Group ("Halter").
See "Plan of Distribution".
There is no current market for the Common Stock. The Company intends to
apply for quotation of the Common Stock on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc. upon effectiveness of the
Registration Statement of which this Prospectus forms a part.
THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 11.
THE SHARES OF COMMON STOCK, SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES A
PREFERRED STOCK TO BE ISSUED IN CONNECTION WITH THE MERGERS HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is , 1996.
<PAGE> 216
[ALTERNATE SECTION FOR HALTER PROSPECTUS]
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus in connection with
the offering of securities made hereby and, if given or made, such information
or representation must not be relied upon as having been authorized by the
Company or any other person. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, any securities, or the solicitation
of a proxy in any jurisdiction to or from any person to whom it is not lawful to
make any such offer or solicitation in such jurisdiction. Neither the delivery
of this Prospectus nor any distribution of securities made hereunder shall,
under any circumstances, create an implication that there has been no change in
the affairs of the Company since the date hereof or that the information herein
is correct as of any time subsequent to its date.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered by this Prospectus,
reference is made to the Registration Statement, including the exhibits thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
Prior to the date of this Prospectus the Company had not been subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The reports, proxy statements and other information to be
filed by the Company with the Commission may be inspected without charge, and
copies may be obtained at prescribed rates, at the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission at
Northwest Atrium Center, 500 West Madison Street, 14th Floor, Chicago, Illinois
60661-2511 and 7 World Trade Center, New York, New York 10048. The Commission
also maintains a WorldWide Web site on the Internet at http://www.sec.gov which
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
<PAGE> 217
[ALTERNATE SECTION FOR HALTER PROSPECTUS]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
SUMMARY...............................................................................
RISK FACTORS..........................................................................
Control by Existing Shareholders, Directors and Executive Officers of Sepco.........
Substantial Competition.............................................................
Risks Associated with Implementation of Corporate Strategy..........................
Dependence on Key Personnel.........................................................
IRS Examination.....................................................................
Risks Associated with Hazardous Materials...........................................
Limitation on Ability to Pay Dividends..............................................
Dilution............................................................................
Potential Anti-Takeover Effects of Articles of Incorporation and Bylaws.............
No Public Market for the Common Stock; Possible Volatility of Stock Price...........
RECENT DEVELOPMENTS...................................................................
SEPCO SELECTED CONSOLIDATED FINANCIAL DATA............................................
NEWMAN SELECTED FINANCIAL DATA........................................................
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.....................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..........................................................................
The Company/Sepco...................................................................
General.............................................................................
Results of Operations...............................................................
Liquidity and Capital Resources.....................................................
Accounting Pronouncements...........................................................
Inflation...........................................................................
Newman..............................................................................
BUSINESS INFORMATION CONCERNING THE COMPANY...........................................
General.............................................................................
Industry Overview and Business Objectives...........................................
Products and Services...............................................................
The iPower Consortium...............................................................
Manufacturers.......................................................................
Competition.........................................................................
Customers...........................................................................
Properties..........................................................................
Backlog.............................................................................
Employees...........................................................................
Insurance...........................................................................
Intellectual Property...............................................................
Government Regulation and Environmental Matters.....................................
Legal Proceedings...................................................................
MARKET FOR THE COMMON STOCK AND RELATED SHAREHOLDER MATTERS...........................
DIVIDEND POLICY.......................................................................
MANAGEMENT............................................................................
Board of Directors' Compensation....................................................
Committees of the Board of Directors................................................
Employment Agreements...............................................................
Executive Compensation..............................................................
</TABLE>
<PAGE> 218
[ALTERNATE SECTION FOR HALTER PROSPECTUS]
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Benefit Plans.......................................................................
The Sepco Industries, Inc. Employee Stock Ownership Plan............................
Nonqualified Stock Option Agreements................................................
Long Term Incentive Plan............................................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................
CERTAIN TRANSACTIONS..................................................................
Sepco...............................................................................
DESCRIPTION OF COMPANY CAPITAL STOCK..................................................
General.............................................................................
Common Stock........................................................................
Preferred Stock.....................................................................
Transfer Agent......................................................................
PLAN OF DISTRIBUTION..................................................................
LEGAL MATTERS.........................................................................
EXPERTS...............................................................................
</TABLE>
<PAGE> 219
[ALTERNATE SECTION FOR HALTER PROSPECTUS]
RISK FACTORS
NO PUBLIC MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
The Common Stock is a new issue of security that will have no established
trading market. The Company intends to apply for quotation of the Common Stock
on the OTC Bulletin board of the National Association of Securities Dealers,
Inc. upon effectiveness of the Registration Statement of which this Prospectus
forms a part. While there can be no assurance in this regard, the Company
believes that the Common Stock should qualify for quotation on the OTC Bulletin
Board. There can be no assurance, however, that a market in the Common Stock
will develop, or if developed, will be sustained. Over 90% of the outstanding
shares of Common Stock are held by less than 20 holders. Concentration of
ownership and the lack of a public market for the Common Stock could adversely
affect the liquidity of such shares and the amount that could be realized on a
sale thereof. See "Market for the Common Stock and Related Shareholder Matters".
The limited number of unaffiliated shareholders and factors such as market
expansion, the development of additional services, its competitors and other
third parties, as well as quarterly variations in the Company's anticipated or
actual results of operations or market conditions generally, may cause the
market prices of the Common Stock to fluctuate significantly if a trading market
does in fact develop for the Common Stock. In addition, the stock market has on
occasion experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many companies. These broad market
fluctuations may adversely affect the market price of the Common Stock, if a
public trading market is established.
<PAGE> 220
[ALTERNATE SECTION FOR HALTER PROSPECTUS]
MARKET FOR THE COMMON STOCK AND RELATED SHAREHOLDER MATTERS
There is no current public market for the Common Stock, and there is no
assurance that such a market will develop. The Company intends to apply for
quotation of the Common Stock on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc. upon effectiveness of the Registration
Statement of which this Prospectus forms a part. See "Risk Factors -- No Public
Market for the Common Stock; Possible Volatility of Stock Price".
Upon completion of the Reorganization, the Company will have 15,987,900
shares of Common Stock outstanding, approximately 9,398,400 shares of which will
be held by affiliates of the Company and will be subject to the resale
limitations of Rule 144 promulgated under the Securities Act.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least two years, including an "affiliate", is entitled to sell, within any
three-month period, a number of his restricted shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock or (ii) an
amount equal to the average weekly reported volume of trading in such shares
during the four calendar weeks immediately preceding such sale. Sales under Rule
144 are also subject to certain manner of sale limitations, notice requirements
and the availability of current public information about the Company. A person
(or persons whose shares are aggregate) who is not deemed an "affiliate" of the
Company and who has beneficially owned restricted shares for at least three
years generally is entitled to sell such shares under Rule 144 without
restrictions or registration under the Securities Act, unless thereafter held by
an "affiliate" of the Company.
<PAGE> 221
[ALTERNATE SECTION FOR HALTER PROSPECTUS]
LEGAL MATTERS
The validity of the shares of Common Stock will be passed on by Fulbright &
Jaworski L.L.P., Houston, Texas.
<PAGE> 222
[ALTERNATE SECTION FOR HALTER PROSPECTUS]
PLAN OF DISTRIBUTION
The 347,391 shares of Common Stock offered pursuant to this Prospectus are
being offered for the account of Halter.
Sales of the shares of Common Stock by Halter may be made from time to time
in the over-the-counter market, on any stock exchange on which the Common Stock
may be listed at the time of sale or in private transactions at prices then
prevailing. The shares of Common Stock offered hereby may be sold by any one or
more of the following methods: (i) a block trade (which may involve crosses) in
which the broker or dealer so engaged will attempt to sell the securities as
agent but may position and resell a portion of the block as principal to
facilitate the transaction; (ii) purchases by a broker or dealer as principal;
(iii) ordinary brokerage transactions in which the broker solicits purchasers;
and (iv) privately negotiated transactions. Halter may effect such transactions
by selling the shares of Common Stock through broker-dealers, and such broker-
dealers may receive compensation in the form of commissions from Halter (which
commissions will not exceed those customary in the types of transactions
involved). Halter and any broker-dealers that participate in the distribution of
the shares of Common Stock may be deemed to be "underwriters" within the meaning
of the Securities Act in connection with such sales, and any profit on the sale
of shares of Common Stock by it and any fees and commissions received by any
such broker-dealers may be deemed to be underwriting discounts and commissions.
The shares of Common Stock also may be sold pursuant to Rule 144 of the
Securities Act to the extent such sales may be made in compliance with the
requirements of Rule 144.
At the time a particular offering of the Common Stock is made hereunder, to
the extent required by law, a Prospectus supplement will be distributed which
will set forth the amount of Common Stock being offered and the terms of the
offering, including the purchase price, the name or names of any dealers or
agents, the purchase price paid for the Common Stock purchased from Halter and
any items constituting compensation from Halter.
<PAGE> 223
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.01-1 of the Texas Business Corporation Act ("TBCA") provides that
a corporation may indemnify any director or officer who was, is or is threatened
to be made a named defendant or respondent in a proceeding because he is or was
a director or officer, provided that the director or officer (i) conducted
himself in good faith, (ii) reasonably believed (A) in the case of conduct in
his official capacity, that his conduct was in the corporation's best interests
or (B) in all other cases, that his conduct was at least not opposed to the
corporation's best interests and (iii) in the case of any criminal proceeding,
had no reasonable cause to believe his conduct was unlawful. Subject to certain
exceptions, a director or officer may not be indemnified if the person is found
liable to the corporation or if the person is found liable on the basis that he
improperly received a personal benefit. Under Texas law, reasonable expenses
incurred by a director or officer may be paid or reimbursed by the corporation
in advance of a final disposition of the proceeding after the corporation
receives a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification and
a written undertaking by or on behalf of the director or officer to repay the
amount if it is ultimately determined that the director or officer is not
entitled to indemnification by the corporation. Texas law requires a corporation
to indemnify an officer or director against reasonable expenses incurred in
connection with a proceeding in which he is named a defendant or respondent
because he is or was a director or officer if he is wholly successful in defense
of the proceeding.
Texas law also permits a corporation to purchase and maintain insurance or
another arrangement on behalf of any person who is or was a director or officer
against any liability asserted against him and incurred by him in such a
capacity or arising out of his status as such a person, whether or not the
corporation would have the power to indemnify him against that liability under
Article 2.02-1 of the TBCA.
The Company's Articles and the Company's Bylaws provide for indemnification
of its officers and directors, and the advancement to them of expenses in
connection with proceedings and claims, to the fullest extent permitted under
the TBCA. Such indemnification may be made even though directors and officers
would not otherwise be entitled to indemnification under other provisions of the
Company's Bylaws.
The above discussion of the TBCA and the Company's Articles and the
Company's Bylaws is not intended to be exhaustive and is qualified in its
entirety by such statute, the Company's Articles and the Company's Bylaws,
respectively.
A registration rights agreement to be entered into between the Company and
Halter will provide for customary indemnification, including indemnification for
liability under securities laws.
Reference is made to the Newman Merger Agreement filed as Exhibit 2.1 to
this Registration Statement for certain provisions regarding the indemnification
of the Company, its officers, directors and any controlling persons by Newman
and LITCO against certain liabilities for information furnished by Newman or
LITCO.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and therefore is unenforceable.
II-1
<PAGE> 224
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES
A. Exhibits:
<TABLE>
<S> <C>
+2.1 -- Agreement and Plan of Merger dated August 12, 1996, by and among
Index, Inc., Newman Acquisition Corporation, Newman Communications
Corporation and Little & Company Investment Securities.
+2.2 -- Agreement and Plan of Merger dated August 12, 1996, by and among
Index, Inc., Sepco Acquisition Corporation and Sepco Industries, Inc.
+3.1 -- Restated Articles of Incorporation.
+3.2 -- Bylaws.
+4.1 -- Form of Common Stock Certificate.
+4.2 -- Form of Series A Preferred Stock Certificate.
+4.3 -- Form of Series B Convertible Preferred Stock Certificate.
+4.4 -- See Exhibit 3.1 for provisions of the Restated Articles of
Incorporation of the Company defining the rights of the holders of
Common Stock, Series A Preferred Stock and Series B Convertible
Preferred Stock.
+4.5 -- See Exhibit 3.2 for provisions of the Bylaws of the Company defining
the rights of the holders of Common Stock, Series A Preferred Stock
and Series B Convertible Preferred Stock.
+5.1 -- Opinion of Fulbright & Jaworski L.L.P.
+8.1 -- Opinion of Fulbright & Jaworski L.L.P.
+10.1 -- Index, Inc. Long Term Incentive Plan.
+10.2 -- Stock Option Agreement dated effective as of May 7, 1996, between
Sepco Industries, Inc. and Kenneth H. Miller.
+10.3 -- Stock Option Agreement dated effective as of May 7, 1996, between
Sepco Industries, Inc. and Tommy Orr.
+10.4 -- Stock Option Agreement dated effective as of May 7, 1996, between
Sepco Industries, Inc. and Cletus Davis.
+10.5 -- Amended and Restated Stock Option Agreement dated effective as of
March 31, 1996, between Sepco Industries, Inc. and Jerry J. Jones.
+10.6 -- Amended and Restated Stock Option Agreement dated effective as of
March 31, 1996, between Sepco Industries, Inc. and Bryan H. Wimberly.
+10.7 -- Amended and Restated Stock Option Agreement dated effective as of
March 31, 1996, between Sepco Industries, Inc. and David R. Little.
+10.8 -- Employment Agreement dated effective as of July 15, 1996, between
Sepco Industries, Inc. and David R. Little.
+10.9 -- Employment Agreement dated as of July 1, 1996, between Sepco
Industries, Inc. and Jerry J. Jones.
+10.10 -- Employment Agreement dated as of July 1, 1996, between Sepco
Industries, Inc. and Bryan H. Wimberly.
+10.11 -- Employment Agreement dated as of July 1, 1996, between Sepco
Industries, Inc. and Bob Evans.
+10.12 -- Employment Agreement dated as of July 1, 1996, between Sepco
Industries, Inc. and Gary A. Allcorn.
</TABLE>
II-2
<PAGE> 225
<TABLE>
<S> <C>
+10.13 -- Second Amended and Restated Loan and Security Agreement dated
effective as of April 1, 1994, by and between Barclays Business
Credit, Inc. and Sepco Industries, Inc., as amended by First
Amendment to Second Amended and Restated Loan and Security Agreement
and Secured Promissory Note dated May , 1995, by and between Sepco
Industries, Inc. and Shawmut Capital Corporation, successor-in-
interest by assignment to Barclays Business Credit, Inc., as amended
by Second Amendment to Second Amended and Restated Loan and Security
Agreement dated April 3, 1996, by and between Sepco Industries, Inc.
and Fleet Capital Corporation, formerly known as Shawmut Capital
Corporation, as amended by Third Amendment to Second Amended and
Restated Loan and Security Agreement dated September 9, 1996, by and
between Sepco Industries, Inc. and Bayou Pumps, Inc. and Fleet
Capital Corporation, as amended by Fourth Amendment to Second Amended
and Restated Loan and Security Agreement dated October 24, 1996, by
and between Sepco Industries, Inc., American MRO, Inc. and Fleet
Capital Corporation and as amended by Letter Agreement dated November
4, 1996, from Fleet Capital Corporation to Sepco Industries, Inc.,
Bayou Pumps, Inc. and American MRO, Inc.
+10.14 -- Promissory Note dated December 31, 1989, in the aggregate principal
amount of $149,910.00, made by David R. Little and payable to Sepco
Industries, Inc.
+10.15 -- Promissory Note dated December 31, 1989, in the aggregate principal
amount of $58,737.00, made by David R. Little and payable to Sepco
Industries, Inc.
+10.16 -- Vehicle Lease Agreement dated July 28, 1993, by and between World
Omni Financial Corp. and Sepco Industries, Inc.
+10.17 -- Real Estate Note dated November 8, 1979, by Southern Engine & Pump
Company, payable to the order of Southwestern Life Insurance Company.
+10.18 -- Sepco Industries, Inc. Employee Stock Ownership Plan.
+11.1 -- Statement re Computation of Per Share Earnings.
+21.1 -- Subsidiaries of the Company.
+23.1 -- Consent of Ernst & Young LLP.
+23.2 -- Consent of Cheshier & Fuller, Inc., P.C.
+23.3 -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibits 5.1 and
8.1).
+24.1 -- Powers of Attorney from Certain Members of the Board of Directors of
the Company.
+27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
+ Previously filed.
B. Financial Statement Schedules:
None
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(a) To include any prospectus required in Section 10(a)(3) of the
Act;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
II-3
<PAGE> 226
PROVIDED HOWEVER, that paragraphs (1)(a) and (1)(b) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form;
(5) That every prospectus (a) that is filed pursuant to paragraph (4)
immediately preceding, or (b) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
II-4
<PAGE> 227
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on the 8th day of November, 1996.
INDEX, INC.
(Registrant)
By: /s/ DAVID R. LITTLE
------------------------------------
David R. Little
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -------------------
<C> <S> <C>
/s/ DAVID R. LITTLE President, Chief Executive November 8, 1996
- ------------------------------------------ Officer and Director
David R. Little (Principal Executive
Officer)
* Senior Vice November 8, 1996
- ------------------------------------------ President/Corporate
Jerry J. Jones Development and Director
*/s/ GARY A. ALLCORN Senior Vice November 8, 1996
- ------------------------------------------ President/Finance
Gary A. Allcorn (Principal Financial and
Accounting Officer)
* Director November 8, 1996
- ------------------------------------------
Bryan H. Wimberly
* Director November 8, 1996
- ------------------------------------------
Cletus Davis
* Director November 8, 1996
- ------------------------------------------
Kenneth H. Miller
* Director November 8, 1996
- ------------------------------------------
Thomas V. Orr
*By: /s/ GARY A. ALLCORN
-------------------------------------
Attorney-in-fact
(for each of the persons indicated)
</TABLE>
II-5
<PAGE> 228
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
+2.1 -- Agreement and Plan of Merger dated August 12, 1996, by and among
Index, Inc., Newman Acquisition Corporation, Newman Communications
Corporation and Little & Company Investment Securities.
+2.2 -- Agreement and Plan of Merger dated August 12, 1996, by and among
Index, Inc., Sepco Acquisition Corporation and Sepco Industries, Inc.
+3.1 -- Restated Articles of Incorporation.
+3.2 -- Bylaws.
+4.1 -- Form of Common Stock Certificate.
+4.2 -- Form of Series A Preferred Stock Certificate.
+4.3 -- Form of Series B Convertible Preferred Stock Certificate.
+4.4 -- See Exhibit 3.1 for provisions of the Restated Articles of
Incorporation of the Company defining the rights of the holders of
Common Stock, Series A Preferred Stock and Series B Convertible
Preferred Stock.
+4.5 -- See Exhibit 3.2 for provisions of the Bylaws of the Company defining
the rights of the holders of Common Stock, Series A Preferred Stock
and Series B Convertible Preferred Stock.
+5.1 -- Opinion of Fulbright & Jaworski L.L.P.
+8.1 -- Opinion of Fulbright & Jaworski L.L.P.
+10.1 -- Index, Inc. Long Term Incentive Plan.
+10.2 -- Stock Option Agreement dated effective as of May 7, 1996, between
Sepco Industries, Inc. and Kenneth H. Miller.
+10.3 -- Stock Option Agreement dated effective as of May 7, 1996, between
Sepco Industries, Inc. and Tommy Orr.
+10.4 -- Stock Option Agreement dated effective as of May 7, 1996, between
Sepco Industries, Inc. and Cletus Davis.
+10.5 -- Amended and Restated Stock Option Agreement dated effective as of
March 31, 1996, between Sepco Industries, Inc. and Jerry J. Jones.
+10.6 -- Amended and Restated Stock Option Agreement dated effective as of
March 31, 1996, between Sepco Industries, Inc. and Bryan H. Wimberly.
+10.7 -- Amended and Restated Stock Option Agreement dated effective as of
March 31, 1996, between Sepco Industries, Inc. and David R. Little.
+10.8 -- Employment Agreement dated effective as of July 15, 1996, between
Sepco Industries, Inc. and David R. Little.
+10.9 -- Employment Agreement dated as of July 1, 1996, between Sepco
Industries, Inc. and Jerry J. Jones.
+10.10 -- Employment Agreement dated as of July 1, 1996, between Sepco
Industries, Inc. and Bryan H. Wimberly.
+10.11 -- Employment Agreement dated as of July 1, 1996, between Sepco
Industries, Inc. and Bob Evans.
+10.12 -- Employment Agreement dated as of July 1, 1996, between Sepco
Industries, Inc. and Gary A. Allcorn.
</TABLE>
<PAGE> 229
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
+10.13 -- Second Amended and Restated Loan and Security Agreement dated
effective as of April 1, 1994, by and between Barclays Business
Credit, Inc. and Sepco Industries, Inc., as amended by First
Amendment to Second Amended and Restated Loan and Security Agreement
and Secured Promissory Note dated May , 1995, by and between Sepco
Industries, Inc. and Shawmut Capital Corporation, successor-in-
interest by assignment to Barclays Business Credit, Inc., as amended
by Second Amendment to Second Amended and Restated Loan and Security
Agreement dated April 3, 1996, by and between Sepco Industries, Inc.
and Fleet Capital Corporation, formerly known as Shawmut Capital
Corporation, as amended by Third Amendment to Second Amended and
Restated Loan and Security Agreement dated September 9, 1996, by and
between Sepco Industries, Inc. and Bayou Pumps, Inc. and Fleet
Capital Corporation, as amended by Fourth Amendment to Second Amended
and Restated Loan and Security Agreement dated October 24, 1996, by
and between Sepco Industries, Inc. American MRO, Inc. and Fleet
Capital Corporation and as amended by Letter Agreement dated November
4, 1996, from Fleet Capital Corporation to Sepco Industries, Inc.,
Bayou Pumps, Inc. and American MRO, Inc.
+10.14 -- Promissory Note dated December 31, 1989, in the aggregate principal
amount of $149,910.00, made by David R. Little and payable to Sepco
Industries, Inc.
+10.15 -- Promissory Note dated December 31, 1989, in the aggregate principal
amount of $58,737.00, made by David R. Little and payable to Sepco
Industries, Inc.
+10.16 -- Vehicle Lease Agreement dated July 28, 1993, by and between World
Omni Financial Corp. and Sepco Industries, Inc.
+10.17 -- Real Estate Note dated November 8, 1979, by Southern Engine & Pump
Company, payable to the order of Southwestern Life Insurance Company.
+10.18 -- Sepco Industries, Inc. Employee Stock Ownership Plan.
+11.1 -- Statement re Computation of Per Share Earnings.
+21.1 -- Subsidiaries of the Company.
+23.1 -- Consent of Ernst & Young LLP.
+23.2 -- Consent of Cheshier & Fuller, Inc., P.C.
+23.3 -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibits 5.1 and
8.1).
+24.1 -- Powers of Attorney from Certain Members of the Board of Directors of
the Company.
+27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
+ Previously filed.
